09 July 2010 00:19 [Source: ICB]
After promising gains in the first quarter, prices are poised to fall in Europe, the US and Asia as a result of weak construction activity
The European and US polyvinyl chloride (PVC) markets are struggling with tepid construction activity, ongoing credit constraints and the expiration of financial incentives for home buyers in the US. In China, government efforts to cool the property market are also putting pressure on Asia PVC prices.
After showing initial promising year-on-year gains from spring 2009 levels, the beleaguered EU construction industry appears to have now hit a wall.
Recent figures from industry body Eurostat confirm that EU construction output in March 2010 had posted gains of 6.8% in the 27 EU member states, suggesting some improvement since the start of the year, before leveling off in April - which is traditionally a strong month for the industry.
The news came as no surprise to players in the European PVC industry, who outlined that as construction was the main end use of PVC, the chance to recover losses and firm up what they deemed unsustainable margins was still out of reach.
Indeed, integrated European PVC producers continued to complain of poor electro-chemical unit margins, which have plagued the market since prices plummeted some 60% in March 2009, sparked by the 2008 financial crisis.
"Despite the continued push for increases, and success of around €100/tonne across the year  so far, our margins are still at the same level as they were in December 2009 because of rising [feedstock] ethylene costs, high running costs and low [sales] volumes," a major northwest European producer explains.
FURTHER GAINS NEEDED
"We still need an increase of €100-150/tonne in order to have comfortable operating margins but this is looking unlikely before the end of the year as the market is not strong enough to absorb it," he adds.
A similar sentiment was echoed further down the chain by major converters. A large Austrian PVC pipe manufacturer termed the market "a battle [for sales] between the pipe suppliers," explaining: "At the moment, we are absorbing the [2010 total €100/tonne] increase as we have not been able to pass it on to our own buyers - there is always one supplier who is willing to undercut to get more market share."
The situation remains the most desperate in the Iberian peninsula, although Italy, Ireland, Greece and, more recently, Hungary are also cited as poorly performing markets in terms of demand and pricing.
A Germany-based specialty PVC producer reports that Spanish consumption of both window profiles and pipe-grade resins - both used in domestic construction - had plummeted by some 40% between the highs registered at the peak of the 2008 property boom to the lowest levels in winter 2009.
And there has been little improvement in this market since.
"The Spanish pipe market was the biggest pipe market in Europe because of the property bubble - all that has disappeared now," the source says.
"Apartment blocks and houses that they cannot sell are actually being demolished and pipe converters are talking about closing sites in the region because they are not viable anymore."
In northwest Europe, however, PVC manufacturers reported that, encouragingly, May 2010 sales had increased by 5-6% from the same period in 2009 and were slightly above levels seen in April.
Several felt that this uptick was the result of stock building as the harsh winter had delayed prebuying in the first quarter (Q1) and part of Q2.
EUROPEAN PLAYERS WARY
Despite the uptick, European PVC players continue to proceed with caution. Nearly all of the sources canvassed agreed that improvement in demand was largely driven by financial stimulus packages that had been implemented by governments across Europe in a bid to get the economy moving, rather than any change to fundamental buying patterns.
"Demand for profiles is particularly good from Russia right now, and this is because the government is building 700,000-750,000 new housing units a year on top of all the renovations they are doing," a large Germany-based producer explains.
"This number fell to about 350,000-400,000 in 2009, but it's back on target now and we immediately feel the result." East European markets, particularly Poland and the Czech Republic, are widely cited as strong consumers of both profile and pipe-grade PVC.
While many attribute this to government-backed investments, others are optimistic that the 15% year-on-year sales growth in May suggests that the recovery could have extended beyond the government stimulus packages into the domestic construction sector.
Overall, many European PVC producers reported that sales in May had improved by 4-6%, but almost all noted that the markets had been somewhat bolstered by the favorable foreign exchange rate as the weak euro shored up export opportunities for EU sellers, while closing the import window.
With global PVC prices now falling off rapidly in the wake of fresh concerns over the European debt crisis and planned government intervention to control the surging Chinese economic market, these export outlets are fast disappearing for European sellers.
US PVC FACES SLOW RECOVERY
The domestic US PVC market continues to wrestle with a slow economic recovery and ongoing credit constraints during the first half of 2010. The traditional peak demand season for construction, therefore, for PVC hits in the spring as improving weather conditions allow building projects and home improvement works to begin.
After a difficult 2009 - wherein the market barely enjoyed a peak season at all - the beginning of the big construction demand season in 2010 was certainly an improvement. But it has not been a stellar year - it has been good, with signs of increasing strength - but the overall construction segment's performance has been standard and aided by the $8,000 (€6,480) federal tax credit incentive for first-time home buyers.
All 12 of the Federal Reserve Districts (the reporting Districts of the US Federal Reserve System) reported improvements in economic activity, according to the Associated General Contractors of America (AGC) report of mid-June. However, many of the districts described the growth pace as modest.
Reasons for moderate growth are lodged in the elevated inventory of existing properties and the "shadow inventory" of foreclosed properties. According to the AGC, most categories of private and state/local government-funded construction remained moribund, with a lack of available credit described as a major obstacle.
Additionally, new home construction activity in the US took a nosedive in May, according to the Commerce Department. New home construction dropped by 10% in May from April, when the year-long $8,000 federal tax credit plan for home buyers expired.
The department also said that the number of building permits issued in May fell by nearly 6% from April.
It is the combo-punch of merely standard, at best, domestic demand, tight credit and feedstock cost fluctuations that is keeping a lid on US PVC buyers' opportunities to recover margins. PVC feedstock ethylene prices soared by 12.5 cents/lb during the first quarter of 2010.
PVC producers reacted to the cost spike by issuing 15 cent/lb of increases over the same time period in 5 cent/lb increments each for January, February and March.
Buyers accepted the full 5 cents/lb for January and February, despite concerns that tight credit and US unemployment rates near 10% would crimp the ability to pass the full amount downstream to consumers.
By March, ethylene prices were backwardated, with spot values sinking by about 10 cents/lb under contract for forward trades. The 5 cent March PVC increase gained traction at 3 cents/lb, but no further. A 5 cent April increase move by two suppliers fell on sinking ground and evaporated amid slipping ethylene feedstock costs.
PVC buyers' concerns about passing the 13 cent/lb Q1 hikes proved accurate, as most buyers said the downstream market was not able to absorb the full amount of increases. In March, one small buyer said: "Tough industry, tough times," in describing the PVC market.
But as April progressed and ethylene prices continued to sink, PVC buyers started looking for price relief. April contracts moved at a rollover from March, but no price reduction was seen.
That changed by late May/early June, as late-closing May inputs showed the initial rollover of that month from April changing to a 2-3 cent/lb reduction in the negotiated contract prices.
US May PVC contracts were last assessed at 74-76 cents/lb for pipe-grade resin and 78-80 cents/lb for general purpose.
June PVC contracts are expected to shed another 2-3 cents/lb, as feedstock ethylene contracts lost 7.75 cents/lb in May and were anticipated to fall again in June.
ASIA PVC FACES UNCERTAINTY
Asia PVC prices rose from a low of $530-580/tonne CFR China Main Port (CMP) during the global financial crisis on Nov 14, 2008 to a high of $1,000-1,030/tonne CFR CMP on March 5, 2010, gaining 47-78% within 16 months.
Since then, prices have slowly but surely fallen. As of July 2, 2010, Asia PVC prices were assessed at $840-860/ tonne CFR CMP, 16-16.5% lower than the recent high in March.
In the key China market, PVC imports have fallen by over 50% to 491,112 tonnes in the January to May 2010 period year on year, based on data from China Customs.
This had come on the back of weakening demand for PVC and as the effects of government measures introduced in late 2009 to cool its overheating economy started to ripple through the housing and construction sector, which is the main demand driver for PVC in China.
The Chinese government has, in recent months, announced several measures to cool the property market.
These include restrictions on presales by developers, stopping loans for third-home purchases, increases in minimum mortgage rates and tightening of down-payment requirements for second-home purchases.
These measures are the result of China's attempt at peeling back a stimulus plan and a $1.4 trillion lending binge that revived the country's economic growth which, at the same time, raised the possibility of an asset bubble build-up.
Market sources say the domestic property market remains volatile as buyers and sellers alike worry over new and potential government tightening measures.
Demand from home buyers is expected to continue softening over the rest of the year as the impact of China's recent tightening measures comes into effect.
Already, the announcements have impacted property sales in China. Property transactions in Beijing and Shanghai slumped by about 70% in May compared with April, while in the industrial city of Shenzhen, sales fell by nearly 62% over the same period, according to the Shanghai Securities News. In China, developers continue to delay home sales and project launches.
CHINA DEMAND GROWS
Demand for PVC in China is anticipated to grow at a slower rate of 5% for 2010, against expected GDP growth of 11%, as housing and construction continues to slow. Government spending and investment in new infrastructure projects is slowing.
Elsewhere in Southeast Asia, domestic demand for PVC from housing and construction in 2010 is expected to improve.
In Indonesia, market players are upbeat about the domestic PVC demand arising from the housing and construction sector.
With the rainy season soon to be over, demand for PVC from the key construction sector is expected to pick up.
Government budget spending on key infrastructure and construction sector should be released soon and should further boost domestic demand.
"PVC demand growth for this year would, at the very least, be expected to be on par with GDP growth for 2010," a producer adds.
Stephanie Wilson is markets editor covering European chlor-vinyls, polyethylene (PE) pipes and African polymers. She studied journalism at Westminster University, UK.
Aaron Cheong covers the chlor-alkali and vinyls chain, as well as soda ash andtitanium dioxide marketsat ICIS. Previously he worked in the oil and petrochemical industry for five years.
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