APLA ’23: PVC demand starting to improve but overcapacities to cast shadow for years – Unipar

SAO PAULO (ICIS)–Global demand for polyvinyl chloride (PVC) is “starting to improve” but the market’s overcapacities may take years to be absorbed, an executive at Brazilian producer Unipar said this week.

Alexandre Castro, business director for PVC, said Unipar’s commitment to Brazil remains firm despite historically high input costs, adding the company’s chlorine division is to tap into the deployment of the basic sanitation framework which is aiming to bring universal water sanitation services to all Brazilians by 2033.

Argentina, where Unipar has roughly a third of its operations, remains in a “very difficult situation” but a bottom may have been reached, said Castro, “as things could hardly get worse” and said the upcoming election on Sunday 19 November to elect a new president may start to bring back the lost confidence in the country.

Unipar mostly produces chlorine, caustic soda, and derivatives such polyvinyl chloride (PVC), vinyl chloride monomer (VCM), ethylene dichloride (EDC) and hydrochloric acid (HCl). Construction and water sanitation are two key end markets for the company; it has two production facilities in Brazil and one in Argentina and is building a third one in Brazil’s Bahia state.

Castro spoke to ICIS on the sidelines of the annual meeting of the Latin American Petrochemical and Chemical Association (APLA).

CONSTRUCTION WOES
As for so many petrochemicals, PVC capacities are exceeding demand globally in what is a key plastic used in the construction industry. The inflation crisis has pushed borrowing costs higher, hitting the residential mortgage market, said Castro.

China’s excess PVC is being exported in large quantities, putting pressure on pricing. China dictates the fortunes of PVC globally, something very much felt in import-dependant, price-taker Latin America, as other producers have also said, such Mexico’s Orbia for whom PVC is also a key division.

But Castro, who seems to fall on the optimistic side of life, said that PVC overcapacities and low prices may be starting to recover globally, bringing relief to the likes of Unipar who had to compete globally with significantly higher input costs.

“We will not see many PVC and chlorine capacities coming on stream over the next three to four years. We expect the curves back to normal in terms of demand and supply. The task for us is to look for better margins over the next few years, so we can reinvest in new capacities for chlorine and caustic soda.

“We are starting to see improvements. When you look at construction, which is an important part of our consumption, the easing of interest rates globally is to help prop up mortgages, helping demand for PVC,” said Castro.

The executive said that “possibly into the middle” of 2024 interest rates will start coming down more significantly, with the subsequent restart in heathy construction activity following.

Speaking of Chinese PVC exports, or any other petrochemical, Castro preferred to stay away from the at times apocalyptic language Brazil’s chemicals trade group Abiquim has used of late, speaking of the potential closure of dozens of chemicals plants if cheap overseas product and high input costs at home persist.

Unipar is a member of Abiquim, which represents mostly Brazilian chemicals producers. It does not represent other sectors of the industry such as distributors, who do take advantage of lower-priced overseas product.

“Here [in Brazil and Latin America] we have never been price makers: it is an international market. But at Unipar we do think we can compete in our region, and of course we are committed to Brazil and its industry,” said Castro.

He added that given Brazil’s higher-than-peers natural gas prices, the company is investing large sums in electrifying its energy supply.

– Given the structural factors affecting Brazil’s chemicals, is the industry viable without the help of state?
– We have been having this conversation over the last 20 years, and we are still here. Unipar is committed to Brazil and our expansion plans shows it. The country is a bit market, and it is growing.

WATER FOR THE PEOPLE
Unipar is building a 20,000 tonnes/plant chlorine plant in the state of Bahia, in Brazil’s under-industrialised and poorer north. It is there where many still lack access to sewage treatment services or sanitised water: a stark contrast to the richer south in this large country of equally large economic disparities.

The plant is expected to start up at the end of 2024 or beginning of 2025, said Castro.

“It is a small plant, but it’s our steppingstone into the north,” he added.

If projects go ahead as planned, Brazil will need a lot of chlorine in coming years. With the plant in Bahia, Unipar is aiming to expand its geographical reach to tap into the potential offered by the Reformulation of the Sanitation Legal Framework – or Novo Marco Legal do Saneamiento in Portuguese, which aims to bring safe access to water to more than 33m who still do not have it.

“When we say 50% of the population have not access to sewage treatment, of course we are not talking about places like Sao Paulo or Rio de Janeiro or other large urban areas,” said Castro.

“And because we are committed to the market, we see the potential in the north.”

ARGENTINA VOTES
Argentina’s worsening financial crisis in 2023 has prompted the government to implement restrictions to import goods and materials, aiming to stop dollars leaving the country so what’s left of the dollar reserves in the central bank can be maintained.

For many companies, the so-called SIRA permits for imports have become a daily battle, with the government allowing certain exceptions, based on the strategic importance of the goods or materials in question.

Castro conceded the financial crisis in Argentina has worsened quickly – the country’s annual rate of inflation stood at more than 140% in October – and the new president chosen on Sunday 19 November will not have an easy job: Argentina’s troubles started so long ago, and have gone so deep, that many even doubt they can be solved.

Earlier in the year, Unipar had said that the inflation crisis had even propped up its PVC sales in Argentina, as customers rushed to buy product in anticipation of higher price rises: the quintessential inflationary spiral.

But that was in the first quarter, and partly in the second. The country’s inflation was running at an already untenable 108%, but things have got worse since then.

Now, most people who have any pesos to spare just tries to exchange them for dollars. With one of the two hopefuls for Sunday’s election bashing his own country’s currency continuously during the campaign, the unofficial, ‘blue dollar exchange rate’ has surpassed the never seen 1,000 pesos to the dollar level.

Far-right candidate Javier Milei wants to dollarise the economy and dismantle the central bank. The other hopeful, Sergio Massa, came on top in the first round, a result that shook many as he has been the economy minister for a year.

According to an economist in Buenos Aires, fear beat anger in the first round: Massa being seen as the one who avoided a bigger disaster, and Milei outlandish proposals seen as the unknown, Carlos Perez at Fundacion Capital said to ICIS.

“It is very difficult to import right now, because of the country’s aim to increase dollar reserves. But the issue for us here is that we must import some materials, so this means a lot of bureaucratic work in terms of SIRAS and other documents,” said Castro.

“Despite still healthy demand, we are not running our plant in Bahia Blanca at full capacity, because we need to balance our operational rate with the company’s capacity to get SIRAs approved. It is a tough moment for the country. But I hear from our customers there that it will not get worse, because it can’t simply get worse.”

Castro concluded saying that, whatever the president chosen on Sunday is, he will have to make “deep changes in their political and economic policies” for the country to recover some financial normality, lost decades ago.

The 43rd APLA meeting ran in Sao Paulo on 11-14 November.

Interview article by Jonathan Lopez