28 September 2012 10:25 [Source: ICB]
Global demand for polyvinyl chloride (PVC) has shown a significant slowdown since the second half of 2011. Despite areas such as the CIS, Latin America and south Asia enjoying high growth rates, the major markets - western Europe, North America and mature markets in the east - have entered into a period of depression.
The PVC market in China, by far the world's largest, has been adversely affected by a severe slowdown in the average consumption growth rate. Following two years of phenomenal growth at double-digit pace in 2009-2010 under the government-backed stimulus, a different pattern has emerged since September 2011, when the government imposed restrictions aimed at controlling speculation in the property sector. Domestic consumption has remained comparatively weak since then.
Demand growth has also declined in India - which accounts for more than 5% of global demand - because of the increasing economic uncertainty and the tightened monetary policies adopted. Consumption Average Annual Growth Rate in the country dropped from more than 13% in 2010 to just about 5% in 2011.
In the US, domestic PVC consumption has deteriorated continuously since 2006, particularly with double-digit annual drops in 2008 and 2009 amid the effects of the global financial crisis. Consumption in 2011 was down again, losing another 1% compared with 2010.
However, in turn, PVC exports from the US have enjoyed a progressive rise and have prevented US production from following the collapse of the domestic construction sector. Annual net exports reached more than 3.6m tonnes in 2011, compared with just 350,000 tonnes in 2005, meaning that approximately 44% of US production in the year was exported. The key to success for US PVC has been the cost advantage for ethylene, which has emerged from the new shale gas resources over the past three to four years. This has sustained long-distance trade.
The question is whether this trend can continue, and what will be the prospective impact on the global PVC balance. Realistically, no substantial changes to trade flows from the US are to be expected in the short term, the main reason being the persistent weakness of demand in important economies including western Europe, and to some extent China. Nevertheless, some growth has emerged, for example with exports to China marking a 3% increase during the first half of 2012 compared with the same period in 2011.
Deliveries are likely to grow more to the less mature markets. In particular, demand is recovering faster in south Asia, where supply availability is also short compared with requirements and a number of plants are operating that are not upstream integrated, thus being exposed to the growing cost of feedstock deliveries.
In the medium term, shale gas in the US is potentially generating huge opportunities in terms of cost advantage, emerging from both a cheap ethylene chain and cheap energy cost.
By looking at ongoing upstream investments, US producers could be strongly competitive in terms of prices in the next five to 10 years. Future sales look solid in fast-growing markets including Latin America - particularly Brazil - eastern Europe, Turkey, CIS, India, Thailand, Indonesia and Vietnam. Despite the potential increase in supply close to those areas, there will be enough room for additional imports should the cost-structure advantage be confirmed.
Estimates of at least 600,000-700,000 tonnes of additional PVC could be exported from the US in 2020 compared with 2012. In addition, exports of ethylene dichloride (EDC) from the US could increase to supply PVC producers elsewhere, particularly in China (to ethylene-based PVC plants) and southeast Asia. The effect on the Chinese industry will still in part depend on the cost fluctuations of the acetylene route compared with the ethylene route. Despite increasing self-sufficiency, it is expected that domestic supply in the country will remain long compared with demand for some years to come.
As for Europe, the impact could be significant in terms of price competition, especially as resources from new crackers will be made available in the US, probably from around 2017-2018. This could generate pressure in terms of profitability for European producers. However, new investments are expected in the region, particularly for restructuring the supply base, and are aimed at developing new products including PVC pastes and specialties.
Fabrizio Galie joined Parpinelli TECNON (now part of ICIS Consulting) in 2005. He contributes to the periodical multi-client reports and publications for plastics, as well as to single-client activities.
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