06 March 2000 00:00 [Source: ICB Americas]By Sean Milmo
European producers of polyvinyl chloride are raising their prices to nearly twice what they were a year ago. At that time, PVC was the cheapest of the bulk polymers. Now it could soon be one of the most expensive.
EVC International, Europe's largest producer of PVC, has just announced a price increase of 10 pfennig (5 cents) this month to around DM 1.75 (93 cents) per kilo for suspension PVC. It also revealed last week that it expects prices to reach as much as DM 1.85 per kilo in the second quarter.
Producers realize that if their selling prices start to outpace those of rival plastics like polyethylene, customers could switch to alternative materials. Although PVC prices have been rising, prices for other polymers, particularly polyethylene, have been slipping.
Nevertheless, analysts say that Europe's PVC industry could be entering its most profitable period since the late 1980s.
In early 1999, European spot prices for S-PVC were a mere DM 0.85 to DM 0.90 per kilo because of the Asian economic crisis and weak domestic demand.
They recovered last summer, after temporary production difficulties among manufacturers of vinyl chloride monomer reduced supplies of PVC. Pricing continued to rise during the second half of last year and continued to surge in the first quarter.
Yet several analysts caution that soaring PVC prices could trigger a shift away from PVC. "Producers have to be careful because if PVC prices get too high, converters will start to think about substituting other polymers," a London-based consultant warns. "In sectors like pipes, some end-users may move out of plastics altogether and go back to concrete."
"The transfer was going to happen anyway to polypropylene and PET (polyethylene terephthalate) in flexible materials," says Michael Fell, a consultant at CMAI Europe, London. "The price rises will quicken up this trend."
The current price increases are being driven by higher raw material costs and strong demand for PVC in Europe and the rest of the world. They are also supported by a lack of excess capacity in Europe, where plants are running at utilization rates in the mid-90s.
"Before the summer of last year, stocks were being emptied throughout the supply chain, so even the people putting the pipes into the ground had low inventories," says Peter Clarkson, EVC's strategic planning manager. "Stocks have been filling up for several months now, but there is still some way to go before they are back to normal levels."
In Europe, S-PVC will be bolstered by demand growth of up to 4 percent this year, twice the region's usual rate, according to industry estimates.
But if PVC prices continue to climb while those of other polymers continue to weaken, there is a danger that PVC will get out of line with competing materials, particularly polyethylene, its main rival in pipes and flexible films.
"Historically, PVC prices have not gotten much higher than 1.25 times polyethylene prices before they fall back because of the threat of an interchange of materials," Mr. Clarkson says. "There are a number of factors that could bring PVC prices down once they get that high."
CMAI predicts that after their current spurt, PVC prices will settle down at around DM 1.60 to DM 1.70 per kilo, probably after a fall in ethylene prices later this year.
"They are unlikely to go as high as DM 1.85 per kilo, as the producers wish," says Mr. Fell. "For producers, the important thing is that as prices go down, they will continue to enjoy relatively high margins for the next couple of years. It is about time their margins did go up because they have had low margins for four years, which is a long cycle."
European demand is expected to remain strong through at least late summer, particularly in the construction sector, which has been boosted by a relatively mild winter. There appears to be little likelihood of a strong flow of imports from North and South America and the Middle East, as often happens when European PVC prices get high.
Strong demand throughout the world has reduced the amount of PVC being traded inter-regionally. In addition, the weakness of the euro against the dollar is deterring exports to Europe.
Nor is the global market likely to face a glut of PVC in the near future. Such a glut undermined European PVC prices when they rose steeply in 1994.
The main factors behind the PVC industry's current boom--strong demand and an absence of excess capacity--are similar to the market's conditions in the late 1980s, when European prices and margins remained high for nearly two years.
Capacity expansions have been held back because some of Europe's leading producers are withdrawing from the market or considerably reducing their commitment to it.
Shell and Akzo Nobel pulled out of PVC last year when they sold Rovin, their 50-50 Netherlands-based joint venture in PVC, to Shin-Etsu Chemical of Japan. At that time, Shell also sold its PVC and VCM operations in southern France.
Degussa-Hüls withdrew from the sector after selling Vestolit, its German-based PVC subsidiary, to investors led by Candover Partners Ltd., London, and D. George Harris, New York. Analysts speculate that Vestolit may merge with Vinnolit, the PVC producer jointly owned by Wacker Chemie and Celanese.
Last year, BASF placed its PVC business into Solvin, a 25-75 joint venture with Solvay. The new company is Europe's second largest producer of PVC and has a nameplate of 1.1 million metric tons per year.
Norsk Hydro says it wants to leave the vinyls sector, and there are doubts about whether AtoFina, the newly combined chemicals operation of the merged TotalFina and Elf Aquitaine, will stay in PVC.
"Chemical companies in Europe continue to view PVC as a sector which strategically does not have good long-term prospects," notes a PVC commercial manager. "Their shareholders do not expect, nor want to see, money invested in new PVC capacity,"
Most European PVC increases are being offset by closures. EVC is scheduled to bring on a 180,000-ton-per-year plant for S-PVC at Schkopau, eastern Germany, in the second quarter. But this follows its closure of a 140,000-ton-per-year S-PVC unit and a 180,000-ton-per-year VCM facility in Brindisi, Italy.
Although the market for S-PVC and its related specialty products has been buoyant in Europe, the sector for paste and extender PVC is struggling to raise prices in the face of rising raw material costs.
Unlike S-PVC, paste and extender PVC prices did not slump in 1998-99. They remained at around DM 1.70 to DM 1.75 per kilo but have since gone up to only DM 1.80 to DM 1.90.
"In the meantime, we have had to deal with increases in raw material costs equivalent to around 40 pfennigs," says Wolfram Pressdorst, head of sales and marketing for specialties at Vinnolit, which has one-third of its PVC sales in paste and extender products.
Europe has traditionally been a large exporter of PVC paste, but European producers have recently focused on the domestic market.
Demand for PVC paste has also been weakened by controversy over the safety of phthalates, a key ingredient in products made from the material.
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