US VCM plugging the leak in the market dike

Bill Bowen

29-Apr-2016

Spectators watch smoke rise from the Clorados 3 plant on 20 April 2016 in the Pajaritos petrochemical complex in Coatzacoalcos, Veracruz state, Mexico. (Xinhua News Agency/REX/Shutterstock)
Despite higher PVC and caustic soda export offers in the US Gulf, price increases were mild after the deadly explosion at the Parajitos complex in Mexico. Spectators watch smoke rise from the Clorados 3 plant on 20 April 2016. (Xinhua News Agency/REX/Shutterstock)

HOUSTON (ICIS)–US producers of polyvinyl chloride (PVC) and caustic soda quickly upped their export price offers last week immediately following the explosion at the Petroquimica Mexicana de Vinilo (PMV) vinyl chloride plant in Mexico.

Offers for PVC FOB (free on board) US Gulf jumped more than $50/tonne and caustic soda offers rose even more.

“Producers are trying to get it above $800/tonne,” a US-based trader said shortly after the 20 April plant incident. The trader said that most transactions out of the US Gulf during the previous week held in a range in the mid-$700s, but went up about $20/tonne during the week.

But the higher prices never took in either market.

After the smoke has cleared and the terrible toll of the explosion and fire has become known 32 dead, more than 100 injured, a vinyl chloride plant destroyed and likely political fallout clouding Mexico’s efforts to further privatize its petrochemical sector more clear-eyed assessments of the market impact emerged.

Little panic-buying took hold in the aftermath, and at least one producer moved its offers lower during the week.

Buyers and traders, having surveyed the damage and the scope of the impact to feedstock streams and trade flows, have held off buying at the higher-offer levels.

And though prices of caustic soda and PVC had been moving up in the weeks leading up to the explosion, they have not jumped as many first expected.

Soldiers stand guard as relatives converge on the petrochemical plant where 32 died and more than 100 were injured 20 April 2016 in Pajaritos petrochemical complex, Coatzacoalcos, Veracruz state, Mexico. (Xinhua News Agency/REX/Shutterstock)
Soldiers stand guard as relatives converge on the petrochemical plant where 32 died and more than 100 were injured 20 April 2016 in Pajaritos petrochemical complex, Coatzacoalcos, Veracruz state, Mexico. (Xinhua News Agency/REX/Shutterstock)

Revised appraisals say that supplies of caustic soda and PVC in Mexico will likely tighten and prices may increase in the domestic market in the short term. But the impact is likely to be limited in scope, though amplified within a couple of markets.

First, the damage to the PMV plant, within the Pajaritos complex in Coatzacoalcos, Veracruz state, Mexico, did not affect the chlor-alkali facility or the ethane cracker.

So prices of caustic soda have held relatively steady, though it is expected that the loss of VCM production will also limit production of caustic soda and chlorine during the coming months.

Most directly affected was the facility’s vinyl chloride monomer (VCM) production. The VCM plant sustained heavy damage and most market participants expect that it will take much longer than six months to a year to get the plant repaired and back to production.

The accident also appears to have drawn political attention and an investigation, and any new construction plans are almost certain to draw scrutiny, market participants agree. Some doubt whether it will ever be rebuilt.  

But US producers, who have ongoing supply arrangements and provide most of Mexichem’s vinyl chloride feedstock requirements, are expected to pick up the slack of the lost production: estimated at 130,000-170,000 tonnes in 2015.

US producers shipped 480,475 tonnes of VCM to Mexico in 2015, down 5% from 2014, according to the US International Trade Commission (ITC). Another 345,000 tonnes were shipped to Colombia where Mexichem also has PVC production facilities.

Additionally, US producers in the first quarter ended a long-term contract to supply VCM to Australian Vinyls, which last year took about 100,000 tonnes. That likely means the US possesses some surplus production capacity.

   

Four parcels of VCM were heard to have been arranged in the past week from the US Gulf to Colombia and to Alta Mira, Mexico. Two of those parcels were from its contractual suppliers, but thought to be in addition to the contracted volumes, according to market sources.

VCM spot prices in the US Gulf are expected to push up, but no spot business was detected during the week.

The impact to PVC is likely to be broader and more significant, even though the plant explosion occurred during an apparent lull in market activity. Many buyers have built inventory ahead of price increases and a round of plant maintenances in the US Gulf.

Additionally, business to India began to quiet during the week ahead of the onset of June monsoon season, slowing what had been the outstanding export market for global producers in recent weeks.

Mid-term, the loss of the VCM plant, which provided less than 20% of the feedstock that Mexichem requires for PVC production, will likely reduce Mexichem’s PVC contributions to export markets in the short term and drive up domestic prices at home.

“They will protect their Latin America business first,” said a trader who is based outside of the US and is familiar with the company’s trading partners. That is the company’s home territory and where it holds market influence.

Mexichem’s exports to Europe likely will be reduced, too, where it bolstered its position with the acquisition of German PVC paste producer Vestolit in 2014. The company has at least nine other PVC plants to help cover the shortfall, further blunting the impact.

But it is expected to work to protect market share and customer relationships it has built in Europe over the past two decades, too. So it is expected to work to fulfill contractual obligations in that region, minimizing impact there.

The impact may be more pronounced in Turkey, where Mexican material has advantaged import duty status over US material, and where it has become the third-largest supplier of imported material to the Turkish market.

Turkey is more of a commodity market for Mexichem, which lacks the longstanding commercial relations that it enjoys in Europe.

The impact in Turkey and Europe is not expected to be felt until June because of the shipping times for parcels interrupted by the fire. 

Still, PVC trade in the US Gulf was heard in a wide range during the week, from $740-790/tonne, according to several market sources, including two producers. Most business, though, was heard transacted in a cluster in the middle of that range.

PVC CFR (cost and freight) prices to Latin America were heard ranging from $800-850/tonne.

Mexico President Enrique Pena Nieto, right, visits the Clorados 3 plant after the 20 April 2016 explosion in the Pajaritos petrochemical complex in Coatzacoalcos, Veracruz state, Mexico. (Xinhua News Agency/REX/Shutterstock)
Mexico President Enrique Pena Nieto, right, visits the Clorados 3 plant after the 20 April 2016 explosion in the Pajaritos petrochemical complex in Coatzacoalcos, Veracruz state, Mexico. (Xinhua News Agency/REX/Shutterstock)

INSET IMAGE: Mexican President Enrique Pena Nieto comforts relatives the day after the 20 April 2016 blast. (Xinhua News Agency/REX/Shutterstock)

Focus story by Bill Bowen

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