Market outlook: Cautious optimism for Latin America PVC

Several countries are facing significant political and economic changes that will certainly have an impact on plastics markets REX/Shutterstock

Polyvinyl chloride (PVC) prices in Latin America have been trending up since in February of 2016, after a sustained price decline during the second half of 2015 and in January of this year.

Several factors have driven the recent increases, according to industry players:

■ PVC and feedstock vinyl chloride monomer (VCM) plant maintenances in the US

■ Improving PVC demand in the US for the peak construction season

■ Tight availability because of shortening supply and improving demand

■ Rising prices in the US and Asia

■ Expected higher prices for ethylene

■ Rising values of upstream crude oil from below $30/bbl a few months ago

Most recently, PVC markets in Latin America are facing upward pressure amid concerns about the lack of feedstock VCM from Petroquimica Mexicana de Vinilo (PMV) as a result of the explosion at its plant in the Pajaritos complex in Coatzacoalcos, Veracruz state, Mexico on 20 April.

The PMV plant, a Pemex-Mexichem joint venture, supplied about 20% of Mexichem’s VCM requirements for its PVC plants in Mexico and Colombia.

Mexichem said that it had placed customers on PVC allocation, although no further details were available as to the amount of the allocation or its duration.

Industry sources said Mexichem’s PVC plants in Mexico and Colombia will continue to operate because most of Mexichem’s VCM had been coming from US producers, which will continue delivering.

By the first week of May, PVC market participants in Latin America and the US had obtained required volumes.

Sources said no effects from Mexichem’s PVC allocations were evident among buyers, either on resin volumes or prices, but cautioned that it will take some time to determine the consequences of the explosion on the PVC market. A PVC buyer in South America said that PVC shipments could suffer because of the events in Mexico.

In Mexico, PVC market direction generally tracks US domestic market dynamics and US export offers to Mexico.

Despite the general uptrend, PVC prices were stable in Brazil and Argentina in the first quarter. The two countries are PVC producers with protective government policies that shield national industries against imports of resins from Asia or the US.

PVC price stability, or lack of it, in Venezuela, will depend on the rules of that the government establishes. The government dictates domestic prices for PVC in bolivares, and US dollar prices are calculated at the currency exchange rates also established by the government. Although PVC prices in bolivares have not changed in months, the devaluation of the Venezuela currency results in cheaper product in US dollars.

Talk surfaced in April that the Venezuelan government is considering setting the price of PVC in US dollars and letting the price in bolivares fluctuate in line with changes in the currency exchange rate.

OIL CONCERNS

PVC industry participants in Latin America have noted their concern about the uncertain direction of crude oil and derivatives markets that depend mostly on events in other regions, but less on political and economic changes in each Latin American country.

On one hand, Russia and major Middle East producers could reach an agreement to limit crude oil production, which should result in higher prices for crude and derivatives.

On the other hand, initiatives to reduce crude production, some led by South American countries, have been described as timid.

If no agreement is reached, the possibility remains that crude prices could fall again.

West Texas Intermediate (WTI) values which had fallen below $30/bbl have risen to around $45/bbl. Also, as sanctions are removed, Iran will be increasing its contribution to world crude supply.

GLOBAL PRICE DIRECTION

PVC prices in Latin America tend to track the direction of PVC prices in Asia and the US.

In Asia, Taiwan’s Formosa Plastics Corporation’s (FPC) PVC benchmark offers rose in March, April and again in May. However, FPC announced price decreases of $30/tonne for June. Demand in China remains soft. Also, in India, another major PVC consuming country, the monsoon season starting in June is expected to reduce construction activity and demand.

Market participants expect demand to fall in the Middle East and in other Muslim countries on the observation of Ramadan from 6 June through 5 July.

In Europe, demand should fall in August because of the summer vacations throughout the continent.

In the US, PVC demand has been increasing in April and May, driven by the peak construction season during the summer, following several PVC and VCM plant maintenances in April and May.

LATIN AMERICA DEMAND

Industry sources in several Latin American countries describe PVC demand as moderate. Market players in Mexico have noted some optimism in the automotive sector, as parts manufacturers that feed assembly plants in the US are moving from Asia to Mexico, strengthening the “maquiladoras” sector.

In South America, several countries are undergoing significant political and economic changes, even turmoil, that will certainly have an impact on petrochemicals and plastics markets, including the PVC market.

Politics in Brazil remain a significant factor, especially following the impeachment of President Dilma Rousseff. The most optimistic projections include a 3.8% reduction in GDP in Brazil for this year. Internal demand for PVC has been reduced to such an extent that net-PVC-importing Brazil continues with efforts to export PVC.

Despite initiatives to protect domestic industries, the new Argentina government is opening the economy.

The current regime is easing import restrictions and access to foreign currency to pay for imports.

The changing dynamics could push prices down for domestic products that until recently enjoyed a certain degree of protection against cheaper imports.

In Venezuela, the PVC industry is being challenged by the lack of raw materials and additives, as well as by depressed demand.

With the refreshed configuration of the country’s National Assembly after recent elections, local market participants hope that changes proposed by the opposition majority will contribute to an improved outlook for the PVC industry and other sectors.

Market sources in Latin American countries noted cautious optimism for the remainder of 2016.

Industry players are hoping that even the outlook for the ailing Brazil economy will improve, although slowly, once the government stabilises and foundations are laid for clearer and more positive political direction.

Of course, the trajectory that crude oil could take – and its impact on PVC and other petrochemical products – is a major unknown. Will crude oil values rise or decline? Will oil producing countries reach an agreement to restrict production?

For what remains of 2016, the direction crude oil takes will certainly be a major factor in determining the outlook for resins markets in Latin America and the rest of the world.

ICIS LATIN AMERICA

ICIS has a dedicated team of over 10 reporters and analysts covering all the latest news in Latin America’s chemicals and energy markets. Specialised content on the region includes reports focused on the PE, PP, caustic soda, PET and PVC markets, as well as the Mexico Energy Report, the first report focused exclusively on the opportunities emerging in Mexico’s gas and power markets.