OUTLOOK ’18: Europe nylon 6 market frets over supply outpacing demand, squeezed margins

LONDON (ICIS)–Producers in the European nylon 6 market are concerned that pricing during 2018 could turn bearish, with material from multiple capacity expansions expected to add significant length to supply, despite growing demand being anticipated.

According to multiple producers, nylon 6 growth for 2017 was generally healthy, with demand in Europe expanding by at least 3%.

On a global level, demand for nylon 6 increased by around 6% in October 2017, year on year, with a sizeable portion of that demand being driven by buying appetite in China.

Looking at 2018, most players expect this level of growth to continue, although macroeconomic conditions will largely shape buying interest and certain sectors are likely to remain more stable than others.

For example, nylon textile and fibre mostly lagged behind the engineering plastics and electrical appliances sectors in 2017.

According to multiple players, this was in part due to the weakening economy in the UK and the falling value of the pound versus the euro.

A significant percentage of the European nylon carpet sales derive from demand in the UK, but more uncertain economic conditions after the EU referendum in 2016, combined with the rising cost of nylon and a weakening pound against the euro, has led to decreasing buying interest and less profit for European sellers.

Furthermore, alternative and more competitively priced material, such as polyester and polypropylene, have continued to challenge and usurp nylon’s market share.

In this sense, the outlook for nylon in 2018 is varied. On one hand, textile and fibre sectors are expected to remain stable to soft, whereas engineering plastics and electrical appliance applications are anticipated to continue strengthening.

Although demand is expected to grow broadly in 2018, some players have an increasingly bearish outlook amid changing fundamentals, following additional capacity coming online throughout 2017.

BASF, UBE, and Grupa Azoty expanded their nylon nameplate capacity in 2017, with Grupa Azoty’s 80,000 tonnes/year plant in Poland being the largest of the three, creating a full-integrated nylon 6 production facility.

Grupa Azoty’s new plant opened in late-September and ramped-up during the fourth quarter (Q4) of 2017.

Greater volumes are expected to be available on the market in 1Q 2018. Additionally, UBE’s new nylon line, which was opened in early-October, is expected to have material available in the market from January 2018.

BASF’s expansion was smaller-scale and occurred earlier in the year, but when all are added together, the capacity expansion amounts to a nameplate increase of 140,000 tonnes/year.

Some sellers are not certain that the additional expansions will automatically drive down prices, as demand is expected to grow and any lengthening will depend on the business strategy that each player takes in relation to either maintaining or trying to gain market share.

According to one producer, Europe has been structurally oversupplied for some years now and the impact of additional capacity could be more sentimental than real.

“UBE and Grupa [Azoty] are there… But will it be more of a psychological impact than anything else. Overcapacity has always been there,” the producer said.

A second producer, however, was more bearish on the matter.

“[I’m] rather pessimistic on nylon 6… I see the market has too much material, especially now with the new plants… Capro producers are complaining but I see no other way out, they shifted the overcapacity problem from capro to nylon 6,” it said.

“If capacity has increased by 20%, of course we can’t complain if margins are going down,” it added.

The continuing expansion of nylon 6 in Europe is partly being driven by the structural overcapacity in the upstream caprolactam (capro) market.

As China rapidly added capro capacity over the last half-a-decade, and is expected to become virtually self-sufficient by 2018, fewer and fewer flaked capro volumes have been available for exportation.

Many capro producers, therefore, decided to build more nylon capacity, which has effectively shifted the problem of (historic) structural oversupply downstream.

BASF, however, decided to also consolidate its capro position by closing, either partly or in whole, four of its capro lines, reducing its nameplate capacity in Europe by 100,000 tonnes/year, or 20% of its total.

The process began in 2016 and is expected to be concluded in Q1 2018.

Adding to this structural issue, upstream benzene volatility through much of 2017 has concerned some players.

Although upstream costs do not always dictate price levels compared with supply/demand dynamics, triple-digit movements have made passing on costs downstream problematic during months where fundamentals fail to correspond.

“Upstream benzene volatility is causing more harm than opportunities in the nylon market,” one nylon compounder said.

If volatile upstream costs help push-up the price of nylon too much, despite lengthening supply, some players worry that customers could look to alternative products for certain applications.

Despite a mostly bearish outlook in the long-term for many players in Europe, the shot-term impact of much anticipated tightening capro supply in China amid strong demand and upstream plants being shut down or asked to run at reduced rates for environmental purposes, could lead to price hikes in Q1 2018, as occurred at the start of 2017.

Some players expect that if prices trend higher in Asia, an arbitrage window could open and capro players in Europe could export material to China, leading to tightening supply domestically and thus higher prices, although whether this occurs remains to be seen.

Nylon, also called polyamide, is used mainly in fibre and engineering polymer applications. Nylon fibres are used in apparel, carpets and home furnishings. Nylon engineering resins are used in automotive parts.