By Zhang Jie, Chemical Department of JLC Network Technology

Domestic caprolactam market has been continually slack in recent time. The downward fluctuation from international crude oil market, the sluggish trend of upstream benzene market, inadequate cost support and weak supply & demand of caprolactam market have cracked down on the market which will be hard to recover in the short term.

The supply & demand  fundamentals are relatively weak and the price has fallen to the new low

The price trend of domestic caprolactam fluid market is shown in Chart 1. The caprolactam market has been pulled back at its highest level since midmonth of Jun 2022, and the market price declined faster whereafter. To the first ten-day of Dec 2022, the caprolactam fluid market price had plummeted to the bottom of RMB11 000-11 300/t.

Chart 1 The caprolactam fluid market price trend in China, 2022

A new round of price competition will make corporate profit hard to recover

From perspective of supply end, domestic caprolactam producers have been at loss continually. Therefore, these producers have lacked enthusiasm for production as 70% of them have started producing at present (Table 1).

Affected by worsened production loss and weak demand, caprolactam producers have gradually exercised more unit maintenance and part of units have been kept shut down for long time. As a result, the rate of operation of the industry has fallen generally, the average rate dropping to around 73.32%. The low rate of operation of caprolactam industry in 2022 could be attributed to deteriorated loss which meant the average corporate profit had dipped to RMB-959/t, a large margin of loss. Due to the cost factor, the price of domestic caprolactam market had a rise-and-fall while the slump was relatively big because of sluggish supply and demand and the wide fall after rise of the overall corporate profit. During the span of the second half of 2022, it was difficult for the caprolactam producers to reverse their production loss and the average corporate profit hit RMB-1  411/t.

The intensified conflict between the supply and demand of the whole industry has been the profound reason for production loss. Excessive supply of caprolactam has kept piling up pressure which makes the problems intractable. The newly increased capacity of domestic caprolactam was 1 040 000 t/a in 2017, an increase up to 37% which marked a relatively saturated condition for caprolactam capacity. Since 2018, the growth of caprolactam capacity has slowed down, the annual average growth rate falling to around 5.5%. As several large scale units of producers including Shenyuan New Material, Hualu Chemical and Lunan Chemicals were put into production and part of existing producers expanded their capacity, newly added domestic caprolactam capacity reached 1 120 000 t/a, and the growth rate was up to 25.99% which slowed down in 2022. To the end of the year, the newly added capacity of caprolactam was only 300 00 t/a, an increase of 5.2%. Since 2022, caprolactam price has been declining gradually and the production loss of producers has worsened. Most of newly constructed units have been suspended or delayed to be put into production, with only one unit completed within the year (Caprolactam expansion project of Phase 2 unit of Risun Chemical in Cangzhou with annual capacity of 300 000 t/a was put into production on Sep 25, 2022). Till now, domestic caprolactam capacity has reached 5 730 000 t/a. The newly added capacity which was already excessive has been reduced, and the competition among producers has been aggravated. Suffered from bigger production loss and restriction of the state environmental protection policies, caprolactam producers are more inactive in producing, so the output is hard to be increased. The imbalance between supply and demand is yet to be changed. 

The processing volume of textile fiber of China has decelerated in growing during the past years. Statistics show that the chemical fiber output were 56 248 000 tons during the first 8 months of 2022, a growth of 0.4% year on year. The demand growth from end textile producers has slowed down as the capacity of domestic polyamide chips did the same synchronously. The capacity of PA6 downstream grew only 380 000 t/a in 2022 and the demand for caprolactam has shrunk because of less demand from the end-users including polymer producing enterprises, few of which started producing with the operation rate of the industry being no more than 70%. Therefore, higher inventory pressure and slacker demand have become the biggest obstacle in the way of recovering for domestic caprolactam market. As COVID-19 measures were lifted since Dec 2022, domestic end textile weaving industry has gradually recovered and the operation rate of end weaving enterprises which now are starting to produce on orders due the end of 2022 has slightly rebounded to 50%. However, due to the recent high price of chemical fiber materials, the profit of weaving enterprises has been squeezed, the orders received anyhow are not sustainable and the operating profit has slid. Consequently, the initiative of weaving enterprises to produce was dented. In addition, end textile industry was still in its usual offseason and the weaving enterprises were expected to stop production and start furlough ahead of time. So, the number of producers resuming production is ignorable and the end-user demand is expected to be declining in the days to come. Due to the uncertainty of the future market, downstream producers are inactive in stocking up caprolactam, future demand will be kept inadequate.

Being relatively use, the growth of caprolactam industry has tremendously been affected by the demand for PA6. In the several years to come, the focus of the industry will be if caprolactam market can keep balance between the supply and demand in the face of expansion of industrial capacity and decelerating growth of demand from downstream. 

As for the supply and demand, domestic capacity of caprolactam will witness a growth of 2 900 000 t/a in the next three years. According to incomplete statistics, the capacity of PA6 is expected to increase by 6 870 000 t/a since 2023, of which 1 840 000 t/a is realizable in the single year of 2023. Although there are many new projects planned to be constructed during the next three to five years, whether they can be put into production will depend on multiple factors including the market, the material supply from upstream, the  demand from downstream, COVID-19 epidemic and the macro economy. Therefore, the number of units to be put into production will remain relatively limited. At the same time, the polymer producing enterprises of downstream which have kept low rate of operation will be inefficient in increasing their demand for materiasl. In conclusion, sluggish demand will become the major stumbling block of domestic caprolactam market and its overcapacity will pile up the pressure continually. In the later period, capacity growth and intensified competition will lead to a new round of price war which will definitely make it hard to realize an evident profit growth for caprolactam producers.