OUTLOOK ’18: Downstream supply length, upstream volatility to complicate European capro market

LONDON (ICIS)–Players in the European caprolactam (capro) market have varied views for 2018, with a range of factors expected to complicate market dynamics.

The most bullish expectation for capro in 2018 is based on downstream market demand. According to one producer, global demand for nylon 6 rose by roughly 6% in October 2017 year on year, on a global scale. With buying appetite for nylon 6 increasing, naturally demand for capro has also risen in line with this.

Some players, therefore, expect demand for nylon 6 to continue to grow above GDP levels again in 2018, when viewed from a global perspective.

Adding to this bullish perspective, the concern in previous years of structural oversupply in Europe has started to be addressed.

One step in this direction was BASF’s decision in 2016 to consolidate its capro capacity by fully or partially shutting down four of its capro lines in Ludwigshafen, Germany, reducing its capro capacity by 100,000 tonnes/year to 400,000 tonnes/year, or 20% of its total nameplate capacity.

BASF’s reduction in capro capacity was anticipated to take place over a period of 18 months, starting from September 2016.

The final phases of the reduction, therefore, are expected to occur in the first quarter of 2018.

Adding to this, capro producers Grupa Azoty, UBE and BASF opened new nylon 6 lines in 2017, with Grupa Azoty now becoming a fully-integrated nylon producer with theoretically few capro volumes available for sale on the open market.

UBE also will have fewer volumes for sale as the new nylon plant is fed capro from its site in Spain.

According to ICIS analysis, UBE’s capro volumes available for sale could theoretically be reduced by up to 38% as the new nylon 6 plant increases its European nameplate capacity to 70,000 tonnes/year.

The reduction of capro capacity by BASF and the opening of new nylon 6 plants has helped to further substantially reduce theoretical structural overcapacity, which only a few years ago estimates had put as high as 300,000 tonnes/year for Europe.

However, there are some bearish trends too which could complicate and hamper the market.

One ongoing matter being that Asia, in particular China, no longer relies on capro imports from Europe.

Recent and anticipated capro capacity expansions in China, and Asia widely, mean that the region is now self-sufficient in terms of nameplate capacity.

Self-sufficiency in Asia means there will be less opportunity for capro players in Europe to export volumes into the region and, in theory, there could be more material in the domestic market for sale because of this, despite the reduction of capacity in Europe seen throughout 2017.

European players who attended the 15th China International Polyamide & Intermediates Forum, which was held in Shanghai on 7-8 December, expressed concerns about continuing capro and nylon 6 capacity additions in China during 2018.

“What [Chinese players said] is that they will keep on building capro and polyamide plants; they believe the prices should go down to levels close to polyester… They [could] build 1m tonnes of capacity [in the future],” one producer said.

A second producer, however, questioned whether the anticipated expansions would actually add to supply, with some plants expected to potentially remain idle or run at significantly reduced rates.

According to the second producer, Chinese players are incentivised to build new plants to obtain housing development permits in that area, which are more profitable than seeking margins in the nylon chain which are expected to be squeezed by overcapacity in the country.

Furthermore, the situation in Asia has been complicated by stricter environmental regulations in China, which have so far limited or shut down a sizeable range of upstream plants for anti-pollution purposes.

Additionally, strong demand in China in the last quarter has led to prices in Asia rising substantially.

Therefore, some capro producers in Europe expect prices in Q1 in Asia to rise even higher and for an arbitrage window with the region to open up again, as it did at the start of 2017, under similar conditions.

The situation in China will likely have a significant impact on Q1 capro prices in Europe.

Adding to this complexity is volatility in the upstream benzene market, which has at times significantly influenced monthly capro contract discussions in Europe, and lengthening in the downstream market.

Typically, supply and demand in the downstream nylon 6 market and the prices settled on a monthly basis, pressure price direction for capro too.

A combination of potentially volatile price spikes in the upstream benzene market and ongoing lengthening in the downstream nylon 6 market amid significant capacity expansions, mean margins for capro sellers could be squeezed.

The European nylon 6 market has been structurally oversupplied for a while now, and some players are concerned that nylon prices could drop, due to the new supply outpacing any expected increases in demand.

The outlook for capro in 2018 is therefore varied and dependent on a number of factors in other regions like Asia, as well as both upstream and downstream markets in Europe and the macroeconomic conditions in the rest of the world.

Capro is used to make nylon 6 fibres for textiles and carpets, and engineering plastics for electronics and automobiles.