You can lead a horse to water, but you can’t make her drink. That seems to be the critical message from the current state of US PVC export demand. This should be booming, based on the cost advantage provided by shale gas. But reality is different, as the chart based on Global Trade Information Services data shows:
• Net exports (red column) are up just 4% versus 2011 levels (blue)
• The main strength is in sales within NAFTA, up 19%; and the Middle East, up 7%
• China sales are up a mere 2% as its economy changes direction
• Sales to all other markets are lower than in 2011
PVC producers gain a double benefit from shale gas. Not only are their manufacturing costs reduced, but cheap ethane gives major advantage on ethylene cost. In the SuperCycle, this low-cost position would have made exports extraordinarily competitive.
But today’s world is quite different. Access to secure demand, rather than low-cost supply, is the key to success. And on this basis, US producers are in a much more difficult position:
• US housing starts are still 62% below their January 2006 peak. We will never see anything like that level again in our lifetimes, as the blog discussed last month
• Lack of domestic demand means producers have to look to export markets for growth – always a much more risky proposition. NAFTA is growing, but its demand remains relatively small
• Other markets are slowing fast. For example, China’s slowdown has had a major impact on Brazil, whose GDP grew just 0.6% in Q1, the 5th consecutive quarter of decline. And as a result, social unrest is building, with riots on the street over rising bus fares
This places a further question mark over the plans to expand US ethylene production by 10 million tonnes. Companies, and investors, need to ask themselves the critical question – where will all this new capacity be sold? The PVC data is yet another demonstration that SuperCycle thinking – ‘if you build it, they will come’ – is now well out of date.