OUTLOOK ’09: Stormy seas await the US PVC industry

05 January 2009 16:18  [Source: ICIS news]

By Greg Holt and Leela Landress

HOUSTON (ICIS news)--The US polyvinyl chloride (PVC) industry faces an uncertain and potentially grim future in 2009.

Prices are falling as feedstocks lose value, but sources said demand for vinyl construction materials is in a bigger slump, and the global economic meltdown has offered few signs that the situation will improve within a year.

The US housing market - and specifically new construction projects - is the largest end-market consumer sector for PVC resin, which is made into vinyl siding, vinyl flooring, PVC pipes and other building materials.

The US mortgage meltdown brought a sharp downturn to new home construction in 2007 even before the US housing crisis spawned a more widespread economic catastrophe many corners of the globe.

As a result, those in the PVC industry that had hoped the housing market would recover in 2009 have seen their hopes grow as dimmer the US economy slides deeper into recession.

“The market must be getting close to the bottom, but there is hope that there will be more stability [in 2009],” one trader said.

Indeed, export spot prices tumbled from $1,200/tonne FOB (free on board) US Gulf to below $600/tonne (€432/tonne) same basis in the fourth quarter as demand from overseas markets evaporated.

The export market was able to support the margins of US PVC producers despite weak domestic demand for most of 2008, but with that option seemingly lost in the economic downturn, plant shutdowns and low production rates are likely to characterize the US PVC industry in 2009, one producer said.

US PVC producer Georgia Gulf announced it would close its 200,000 tonne/year PVC plant in Sarnia, Ontario, and market participants said there was concern that other US facilities would suffer the same fate.

In the upstream vinyl chloride monomer (VCM) and ethylene dichloride (EDC) markets, participants were pessimistic when considering the outlook for 2009 and did not see clear indicators pointing towards recovery.

“Demand is dead and we don’t see it improving until credit lines are freed up,” a buyer said. “Until then, you could offer this stuff for a dollar and if there is no demand, no one will buy it.”

“Even though Asia has seemed to rebound a little, here [US], people are only buying the minimum amounts necessary for short-term production,” another buyer said. “Demand remains soft and there’s no telling when it will improve.”

According to sources, the current economic situation is considered unprecedented, with many market participants unsure of when the situation will improve.

“I have no idea when it will improve,” a trader said. “It all depends on the economy and what happens with caustic soda prices.”

Chlorine and caustic soda are produced simultaneously in the same manufacturing process. High caustic soda prices encourage greater chlor-alkali production, but that can oversupply the markets for chlorine and its derivatives. EDC, VCM and PVC are composed of roughly equal parts chlorine and ethylene.

Buyers said producers reduced production rates and moved up scheduled maintenance in an attempt to manage supply and stabilise prices.

A producer said it expected demand to improve in January due the large reductions of inventories, but other market participants disagreed.

“Business has been short for some time,” a source close to the market said. “Right now everyone is trying to maximise cash flow, so they are utilising their inventories.” The source said that at some point inventories would have to be re-stocked, but was unsure as to a real time frame.

“This is the low point in feedstock costs and refineries won’t continue to produce at a loss, so as they shut down [ethylene] crackers we’ll see supply drop,” the source said. “We’ll have a better idea of what real demand is after the New Year and inventories are depleted.”

The US caustic soda market had a stellar year in 2008, but sources said diminishing demand will probably bring prices down from their current record-high levels next year.

Largely due to weak demand for co-product chlorine from the PVC industry, low chlor-alkali production sent prices soaring this year, delivering huge profits to US producers.

However, sources said the economic downturn had a delayed impact on caustic soda demand, particularly once the prices for pulp and aluminium tumbled along with most other commodities.

Those industries consume large amounts of caustic soda in their manufacturing process, but scaled-back production loosened up caustic soda supply near the end of the fourth quarter, and contract prices stood on the precipice of a possible decline for the first time since September 2006.

Producers were optimistic that they could maintain current margin levels by reducing production rates as demand softened. However, fast-growing chlor-alkali companies in Asia and the Middle East have not overlooked the US as a potentially lucrative export market once new capacity additions come online in 2009.

($1 = €0.72)

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By: Greg Holt
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