Europe PVC faces bleak future

20 June 2011 00:00  [Source: ICB]

Stricter EU legislation hits at a time when profitability is dire. US producers enjoy a feedstock advantage

Although the European economy has shown some significant signs of improvement since the 2008 financial crisis, the future remains bleak for many chlor-alkali producers that insist that profitability throughout the industry ­remains low.

 
Spending on construction, which is a main driver of PVC demand in the US, is still down from 2006
Aleksander Cocek
As the EU's 2020 deadline to switch mercury chlor-alkali production to the more energy-efficient membrane technology draws ever closer, European chlor-alkali producers ­lament that the timing of the costly conversion could not be worse for the industry.

Margins of downstream polyvinyl chloride (PVC), which account for the majority of ­European chlorine use, remain in negative territory following the 2008 economic downturn, when demand for suspension-grade PVC slumped by some 25% from the record-high 2007 levels and soaring feedstock prices squeezed producers.

Little has changed in recent years, with one manufacturer observing: "Although we have seen some recovery, it does feel like one step forward, two steps back when it comes to PVC prices. Margins are still lagging by €40-60/tonne ($58-87/tonne) compared with ethylene, and that's before adding the ­increasing costs of energy, labor and transport into the equation."

The majority of producers agree that offtake remains 10-15% below 2007 levels, as the key construction industry, which accounts for more than 70% of suspension grade PVC offtake, remains on shaky ground.

According to thelatest Eurostat figures, March 2011 construction output fell by 4.9% in the euro zone compared with the previous year. Slovenia, Portugal and Bulgaria registered the largest reductions.

One producer notes: "Western EU is still around 5% behind pre-crisis levels, but eastern, central and southern Europe are lagging far behind that. We do not expect demand in western Europe to be back at 2007 levels until at least 2012 or 2013, and the other regions could take longer, if they ever reach the same levels again."

INVESTMENT NEEDED
Subsequently, the plight of the industry ­remains severe as substantial reinvestment is required to meet the 2020 deadline, with almost one-third of the industry yet to make the change to new membrane technology, which uses 20-30% less ­energy than the mercury process.

Another manufacturer says: "It costs in the region of €500-1,000/tonne to convert a plant, sometimes more, depending on the size of the plant. If the current situation prevails, then I do not think that all plants will be converted over, particularly as there is still something like 500,000-700,000 tonnes of overcapacity in the European market since demand dropped."

The source adds: "Everyone is losing money, and it's a question of time now. Either the demand has to come up quickly or some production has to disappear. The entire [­chlor-alkali] industry is just covering its ­production costs; it's not clearing its overheads, and PVC is a losing market."

However, producers are caught between a rock and a hard place, as manufacturers note that the cost of curtailing chlor-alkali production is extremely high given the European legislation around the clean-up procedure.

A producer says: "The industry is in Catch-22. It actually costs more to decommission or idle a facility - or even form a synergy between two producers - than it does to reinvest the capital into a PVC plant, even at smaller sites, so we do not expect too much consolidation."

A second producer feels that the lack of ­return on PVC and the high cost of closing production will ultimately serve the market in the long run, explaining: "When you look at the cost of building a PVC plant versus a polyethylene plant, you are talking about twice the cost for the same capacity of material, so no one will be looking to invest money into PVC in the near future. The bigger European sites have already been converted; we just have to wait for demand to outstrip supply and the market will become structurally short.

"The high cost of PVC reinvestment - particularly given the low returns - means that there's likely to be more investment in other material, safeguarding the future of PVC."

GOOD GLOBAL OUTLOOK
The source says that demand growth, particularly in the developing economies, is promising, with PVC consumption per capita in the more mature economies of western Europe and the US around 15-20kg, versus 7-8kg per capita in eastern Europe and 5-6kg per capita in China, Africa, India and South America.

The source says: "PVC demand grows slightly faster than the overall economy. PVC growth is 5-6% globally, versus GDP growth of 4.5-5%. We expect it to continue at least at this level for the next five years."

However, one producer believes that time is running out for chlor-alkali manufacturers, and that some consolidation in Europe is necessary if profitability is to improve. The producer explains: "PVC growth is closer to 4-5% globally, and for European producers, the demand has to come from local markets as it is impossible to be competitive in China, India and South America; they are not served by European producers.

"Our cost basis is just too high. Europe is the worst region in the world to manufacture PVC, and it's getting worse; the recent decision to close [German] nuclear power plants by 2022 will not help the industry to be competitive ­either. The only way out of this is consolidation and more focus on speciality grades."

The source concludes: "The bigger sites will be forced to switch their production over, but how long they can survive in this climate is only a matter of time."

 

US PVC EXPORTS FUELED BY FEEDSTOCKS
The US polyvinyl chloride (PVC) market has been supported by exports due to its ethylene advantage amid a weak ­domestic economy.

In 2010, the US PVC industry contributed to more than 60% of global trade, according to US-based consulting firm Nexant. However, the industry outlook is now muddled, as exports may be slowing from their initial robust activity, and an anticipated recovery in housing and construction may be more drawn out.

Since early 2011, PVC export prices have been rising, as US Gulf producers sought lucrative prices in the global market. In late May, US exports began to turn direction, as global buyers resisted prices sought by producers. But market participants expect the overall price direction to remain strong.

Domestic US housing and construction, the main drivers of the PVC market, continue to show a lackluster picture. "Construction has really gone through a depression, not just a recession," says chief economist Ken Simonson of the Associated General Contractors of America.

DOLDRUMS
Construction spending was at its peak in March 2006, but through March 2011, the industry benchmark has plummeted by 37%.

New-construction starts slipped by 9% year on year for the first four months of 2011, compared with the same period a year ago, according to McGraw-Hill Construction.

Similarly, US housing starts in April fell by 11% at a seasonally adjusted annual rate, and sank by 24% compared with the previous year, according to the US Census Bureau. Federal funding that boosts much of the US building economy has ended or will soon ­expire, Simonson says.

The US economic stimulus program that supports construction on military bases is expected to end within the next 12 months, he says. However, Simonson notes a few areas of improvement in the construction sector: the building of multi-family apartments, hospital projects and factory construction.

North America may be supported by growth in Mexico and an expected recovery in the US, but the demand would not be as strong. Two US chlor-alkali producers, Shintech and Formosa Plastics, are expected to begin production at their caustic soda expansions by July 1, but no major changes in capacity are expected for PVC.

Shintech's Freeport, Texas, facility has a nameplate capacity of 1.45m tonnes/year and its plant in Addis, Louisiana, has a capacity of 590,000 tonnes/year.

The Plaquemine, Louisiana, facility finished its PVC expansion in 2010, with a total capacity of 600,000 tonnes/year.

Key facts
Environmental regulation
The US PVC industry also may have to face stricter emission standards from the Environmental Protection Agency. The federal agency proposed new rules last April on the emissions of dioxins and vinyl chloride at PVC production sites in the US, which are chiefly in Texas and Louisiana. The agency said complying with the new rule would require an estimated total capital investment of $16m and "an associated total annualized cost of $20m."

Read about key influences on the chemical market on Paul Hodges's Chemicals & the Economy blog


Author: Stephanie Wilson and Ruth Liao



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