23 April 2012 00:00 [Source: ICB]
Because of the strong correlation between polyvinyl chloride (PVC) and the construction industry, global demand growth for the material has been somewhat muted for the past few years.
"We are still waiting for the great construction recovery," pointed out Laurence Alexander, analyst with US-based investment bank Jeffries. "We're sure it's coming, but the early signs of improvement we saw over the winter have stalled," but not retreated, he added, noting that nonresidential construction spending may be down roughly 25% from its 2008 peak, but 75% of projects are still being completed.
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Global PVC revenues will exceed $65bn by 2019, a study says
But others are more upbeat, and many believe that the global recession has ended. As such, the construction industry will again boost demand for PVC, and Germany-based Ceresana Research expects the global PVC market to reach revenues of more than $65bn (€50bn) by 2019. Ceresana released a report on PVC in March.
The global market value of PVC in 2011 was roughly $43.5bn, the consultancy estimates, with the biggest share held by Asia-Pacific with 49.3%, followed by Western Europe with 17.7%; North America, 13.6%; Eastern Europe, 8.5%; South America, 5.1%; Middle East, 3.9%; and Africa, 1.9%.
According to UBS analyst Andrew Cash, PVC demand and operating rates were firm in the first quarter of 2012, "aided by restocking following a severe industry inventory pull-down in [the fourth quarter of 2011], firm exports, and possible pre-buying ahead of anticipated second quarter price increases."
US DEMAND RISES
So far this year, US contract PVC prices have had total increases tallying 8 cents/lb. Spot prices for PVC in the US are up about 10 cents/lb from the first of the year. "This has lowered the arbitrage window and resulted in reduced exports," said Cash.
For April, US-based producer Occidental Chemical has proposed an increase of up 2 cents, while for May, US producer Georgia Gulf proposed a PVC price increase of 3 cents/lb. "It's possible the industry may get behind this increase, but it is a bit early to tell," noted Cash.
Also for May, Shintech proposed a 2 cent/lb increase on US PVC. One buyer of PVC said he believed Shintech made the move anticipating stronger demand from the spring and summer homebuilding season.
But, the source added, buyers are likely to resist the increase, noting that the earlier ones were not fully implemented. Demand may not be as strong as producers believe, the source said.
US contract prices for pipe-grade PVC are assessed by ICIS at 56.50-61.50 cents/lb. General-purpose PVC is assessed at 58.50-63.50 cents/lb.
For January, the US exported 440m lb of PVC, down 18% from December. This was due in part to increasing PVC export prices that reflect higher US ethylene spot prices. Exports to South America remain strong, noted UBS analyst Cash.
"Domestic demand has picked up, but it is unclear how much restocking was due to improved demand," noted Cash. "Another consideration has been the mild weather in the US thus far this year that has encouraged an early start to the construction season."
Globally, Ceresana projects that the average annual growth rate of 3.3% seen in the past eight years is likely to be surpassed in future, increasing at an average annual rate of 3.9% over the next years.
"Moreover, the construction industry is boosting in these [developing] countries, where many PVC products are used in civil and structural engineering," said Sandra Schulze, marketing manager for Ceresana.
In fact, in India, PVC demand increased by 3% in 2011-2012 to 1.98m tonnes, as opposed to previously issued projections of 1-2% growth.
India PVC imports are expected to increase significantly, as demand is outstripping the country's growing downstream processing capacity. "Indian producers face severe competition from overseas suppliers," said SS Naik, senior vice president at India-based Reliance Industries, speaking at the Vinyl India 2012 conference held in Mumbai in April.
Meanwhile, the Indian government has set a target to construct 2m housing units/year to combat the country's housing shortage of 22m units. Naik notes that each unit can consume 200kg of PVC products such as pipes, doors and windows. PVC pipes remain the dominant end-use in India, accounting for 70% of demand.
As a result, this segment has the potential to create 400,000 tonnes of PVC demand in the future, Naik estimated.
Indian government plans for irrigation over the next five years have the potential to consume 8.5m tonnes of PVC, while the power sector will need about 1m tonnes of PVC for use in wiring and cables, he added.
The current global PVC capacity of about 50m tonnes is projected by Ceresana to be increased by 13m tonnes by 2019, with almost 80% of these new capacities created in the Asia-Pacific region.
The manufacture of pipes and conduits accounted for 39% of global PVC demand in 2011, with PVC plastic profiles responsible for just less than 20%. Films and sheets accounted for 18%, cables and cable sheathing 7%, and flooring 4%.
The optimism continues for North America: "The bright spot is its low cost production advantage, which should provide greater export opportunities," said Frank Mitsch, analyst at US-based Wells Fargo Securities.
In 2006, the US accounted for only 16% of the PVC export market, noted Mitsch. But in 2011, it reached 38%, and for 2016, it is forecast to account for 41%.
Because of higher costs, Western Europe, which is naphtha-based, and Asia - acetylene-based - are forecast to generate profits that are only near breakeven in 2012 and 2013.
"European players have a less competitive cost base than their US peers," said Gianmarco Migliavacca, senior analyst and vice president with global credit ratings agency Moody's Investor Service, in a February report.
The average cost of producing PVC in Europe was €200 more per tonne than in the US in 2009, and "this gap has widened further in the past few years," explains Migliavacca. "This is [due to the] increasingly cheaper ethylene in the US, which accounts for nearly 50% of the cost of producing a tonne of PVC."
Additionally, he notes, most European PVC producers purchase their ethylene from third parties, while several US manufacturers produce their own.
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