INSIGHT: Europe PVC market tightness boosts profitability

05 March 2012 17:15  [Source: ICIS news]

LONDON (ICIS)--Persistently depressed demand and limited export opportunities have made it difficult for European polyvinyl chloride (PVC) producers to substantially improve operating rates and adequately pass on higher feedstock costs.

In contrast to other commodity markets, the PVC industry in Europe, which is heavily reliant on local construction markets, has not recovered significantly from the downturn suffered in 2009, after the credit crunch hit.

Producers have had to adjust operating rates to meet demand levels, as tight credit conditions have led to a new operating environment in which market players refuse to hold inventories for any longer than strictly necessary.

“You cannot afford to have one month worth of inventory in the commodity markets in such volatile economic conditions,” a PVC producer said.

Despite an average capacity utilisation of 70-80% during the past four years, Europe’s PVC segment has remained burdened by overcapacity, while prices have tended to either increase less or decrease more than ethylene.

“Operating rates need to be close to 90% for the PVC business to be profitable, so something close to 80% is a disaster,” a second producer said. “Suspension PVC is a loss-making business for all of us, and it has been so since 2009.”

However, the situation in February has changed, as low inventories due to year-end destocking have coincided with supply constraints at major producers Arkema and SolVin, which declared force majeure on PVC supplies after weather-related outages.

Arkema’s force majeure at its PVC facility in Berre in southern France remains in place, pending the restart of its vinyl chloride (VCM) plant at the same location.

SolVin’s PVC facilities in Tavaux, France, and Jemeppe in Belgium have now returned to normal operating rates and the force majeure has been lifted, but the company is able to supply only limited quantities.

Other producers, such as Japan’s Shin-Etsu and Vinnolit, of Germany, have implemented strict allocation on PVC supplies because of low inventory levels.

“Almost 70,000 tonnes of stock have been removed from the industry, resulting in a tight market,” a third producer said.

The immediate result has been a 20-month-record hike in February PVC contract prices – up by an average of €75/tonne ($99/tonne) FD (free delivered) from January – which more than offset the €99/tonne increase in the upstream ethylene contract price for February.

A further increase of €70-85/tonne is expected for PVC March contract prices, which far exceeds the rise suggested by the ethylene settlement, which was up by €86/tonne from February.

Ethylene accounts for nearly 50% of the cost of producing a tonne of PVC, with the remainder the price of chlorine and processing.

“[February] was a good month for producers, with strong demand and big increases across the board,” the third producer said.

However, while upcoming maintenance shutdowns and the peak of the downstream construction season are likely to support further margin improvements in March and April, the long-term outlook remains uncertain because of sluggish domestic demand and poor competitiveness.

Consumption in the domestic market has improved only marginally from the extremely low levels of December, and the 2012 outlook points to contraction, as eurozone austerity measures delay investment in the downstream construction sector.

According to research group Euroconstruct, construction activity in Europe this year is expected to fall by 0.4% compared with 2011 and by 17% against 2008.  

“In this kind of [tight] situation, it is difficult to understand what the real demand is, but downstream conditions remain depressed,” a fourth producer said.

“Also, there has been plenty of pre-buying activity because of speculation on ethylene prices, so the downtrend could come once people get a sense that upstream costs have reached their peak,” it added.

Also, efforts to offset weak domestic demand through export opportunities are unlikely to succeed, given the relatively high cost of production and raw materials in Europe, especially compared with US ethylene, which settled at 54.00 cents/lb in February, down by 1.75 cent/lb from January.

Finally, European players face the additional costs of upgrading their plants to comply with EU-wide environmental policies requiring chlorine plants to be converted from mercury to membrane technology by 2020.

Credit rating agency Moodys predicts that during the next 12 months 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 = €0.75)


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By: Abache Abreu
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