FocusPost-quake construction to boost China PVC

22 May 2008 05:13  [Source: ICIS news]

By Ng Hun Wei

SINGAPORE (ICIS news)--Reconstruction activities in the aftermath of the Sichuan earthquake are likely to boost Chinese demand for polyvinyl chloride (PVC) but bearish supply fundamentals could undermine the bullish outlook, producers and traders said on Thursday.

Measuring 8.0 on the Richter scale, the quake - which struck on 12 May in China’s southwest - has taken  almost 41,000 lives while nearly 33,000 were missing, according to official figures released late on Wednesday.

Early estimates of the total property losses from the quake range from CNY70bn ($10bn) to CNY140bn, ratings agency Moody’s earlier this week, hinting at the amount of resources needed for Sichuan’s reconstruction.

“The reconstruction is going to be massive because all these buildings will have to be rebuilt. PVC would be needed to build new piping systems, among other uses, and we expect Chinese demand for the product to rise in the short term as a result,” a northeast Asian producer said.

Market players said it is too early to estimate how much PVC would be needed in the reconstruction but official figures paint a bullish picture.

Data from China's Ministry of Civil Affairs suggested that 5.4m homes will have to be rebuilt while repairs are required for another 21.4m homes. Reconstruction and repairs are also required for buildings, which were destroyed and damaged in the quake, of more than 12,000 industrial enterprises.

The resulting rise in PVC demand will naturally exert upward pressure on prices but Chinese producers and traders are quick to point out that the overall impact on the market will be determined by other factors as well.

“Amid the talk on how much PVC is needed for rebuilding, I think people sometimes overlook that fact that China is going to be a net PVC exporter by 2010. This means China is going to be long on PVC very soon,” a trader said.

China’s growing PVC supplies has already manifested itself in the near term.

In the immediate aftermath of the earthquake, logistical difficulties have hampered PVC deliveries from Sichuan to south China but high inventory levels in the latter have insulated buyers from the supply shock.

Carbide-based PVC prices in south China’s domestic market has, as a result, only edged up CNY50/tonne – or less than 0.6% -- in the week following the earthquake. This is a modest rise considering that Sichuan, which produces one million tonnes of PVC a year, accounts for around 10% of China’s total PVC production.

It could be that more time is needed for the market to react fully to the impact of the earthquake, some industry sources said.

Domestic prices of carbide-based PVC in China have been softening in the past month prior to the earthquake, falling CNY200-250/tonne to CNY8,300-8,400/tonne DEL (delivered). This trend has at least been reversed in south China after the earthquake and could pick up pace once the reconstruction efforts begin in earnest.

Or will it? Some Chinese producers pointed out that even in the mid to long-term, ample supplies continue to be a factor.

This year alone, China is expected to add another two million tonnes to its annual PVC production capacity, almost twice as much as the 1.3 million tonnes it imported for the whole of 2007.

Given that full reconstruction of disaster-hit areas usually take place over several years, it could well be that the increase in PVC demand due to the reconstruction will significantly lag the rate of increase in Chinese PVC production, traders noted.

Many PVC plants in China are also currently running at reduced operating rates due to high feedstock costs, which means that producers can call upon these idle capacities should the economics improve enough.

"A lot of the PVC plants are now running at only 70-80% and they can easily increase production when prices are attractive enough. So in a way, this will set a limit on how much prices can rise,” a Chinese producer said.

In addition, there is growing buying resistance to the high PVC prices, assessed last week at $1,180-1,200/tonne CFR China Main Port (CMP). Offers had been reported at more than $1,200/tonne CFR CMP, but sellers were heard this week to lower their prices due to a dearth of buying interest.

“It is obvious that PVC demand will increase in times like this. But when you consider other factors such as the supply situation and the record crude prices, it is very hard to predict how this higher demand will actually play out in the market,” a Chinese producer said.

The muted response of the PVC market to post-disaster reconstruction works is not without precedent.

In the year following the 2004 tsunami that devastated much of southeast and south Asia, PVC prices on a CFR SE Asia basis actually fell by around nine percent even though the price of feedstock ethylene rose by five percent.

($1 = CNY6.96)

By: Hun Wei Ng
+65 6780 4359

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