European PVC demand hit by poor construction outlook

Economic uncertainty and fears of a double-dip recession are shaking the European chlor-vinyl market as the negative sentiment in the downstream housing sector continues to destabilize supply-and-demand balances.

© Rex Features

There is little hope for a turnaround in construction, which accounts for more than 50% of polyvinyl chloride (PVC) consumption before 2013. Construction output in the EU fell by 1.3% in October compared with the previous month,Eurostat statistics agency says.

With an average output growth in the first 10 months of 2011 of 0.6% in the EU-27, the sector has barely offset the consequences of the 2010 downtrend, let alone the collapse suffered when the credit crunch hit in 2008.

Plummeting consumption levels in the PVC market have led to a drastic reduction in the output of feedstock chlorine as well as shrinking supplies of caustic soda, a co-product of chlorine, and sent spot prices soaring to levels not seen since 2009, one of the worst on record for the European chemical industry and the PVC market.

High ethylene and energy costs and low demand in the PVC market have also driven the European ethylene dichloride (EDC) and vinyl chloride monomer (VCM) spot markets to stagnation because PVC producers are reluctant to buy high-priced feedstock when they are not confident they will manage to pass the cost of these through to the PVC market.

Recent optimism in the global capital markets over moves towards further fiscal integration in the eurozone have once again ground to a halt because of speculation about the consequences that a potential downgrade of France’s credit rating would have on the European Financial Stability Facility credit status.By the year end the debt crisis had spread to 12 of the 17 eurozone members.

The grim outlook continues to spread beyond countries using the euro, with the UK said to stand a 70% chance of falling back into recession, according to a study by theNational Institute of Economic and Social Research.

Fragile economic conditions and difficulties in obtaining credit have dulled activity in the housing market, a key end-user sector for the chemicals industry and the PVC market in particular, as economic troubles undermine consumer confidence and deter investment.

PVC activity in 2011 was around 15% below 2010 levels, says one producer, while margins were equivalent to those in 2009, a year that saw the construction sector shrink by about 8.4%.

“Margins are nearly half of 2008 for some producers. It is absolutely unbelievable,” says a PVC producer. “The difference in ethylene prices over the past three years is the same as the difference in our margin situation.”

Another producer says: “[PVC] prices have decreased steadily from July, whereas ethylene prices are much higher than three years ago. Margins are not really acceptable. We are at rock bottom at the moment.”

Producers have announced increases of up to €50/tonne for January contract prices in order to ease pressure on margins, after reportedly seeing signs of a recovery in buying interest for January orders.

This has come largely from customers wanting to benefit from 2012 bonus and discounts for large quantities.

Buyers, on the other hand, seem reluctant to accept these increases because of poor market fundamentals. “It’s reasonable to expect producers to aim for price increases, but I’d be very surprised if the market was ready for that, as demand is usually low after Christmas,” a buyer says.

Efforts to offset low domestic demand with exports have been undermined by softening Asian and US prices and negative sentiment in the global economy, with European FOB (free on board) prices falling by almost $400/tonne (€298/tonne) since June 2011.

One supplier said material is becoming less competitive the further away it moves from Europe and the more it enters the US dollar’s areas of influence, especially since feedstock ethylene contract and spot prices have dropped substantially in the US.

Upstream, efficiency struggles and strong international competition in the ethylene market are also having a knock-on effect on the vinyl chain, particularly since downstream PVC producers’ attempts to implement rises in line with upstream price developments have been frustrated by poor market conditions.

A lack of global competitiveness has placed downstream PVC players at a disadvantage, especially when considering the logistical difficulties involved in transporting ethylene across regions.

High energy costs, combined with strict environmental legislation, are also undermining competitiveness, with the Association of Petrochemical Producers in Europe (APPE) suggesting that the EU’s post-2013 Emissions Trading System (ETS) could lead to the closure of almost 10% of the region’s ethylene plant capacity.

High ethylene and energy costs, and slow demand in downstream PVC, have brought the European EDC and VCM spot markets to a standstill. Trading activity for both products has depended on the outcome of PVC negotiations, which have been unsuccessful as poor market conditions continue to cap potential rises.

Late December deals in the market for EDC – 95% of which is consumed in the VCM market – brought prices down to a 34-month low of $180-200/tonne FOB WE (Western Europe). However, sellers reiterated this was the consequence of year-end “distressed” circumstances, and that most suppliers would be reluctant to offer into the merchant market at these levels, given the high costs of European ethylene. Earlier in the month, European VCM spot prices hit a 30-month low after trades between Northwest European suppliers and east Asian buyers were concluded at $830-850/tonne CFR (cost & freight). Market activity in Europe experienced a brief pick-up because of demand from the Asia-Pacific region, where outages at Japan’sTosoh, a global supplier of inorganic chemicals, petrochemicals, and specialty materials, have led to tightness in supply and rising prices.

These values are still unlikely to stir buying interest from the downstream PVC market because such figures do not generate sufficient netback once converted into PVC, buyers said. “The current price levels are not competitive enough,” a PVC producer said. He said VCM prices would need to fall to $500/tonne FOB to be competitive.

Cutbacks in operating rates in PVC to just above 70% have led to a steady reduction in output of chlorine, leading to tightness and price hikes for co-product caustic soda.

Supply shocks and price volatility in the chlor-alkali chain are common in economic downturns because chlorine’s main downstream markets, PVC and isocyanates, are more strongly connected to the construction and housing sectors than caustic soda.

Caustic soda applications, on the other hand, are less linked to construction. They include pulp, paper and cellulose, car paints, glass and ceramics, food industries, water treatment and aluminium and metal.

Consumption patterns in the chlorine market are therefore more sensitive to abrupt changes in the state of the economy than in the caustic soda market.

According to producers, the supply imbalance that emerges in the chlor-alkali market after a collapse in PVC demand tends to rebalance after six months.

During that time, since almost all chlorine and caustic soda are co-produced simultaneously through the electrolysis of salt, manufacturers need to price both chemicals according to market fundamentals, because they need to be sold in the same proportion in which they are produced. A downtrend in chlorine prices is usually joined by price hikes in caustic soda.

Major European producers, such as US-based Dow Chemical, Germany’s Bayer and Vinnolit have announced rises in caustic soda contract prices for the first quarter of 2012 of €50-60/dry metric tonne (dmt) because of market tightness, which has been exacerbated by production outages at some European manufacturing sites, while other producers are negotiating price hikes of up to €70/dmt.

These announcements have been received with skepticism by buyers, who say they are excessive, pointing to slowing demand in key downstream markets. Regardless of the outcome of contract price negotiations, most market players agree that price hikes in caustic soda will not be sufficient to compensate for the margins producers have given away in the chlor-vinyl chain.

According toindustry body Euro Chlor, while European daily chlorine production in November fell by 0.2% from October 2011, inventories of co-product caustic soda rose by 10.6% in the same period, as demand from the key downstream markets of aluminium and pulp and paper is softening in both northwest Europe and the Mediterranean region.

Further improvements in availability are expected, as global industrial and French specialty chemical company Arkemahas restarted its electrolysis units in Fos-sur-Mer and Lavera, near Marseilles on France’s Mediterranean coast, following plant shutdowns. Logistical constraints have also eased, as the Rhine’s water levels have risen following rainfall. The river is an important European shipping route for chemicals and other commodities. The European caustic soda markets remain tight, with little availability for spot transactions. Conditions are particularly tight in the Mediterranean, where spot prices have risen to $475-515/dmt FOB MED (Mediterranean). If demand for caustic soda improves, supply imbalances in the chlor-alkali market will aggravate, while price hikes in spot and contract will be likely.

However, demand levels fell towards the end of last year and this trend could continue amid economic fears, correcting the market disparity, but forcing reductions in operating rates and further eroding profitability in the chain. There is little room for optimism in the European chlor-vinyl markets as demand from the key construction sector is unlikely to recover until at least 2013.

Price volatility and supply shocks throughout the chain are expected to continue, as escalating problems in the eurozone continue to hurt the global economy, leading to tight credit conditions, frail consumer confidence and low levels of investment.