15 January 2010 00:00 [Source: ICB]
After a tumultuous 2009, the global PVC market looks set to rebound in 2010. Will market conditions be constructive?
By Stepahnie Wilson/London and Judith Taylor/Houston
Rex Features/Chris Eyles
According to global credit ratings agency Fitch Ratings, 2010 is not likely to fair any better. The average revenue of European construction companies is forecast to fall by 5-10% by the end of 2011, as economic conditions remain fragile and credit difficult to secure.
This does not bode well for the European polyvinyl chloride (PVC) industry. With at least 50% of its main end use in the construction sector, the market has seen one of its most volatile pricing periods.
"The speed at which prices lost and then gained ground was amazing. I've never seen anything like it in all my working life," says one German PVC manufacturer. "2010 should be the year when there is at least some margin recovery, as we are coming from such low prices and have already seen increases in 2009."
EUROPEAN PVC OUTLOOK MIXED
Values lost €370-385/tonne from mid-2008 to early 2009, as demand plummeted by a reported 25-30%. Prices then gained €300-310/tonne over the stronger summer season as production rates were slashed in a bid to quell the oversupply in the market, and to return values to early 2008 levels.
This remains the aim of PVC producers in 2010. The majority are adamant that price increases are necessary, as margins are deemed unsustainable and producers need to recoup losses.
"The pressure on European PVC producers is severe," notes one manufacturer. "Very few are in positive territory - most are more or less breaking even, but a few are already into negative territory. If we see further deterioration of volumes or margins, there is no question that producers will have to think about idling, or even closing, plants."
The worst forecasts for 2010 predict that European construction activity will actually shrink, with global investment bank Citibank estimating a contraction of 1%, before returning to growth of 1.6% in 2011. However, the majority of PVC players expect to see some marginal increase in volumes across the wider European PVC market.
These expectations range from a modest increase of 1-2%, to a more optimistic 5-12%.
"Our view is that PVC volumes will increase 3-4% overall in 2010, but that generally, the situation will remain quite difficult as margins will remain squeezed," a Mediterranean producer says. "These predictions relating to a contraction are misleading for the PVC industry. While the outlook for construction activity might still be negative, it is improving and demand for PVC from the sector is increasing in 2010."
However, it is widely agreed that the construction industry remains one of the weakest end-markets.
"Very few new projects have been commissioned in Northwest Europe," notes a German window profile converter. "It takes a while for the construction industry to register change because current activity is based on orders made months or even years earlier. Any significant improvement in demand we are seeing now could be from stimulus packages at the start of 2009."
"The situation will remain quite difficult as margins will remain squeezed"
"Although liquidity in the region remains a problem, it is improving. The growth in this sector will continue at a faster pace than elsewhere in Europe because the infrastructure is continuing to develop," a Northwest European PVC producer concludes.
GERMAN MARKET IMPROVES
This has led to some improvement in volumes in the German market, most notably the profile window industry, according to market players. The uptick in buying interest from Central and Eastern Europe, combined with German stimulus packages, already led to a reported 2% strengthening in the German profile window market in 2009, according to several producers, who expect this to continue into the new year.
"The German government has set aside almost €2bn [$3bn] to rebuild schools, public buildings and government housing," a major German PVC producer says. "Demand for PVC construction components will continue to grow over 2010, and we expect a strong demand from elsewhere in Europe too."
"Our view is that PVC demand from the construction sector will increase 3-4% across Europe overall, but that generally, the situation will remain quite difficult as margins will remain squeezed," the source adds.
A German PVC converter highlights the impact of government stimuli. "Although these figures look good, we have to remember that there has been a lot of government intervention in 2009. We are coming from low levels, too - early 2009 was 25-30% below early 2008 figures, so, even if there were gains of 10% in demand, it would still be from a very low level."
Another major PVC producer says: "We are facing a tough year. We will have our good months and quarters, just as we will have our challenging ones. In the long term, there is no quick solution, but we do not expect 2007 levels until at least 2013, or maybe beyond."
US PVC MARKET AWAITS RECOVERY
The US PVC market awaited economic recovery for most of 2009, and is likely to continue waiting well into the first quarter of 2010.
Flat demand from housing and construction dominated 2009, with beneficial effects from government stimulus plans obscure in the open market.
A stuttering recovery was said to be taking place in the housing sector, but has thus far proven not substantial enough to build up the necessary momentum to provide fresh outlets for new housing construction.
"No housing recovery is on my radar screen," one large pipe-grade PVC buyer says.
Municipal construction typically lags the housing segment, and pipe and other conduit demand flattened during the fourth quarter.
"Volumes are limited and prices in the municipal sector have slipped," says another buyer.
Sluggish demand took a toll on price initiatives in the third and fourth quarters. About 5-6 cents/lb ($110/tonne) in price increases were implemented on up to 10 cents/lb sought, with the bulk taken between July and September. October/November/December business reflected little change from September price levels by most accounts.
US PVC pipe manufacturers and vinyl product manufacturers in the fence and siding business say the credit crunch is far from over and is significantly affecting their business.
Product manufacturers say companies are taking a hard look at credit, including extension of credit to their buyers, as well as business credit requirements for the manufacturers themselves.
Buyers and sellers say the fourth quarter has always been a seasonal low. There is optimism that demand could pick up in the spring when the home improvement and building season gets underway.
Stephanie Wilson is markets editor covering European chlor-vinyls, polyethylene (PE) pipes and African polymers. She studied journalism at Westminster University in London, UK.
Judith Taylor has been an ICIS editor for 10 years, with experience in a wide range of markets, including glycerin, other oleochemicals, and biodiesel. She currently covers several oleochemical products as well as caustic soda and polyvinyl chloride (PVC) in the US and Latin America. She holds a Bachelor's degree in biology, with a minor in chemistry.
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