Europe PVC faces further deterioration in 2012 on slow demand

23 February 2012 13:19  [Source: ICIS news]

LONDON (ICIS)--The European polyvinyl chloride (PVC) industry faces further deterioration in 2012 because of declining demand from the downstream construction sector, credit rating agency Moody’s said on Thursday.

Construction activity in Europe is expected to contract by 0.4% year-on-year in 2012, as euro area government austerity measures are forecast to delay public investments and construction activity, according to research group Euroconstruct.

If construction activity, which represents more than 60% of PVC’s end uses, falls 0.4% in 2012, activity between 2008 and 2012 will have declined by a total of 17%, Moody’s said.

Relatively high production and feedstock costs have undermined efficiency and competitiveness of European manufacturers in the global markets, especially when compared with their US peers, and reduced opportunities to offset low domestic demand with increased exports.

According to Moody's, the average cost of producing PVC in Europe was €200 ($263) more per tonne than it was in the US in 2009, and this gap has widened further in the past few years because of cheaper ethylene in the US, which accounts for nearly 50% of the cost of producing a tonne of PVC, with the remainder comprising processing/ fixed costs and chlorine.

Persistently depressed demand and more limited export opportunities have made it difficult for European PVC producers to substantially improve operating rates and adequately pass on higher feedstock cost, especially ethylene.

Despite some capacity rationalisation in recent years, especially in southern Europe and the UK, the European PVC industry remains burdened by overcapacity.

Capacity utilisation in Europe was around 70-80% during the past four years. This is well below both the last peak of 91% in 2007 and the average 90% utilisation rate of major export-oriented US PVC producers in 2010.

Market conditions in Europe have changed over the past few weeks, as production outages at SolVin and Arkema have resulted in lower inventories across the European market and higher spot, export and contract prices. Demand, however, has only seen a slight recovery from the extremely low levels seen in the fourth quarter of 2011.

According to Moody's, during the next 12 months, pure European PVC players without substantial geographic diversification will be more vulnerable than their regional peers, while smaller, Europe-focused regional players, especially in Southern Europe, will be more exposed to a potential downturn.

($1 = €0.76)

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By: Abache Abreu
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