US PVC overcapacity

PVC overcapacity may last long

28 January 2008 09:25  [Source: ICB]

Roughly 1.5bn lbs/year of new capacity is projected to come on in North America in 2008. The timing could be a lot better

Ivan Lerner/New York

RECENT CAPACITY increases by several polyvinyl chloride (PVC) producers in the US have raised concerns about overcapacity, especially with housing construction down. That excess PVC may lead to a downturn in pricing, and to a hit to already thin margins.

Houston, Texas-based Shintech, part of Japan's Shin-Etsu Group, plans to have its new PVC facility in Plaquemine, Louisiana, up and running this quarter. The plant will have an initial capacity of 300,000 tonnes/year (661m lbs/year) and will be expanded to 600,000 tonnes/year by 2010. This will increase Shintech's North American capacity to 2.34m tonnes/year.

Another Houston-based producer, Westlake Chemical, is investing $90m to expand PVC capacity at its Calvert City, Kentucky, plant by 136,000 tonnes/year by 2009, increasing total company capacity to around 771,000 tonnes/year.

Atlanta, Georgia-based Georgia Gulf began a $100m, 20,400 tonne/year PVC expansion at its Plaquemine site in the summer of 2006. This will increase capacity to roughly 580,400 tonnes/year. The expanded facility is now in its testing phase.

Market participants are hopeful that a series of temporary plant closures by Georgia Gulf will relieve PVC capacity pressure, however. The company has begun to shut down about 317,500 tonnes of capacity at several facilities.

North American nameplate PVC capacity is about 8.2m tonnes for 2007, according to Houston-based consultancy Chemical Market Associates Inc. (CMAI). CMAI forecasts global demand for PVC to increase by 4%/year through 2012, with developing nations having higher growth rates.

According to the consultancy, a total of 5.5m tonnes of capacity have been added to the global market from 2004-2007, representing 14.4% of current global capacity (estimated at 44m tonnes).

According to market research firm Freedonia Group, US PVC demand in 2006 was 15.8bn lbs, and the US PVC industry was worth about $5.3bn.

WINTERTIME BLUES

The PVC market is routinely characterized by cyclicality, note several industry participants. "It is true we are in a downturn now, but we have been through this before and we know it is cyclical," says Allen Blakey, senior director of public affairs for the Arlington, Virginia-based PVC trade association The Vinyl Institute.

While acknowledging that some in the vinyls industry are estimating that a downturn could last a year or two, he adds that there was a previous market downturn in 2001-2002, followed by, in 2003-2004, an 8% upturn in vinyls production.

However, overall demand (domestic sales plus exports) for PVC in 2008 should be about the same as 2007, estimates CMAI. "Not much growth is expected, but also a decline is not expected," says Steven Brien, CMAI's global business director for chlor-alkali and vinyls.

"The unusual item this winter is that PVC prices have been moving upward due to cash cost increases [but] not due to demand increases, [and] PVC margins have been shrinking due to higher cash costs to produce," says Brien.

Overall, the manufacture of PVC is still not profitable due to the increased pressure on margins from higher raw material costs, notes Dick Heinle, vice president of PVC at Formosa Plastics, based in Livingston, New Jersey. Heinle does note that the commercial market has compensated for weakness in the residential market.

Bank of America estimates that every $10/bbl increase in the price of oil means a corresponding increase of about 5 cents/lb in PVC. ICIS pricing notes that PVC producers took a hit when feedstock ethylene increased by roughly 50% in 2007.

Heinle states that as a result of compressed margins, price increases have been announced and implemented.

But about 70-75% of PVC is used in housing construction, and the National Association of Home Builders expects new home construction in the US in 2008 to fall about 20% to 1.08m units compared to 2007's 1.35m new housing starts. US housing peaked in 2005, with 2.1m units constructed.

FINANCIAL FROWNS

Financial analysts at JPMorgan, HSBC and Bank of America express concern about new PVC capacity being added at a time when none seems needed.

Bank of America analyst Kevin McCarthy expects industry operating rates to decline seasonally to 82% this winter, from 90%.

Additionally worrisome, McCarthy believes nonresidential construction, which has been relatively unaffected, could begin to soften in mid-2008. "We still expect a highly competitive PVC landscape in 2008 with net capacity expansion of 4.5% into a shrinking market," says McCarthy.

Domestic sales have declined approximately 6% from 2006 to 2007, "making PVC the worst-performing resin along with polystyrene," says McCarthy. "The only good news this year has been the increase in net exports."

SELLING GLOBALLY

According to ICIS pricing, US producers have been able to match prices in foreign markets, irrespective of US market dynamics. Bank of America notes that Western Europe now has the highest-priced PVC market, giving US producers opportunities to export.

Rising prices in China, Taiwan and Thailand also spurred a recovery in the US export price, and ICIS pricing notes that the weak dollar has helped move PVC exports.

The Vinyl Institute believes much of the new American capacity will be used as export, also somewhat driven by the current low value of the dollar.

The US International Trade Commission said US PVC exports in November (the latest month for which statistics are available) were up 21% from the year-ago period, to 99,563 tonnes, and up 1% from the previous month. Canada received 26% of US PVC exports, followed by Brazil and Egypt.

As of mid-January, US export spot prices for PVC were $1,000-1,050/tonne, with most deals done within the $1,020-1,030/tonne range, according to ICIS pricing. Domestic spot prices and contract prices are holding at 46-52 cents/lb, and 54-60 cents/lb, respectively.

One source has told ICIS pricing that export prices in 2008 will climb into the $1,050-1,100/tonne range, and will continue to rise until oil prices drop dramatically.

 

BIG BOX BLACKBALLING

PVC's misfortunes grew in December, when Sears Holding, the parent corporation of retail giants Sears and Kmart, announced it would be joining Target, Wal-Mart, Microsoft and several other large retail-oriented companies in phasing out PVC.

In response, The Vinyl Institute will begin a campaign to further educate consumers regarding the lower quantities of energy PVC needs to be produced, as well as the fewer greenhouse gases it emits during production.

While the phaseouts will "hurt the image" of PVC, CMAI's Brien feels the actions of these retailers will have "a very small impact on demand." Formosa's Heinle says: "Once the facts are carefully considered, PVC will prove itself to be the sustainable and preferred choice."

PVC producers in North America

Major producers	Total North American capacity (bn lbs)	% of North American nameplate capacity
Shintech	4.533	25
Occidental	3.217	18
Georgia Gulf	2.7	15
Formosa	2.628	15

Source: Deutsche Bank

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