Weak lira hits Turkish PVC demand, currency near tipping point

Focus article by Chris Barker

LONDON (ICIS)–A steep decline in the value of the lira is contributing to weak polyvinyl chloride (PVC) demand in Turkey, with markets close to a psychological tipping point, according to sources on Monday.

The lira has sunk against the US dollar over the past year and reached a record low last week at over 2.94-1.

Source: xe.com. 1-year chart.

“The lira is almost 3-to-1 [against the dollar]…there is a psychological threshold at three, until we reach that it should be more acceptable,” one trader said.

“Of course you can see [the] advantage to exporters but this also brings inflation and lots of adverse effects from the increase in currency.”

Higher inflation

“When the lira is devalued in the long term this is reflected in higher inflation- in the long run this will also lead to low demand…The convertors of plastics who are buying plastic resins and converting to the end product are selling in Turkish lira, on the other hand [they] have to import in dollars,” the trader said. 

“When it is 3 per dollar instead of 2.6 this is increasing their costs…This will mean they have to increase sales prices, which also adds to inflation,” it added.

“I think inflation is not yet a direct threat to downstream [markets] but because of uncertainty everyone is acting carefully and not buying more than they need.”

Unstable market

Another trader said: “[The] Turkish market is quite fragile and unstable at the moment due to the record low against the dollar…We wouldn’t want to give bigger sales into Turkey [because] the liquidity is risky.”

It added: “Buyers are believing that the price has to soften further.”

Players pointed to political instability and military action in Turkey as contributing to weak demand, with the failure of parties to establish a governing coalition and violent clashes between rebel groups and military police further driving down the lira.

A source said that the violent atmosphere is contributing to the flight of investors from the country, adding: “When the foreign investors want to sell their shares in the market it leads to the immediate movement of currency outside the market.”

European PVC export prices, which often reflect sales in Turkey, have trended downwards in H2 2015 after peaking in May (see chart below). Last week’s prices were assessed at USD $855-880/tonne (FOB) free on board.

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