Home Blogs Asian Chemical Connections Global PVC markets tell a familiar of story of supply overhang, greater geopolitical risks

Global PVC markets tell a familiar of story of supply overhang, greater geopolitical risks

China, Olefins, US
By John Richardson on 06-May-2024

By John Richardson

NO MATTER which petrochemical or polymer you examine, the story is similar. To illustrate this point, let’s today look at polyvinyl chloride (PVC).

What’s similar about PVC and many other products is the huge growth since 1992 in China’s influence on global demand This was the year of Deng Xiaoping’s Southern Tour, signalling a big step-up in economic liberalisation.

As China’s economy boomed, largely thanks to the growth in its exports, so did petrochemicals demand, increasing the gap between China’s consumption and that of the much more populous Developing World ex-China region.

Then came China’s admission to the World Trade Organisation in 2001 and the removal of the tariffs and quotas that had restricted China’s exports to the West. This enabled China to take maximum advantage of what at that stage was still a youthful population and major government and private investment in export-focused manufacturing.

But, of course, PVC is very much a “local for local” product because of its end-use applications in water and sewerage pipes, window frames and sidings – although other applications include wire and cable, hospital blood bags, electronics and automobiles.  

Hence, China’s 2008-2009 US$586bn economic stimulus package – which largely went into housing and infrastructure – seems to have had a much bigger effect on the country’s PVC demand than in some other products.

The package, a response to the Global Financial Crisis, was comparable in size to stimulus that was later-on introduced by the US. But at that time, China’s economy was only one-third the size of the US economy.

Up until the Evergrande turning point in September 2021, China’s investment in housing and infrastructure continued at apace.

It appears as if stimulus greatly increased the importance of Chinese PVC demand as a driver of global PVC demand: Between 1992 and 2008, China’s share of global demand averaged 17% per year; in 2009-2024, the ICIS Supply & Demand Database expects China’s share to reach 41%.

China’s demand growth averaged 10% per annum between 1992 and 2023. But growth is forecast to decline to 3% per year in 2024-2030. This is again in in line with forecast declines in demand growth for other products.

China’s property bubble appears to be over, perhaps for good. Its population is rapidly ageing, representing challenges to export competitiveness and domestic consumption growth.

Infrastructure spending is said to have reached saturation point in many provinces. Many of the bridges, roads and airports that needed to be built have been built, especially in China’s more populous provinces, suggests some analysis.

Then there are China’s debts. “China’s debt is more than 250% of GDP, higher than the United States. It remains lower than Japan, the world’s most indebted leading economy, but some experts say the concern is that China’s debt has surged at the sort of pace that usually leads to a financial bust and economic slump,” writes Reuters.

China’s ability to spend money on infrastructure could be constrained by its debt position.

Another familiar story: Record levels of global PVC oversupply

Between 1992 (the start of what I see as the Petrochemicals Supercycle) and 2023, global PVC capacity exceeding demand was estimated by ICIS as averaging 8m tonnes a year, including a sharp increase from 2022 onwards (the year marking the end of the Petrochemicals Supercycle).

As with many other products, ICIS forecasts a big increase in global PVC capacity exceeding demand in 2024 -2030. During this period, capacity exceeding demand is expected to average 15m tonnes a year.

This is forecast to lead to a fall in global operating rates. In 1992-2023, operating rates averaged 80% per year. A decline to 75% is forecast between 2024 and 2030.

In another parallel with other products, China’s self-sufficiency in PVC has reached the point where it has swung from being a major net importer to being a net exporter, as the next chart details.

China’s net imports of PVC peaked in 2001, declined until 2008 and then recovered as the big economic stimulus programme kicked in.

But net imports then declined before bumping along the bottom until 2021. There was next a big swing to significant net exports from 2021 onwards.

The importance of this is evident from the above table. In 1992-2023, China accounted for an estimated 24% of total global net PVC imports among the countries and regions that imported more than they exported.

In other words, the total global net import market has suddenly become 24% smaller; and, as mentioned, China is also now a major net exporter.

Here are some more important statistics to consider: In 1992-2020, before China swung into net exports, its share of global capacity increases averaged 21% per year; in 2021-2027, this is forecast to jump to 78%.

Geopolitics, reshoring and PVC export competition

Trade tensions between China and the West have been building since Mike Pence, the then US Vice President, made a landmark speech in October 2018 in which he said:

“The Chinese Communist Party has used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies that are handed out like candy to foreign investment.”

One of the few things that Republicans and Democrats appear to agree on is this approach to China, even though tactics to achieve the same ends differ. Since President Biden came into office we have seen an increase in trade measures against China – and a major reshoring push through the Inflation Reduction Act.

“China’s seeming reluctance to rebalance its economy [towards greater domestic consumption] is one of the great challenges facing global financial systems, threatening to worsen Beijing’s trade and diplomatic relations not only with Western countries but also with developing nations,” wrote the Financial Times in this 1 May article.

As I discussed in my 29 April blog post – quoting analysis from Peking University economics professor Michael Pettis – China’s focus on exports as a means of trying to maintain to GDP growth at 4-5% year faces these challenges:

  • If China were to maintain current growth rates while keeping its high investment and manufacturing shares of GDP, its share of global investment and manufacturing would expand much faster than its share of global GDP.
  • Even without today’s geopolitical tensions and policies in the US, India, and the EU to boost domestic investment and manufacturing, this would still be highly unlikely.
  • Under a scenario where China continued to focus on investment-led growth, the rest of the world would have to agree to reduce the investment share of its GDP by roughly 1 full percentage point to 19% of GDP, well under half of the Chinese level, Pettis added.

Could this translate to more protectionism in global PVC? It is a scenario worth considering, making use of ICIS data and analysis to stress test your business.

The above chart provides three scenarios for China’s average annual net PVC exports in 2024-2030, based on the same demand growth of assumption of 3%, but factoring in different operating rates.

The ICIS base case assumes operating rates at 71%, leading to net exports of some 900,000 tonnes a year. Raise the operating rate by five percentage points to 76% and annual net exports become 2.4m tonnes. Increase the operating rare by another five percentage points and net exports rise to 4.1m tonnes a year.

Now let’s switch our attention to the US and the big surge in its actual net exports since 2006.

The US completely dominated global net PVC exports in 1992 2023 – 85% of the global total. Big increases in US exports happened from 2006 onwards because the shale-gas revolution led to cheap ethylene and cheap electricity (upstream in this industry, electricity is the most-important feedstock).

A temporary dip happened in US exports in 2021 because of the Texas Winter Freeze that led to major power outages. But last year, net exports had rebounded to 2.6m tonnes – near their record high in 2010.

To complete the picture, let’s look at three scenarios for US PVC net exports in 2024-2030. Here, I see the potential range of outcomes as being narrower than for China.

The ICIS base case – factoring in 2024-2030 local demand growth of 3.1% per annum and an operating rate of 84% – assumes net exports at an average of of 3.1m tonnes per year.

But what if demand growth rose to 6% per year? The Inflation Reduction Act is delivering such a major boost to US manufacturing that perhaps growth will hit this level. Raise operating rates to 89% and average annual net exports would reach 3.4m tonnes a year.

Or in my third scenario, let’s again assume an 89% operating rate and demand growth at the ICIS base case of 3.1%. Net exports would be at 3.6m tonnes a year.

Conclusion: The importance of the big picture analysis

During the Petrochemicals Supercycle, the world was becoming ever-more globalised rather than what we are seeing today – the reverse.

China was the tide that lifted all ships. Almost every year, its growth surprised on the upside, guaranteeing success for even the least-competitive plants in every region of the world.

We didn’t have to worry about big increases in China’s self-sufficiency across in value chains such as PVC, polyethylene (PE) and polypropylene (PP).

Now everything has changed, making big picture analysis of China’s economic problems and the geopolitical landscape crucial. This kind of analysis has become as important if not more important than studying of cost-per-tonne economics.