OUTLOOK '09: Uncertainty clouds Asia PVC market

05 January 2009 05:29  [Source: ICIS news]

By Ng Hun Wei

SINGAPORE (ICIS news)--The ongoing global economic downturn casts a pall of uncertainty over polyvinyl chloride (PVC) markets in 2009 although prices have rebounded in recent weeks, traders and producers said on Monday.

PVC prices have risen by almost 20% since hitting a low of $555/tonne (€399.6/tonne) CFR (cost and freight) CMP (China Main Port) in mid-November 2008, according to global chemical market intelligence ICIS pricing.

Neither buyers nor sellers were confident that the trend would carry on this year.

“Prices may have gone up but it is more like a technical rebound. Actual demand has been generally been very thin since September,” said a Chinese PVC trader.

Indeed the volume of PVC imports (HS code: 39041090) into China have been declining since August last year, plummeting to 383,000 tonnes in October compared to 883,000 tonnes in January, according to official data from the China Customs. As PVC demand is closely correlated to GDP, most traders and producers do not expect sales volumes to recover this year.

The International Monetary Fund (IMF) has already hinted that its 2.2% world GDP growth forecast for 2009 was too optimistic.

PVC demand has been adversely affected by the global economic weakness that major producers have started slashing operating rates as early as August 2008, market sources said.

Producers across Asia have scaled back production -- by as much as 50% in some cases -- to help counter weakening demand. Although most producers said such measures had helped exert some upward pressure on prices, some industry sources remained convinced that the cuts were still not hefty enough.

“Ideally the whole industry should reduce its operating rate according to how quickly demand is falling but it doesn’t make sense for any one single producer to cut his production just to benefit his competitors as well,” a trader said, adding that this has resulted in a more tentative pace of cutting production.

Asian producers also have to contend with huge volumes of deep-sea cargoes coming into Asia from the US and increasingly from Europe, whose badly-hit housing markets had drastically lowered demand for PVC.

Sellers of such deep-sea cargoes have recently showed willingness to conclude deals at extremely competitive levels, dragging down the prices of Asian products.

Some traders attributed this to customary year-end rush by US producers to pare down their inventory levels, raising hopes that this situation could ease early this year and lift some downward pressure off PVC prices.

However, other traders and producers noted that much still depends how prices of caustic soda, which is produced together with chlorine, behave.

High caustic soda prices will, in effect, allow integrated producers to subsidise prices of their PVC products and encourage them to maintain vinyls production.

The chlorine that was simultaneously produced in caustic soda production usually ends up as PVC, that inventory pressure on PVC producers was unlikely to ease in such a scenario, industry sources said.

US chlor-alkali production, however, has fallen to 70% in November 2008, down from 86% of capacity in October, suggesting that producers were unable to sustain their PVC operating rates given current caustic soda prices.

Traders and producers were also monitoring changes in the Chinese domestic market. Plunging crude benchmarks have chipped away the traditional cost advantage enjoyed by carbide-based PVC producers, which use calcium carbide rather than ethylene as feedstock.

Faced with high operating costs, many Chinese carbide-based PVC producers have shut down their plants, thereby increasing demand for the competing ethylene-based grade, traders said.

But the situation could be easily reversed, traders and producers said. A sudden surge in crude prices or a drastic fall in calcium carbide prices could hand the cost advantage back to carbide-based PVC producers, enabling them to ramp up their operating rates and compete again with their ethylene-based counterparts, traders and producers added.

($1 = €0.72)

For more on VCM, PVC and caustic soda visit ICIS chemical intelligence

To discuss issues facing the chemicals industry go to ICIS connect

By: Ng Hun Wei
+65 6780 4359

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