Price and market trends: Europe capro producers call margin situation desperate

24 February 2014 00:00 Source:ICIS Chemical Business

High European benzene costs are squeezing caprolactam (capro) chain margins, with several sources throughout the chain calling the situation desperate.

Producers throughout the polyamide chain have been complaining of low margins since 2011, when poor macroeconomic conditions meant that feedstock cost spikes could not be passed through to the market. Spread levels have now seen significant recovery.

Cyclohexane

“Frankly speaking they [nylon producers] are suffering,” a nylon buyer said.

Cyclohexane (CX) is the feedstock for the capro chain. The CX monthly contract is a formula-based price comprising the quarterly negotiated CX delta and the upstream monthly benzene contract price.

“Of course, the benzene’s making a lot of trouble, giving all of us a lot of headache,” a CX buyer said.

Although nylon 6 and caprolactam spreads against CX were broadly increasing between January and October 2013, spreads have shrunk since November contract prices were settled because of spiking upstream benzene costs, which could not be passed on downstream.

NYLON/CAPRO SPREAD FALLS

The spread between European capro contract prices and nylon 6 contract prices has fallen by €12-35/tonne compared with the November contract settlement, according to ICIS analysis on 11 February.

Across December and January, the spread between capro and feedstock CX contract prices has decreased by €66-89/tonne.

The CX contract price saw a further €61/tonne rise in February. February capro and nylon 6 contract negotiations are ongoing. Nevertheless, early contract settlements in the nylon 6 and capro markets have failed to match the CX cost increase.

Early European nylon 6 contract price settlements have been achieved at an increase of €0.05/kg.

EARLY CONTRACT ACTION

Some Early February capro contract prices have been agreed at a rise of €50/tonne, failing to match the €61/tonne cost pass through from benzene, sources said on 12 February.

The inability to match upstream cost rises was attributed by a capro producer to oversupply in the market and difficulties in passing on cost increases further downstream.

“We’ve closed all deals for February at plus €50/tonne – so our job is done now... [The settlements were] lower than cyclohexane because there is oversupply and downstream doesn’t expect [nylon 6 virgin] polymers to go up by €50/tonne,” the producer said.

Nevertheless, other capro producers continue to target price hikes of €70-90/tonne, citing the need to recover margins lost against feedstock CX since November.

Capro buyers are aiming to limit price increases to a maximum of €50/tonne because of poor profitability in the downstream nylon 6 market.

“The margin between capro and nylon is not okay anymore. There’s an absolute need to readjust it. There was a need to increase polymer prices, but it didn’t happen,” a capro buyer and nylon producer said.

If early capro February settlements at plus €50/tonne reflect the general trend in the market then February contract price movements – which remain under discussion – will result in a reduction in the spread between CX and capro of €77-100/tonne since the November settlement.

MARGINS UNSUSTAINABLE

Profit margins have become unsustainable, several capro and nylon sources have said.

“Really, it’s tight through the chain, this high raw material price is very demanding, especially capro producer... Capro margins have shrunk. 
It’s not positive,” a capro producer said.

At least one nylon 6 producer said that a failure to restore the profitability of nylon 6 and 6,6 would result in sales of the material being suspended.

“This [the margin loss] is not [just] substantial, it’s crucial... or it doesn’t make sense to sell polyamide,” the nylon producer said.

This was echoed by a capro producer which said margins needed to be restored by March at the latest.

Nylon 6 - capro

“The situation is desperate in fact. We will not be ready to maintain this kind of margin level over the next month – we need to restore some 
margins here,” the capro producer said.

Buyers of capro and nylon 6 said they understood the need for producers to restore margins, but highlighted their own narrow profitability.

“I think they will try to increase again in March. I don’t know if they will achieve [price rises] but it’s important they do it – as some margins need to be clawed back, if not producers will have big problems,” a nylon buyer said.

By Mark Victory