OUTLOOK ’17: Uncertainty and optimism ahead for European PVC

LONDON (ICIS)–The overall outlook for European polyvinyl chloride (PVC) in 2017 is for stable to slightly increasing demand and steady supply conditions.

However, significant uncertainty surrounds these predictions due to risks to political and economic stability in Europe combined with the unclear outlook for feedstocks.

With regards to demand, there are many risk factors for economic and political stability in 2017 including rising political populism in the EU and US, which could also threaten the structure of the EU and the integrity of the euro; and a troubled environment in the Middle East, which affects Turkey, Europe’s largest export market.

Despite the uncertain scenario for next year, PVC market expectations were mildly positive for demand and business conditions in 2017, with the market consensus cautiously optimistic. 

This is partially due to the end of several trends which have been causing problems in Europe.

Demand in eastern and central Europe has been weaker than in 2015 due to delayed infrastructure investment from the EU, which has significantly reduced overall PVC demand in Europe, particular for pipe-grade end users. New infrastructure projects have been rescheduled for early 2017.

The economic outlook for most of northwest Europe is also quite positive – albeit with caveats – with the construction industry reviving somewhat towards the end of this year, particularly in Germany.

One exception is the UK, where domestic buyers saw a significant drop in domestic demand for profiles in 2016 and expect the same situation going forward, due in part to stalling house prices following the UK’s vote to exit the EU earlier this year.   

UK PVC-ethylene spread 2013-2016

The fluctuating British pound, which dropped against the Euro in response to the vote and then rose following the US election result, has also created challenges for European producers in 2016 due to UK being a structural importer of PVC.

Sterling is expected to remain weak in 2017, and economic and currency uncertainty is likely to continue into at least the next year, with businesses also reducing long-term orders and office construction due to uncertainty. This will also lead to spillover effects in the rest of the EU.

Real estate research firm Savills has predicted flat house prices in the UK for 2017 and a fall in commercial development activity of 30-40% over the next five years, due mostly to knock-on effects from the Brexit vote.

In the longer term, the lack of subsidies from the EU for sectors of the UK economy such as agriculture could have a serious impact on demand; however, funds are expected to remain in place until 2020.

The outlook for the Turkish market is mixed, with political instability rising following a coup attempt in mid-2016 and structural issues such as poor demand in export markets, slowing economic growth and low credit availability.

However, the market now presents good export opportunities for European producers due to US material being squeezed out of the market by new tariffs introduced in 2015. As a result, US exports to Turkey have fallen by more than 40% in 2016 compared to 2015.

Source: Turkstat (2016 figures subject to revision)

Export spot prices also rebounded in the second half of the year, although this was partially as a result of limited availability from European producers due to feedstock issues.

European PVC export prices 2016

In the long term, the recent victories by government forces in Iraq and Syria may lead to a more stable situation in Turkey’s bordering export markets. Market players expect any return to stability in the market to take between 18 months to three years, and the overall outcome of both civil wars is still in doubt, so this is unlikely to have any immediate impact in 2017.

There are no production capacity changes scheduled in Europe for 2017. However, the European market will continue to be affected by structural changes in the global supply and demand situation.

In a global perspective, India remains a strong and rising market despite suffering some short-term demand difficulties due to demonetisation, while Chinese prices are expected to be stable-to-firm due to increased regulations on the carbide production process introduced in the second half of 2016, and the Chinese administration’s intention to prioritise environmental clean-up in the coming years.

The US dollar gained strongly against the euro in 2016 following the election of Republican presidential candidate Donald Trump, which saw a fall in PVC imports into Europe. One of the scenarios over the next year involves a stronger US dollar, which is likely to have a similar impact in 2017.  

Dollar vs Euro 2016

Source: Xe.com

PVC feedstocks ethylene dichloride (EDC) and vinyl chloride monomer (VCM) are likely to become a significant bottleneck for the market from late 2017 onwards, with plants at Martorell, Spolana and Ercros’ Spanish sites expected to close due to the phasing out of mercury chlorine cells in Europe from December 2017 onwards.

Analysis by ICIS consulting suggests that the feedstock market will become tighter from 2018 onwards, but this will not be a factor for most of 2017, with only the Spolana plant in the Czech Republic scheduled to close in the first half of the year.

In order to maintain the required level of EDC/VCM production to continue PVC production at the same rate, European producers may increase chloralkali run rates to pre-2008 levels of 83-85%, although this will lead to problems related to excess chlorine production within the overall European system, particularly at specific locations.

In addition, European EDC capacity is quite well utilized compared to chloralkali, which could lead to a bottleneck in production and an increase in imports from, for example, the US or the Middle East to fill the gap.

Margins
PVC prices in 2015 increased strongly relative to ethylene due to the very tight market as a result of production issues in crackers and PVC plants across Europe.

PVC-ethylene spread 2013-2016

European producers have mostly succeeded in maintaining their margins in 2016, despite the lack of major production issues to drive down availability in the market. While the PVC-ethylene spread has decreased slightly towards the end of the year it is still considerably wider than in 2013-2014, a low point for the European market as a whole.

This was attributed partly to greater consolidation in the market, with the new company INOVYN formed in the second half of 2015 from INEOS and Solvay, with some assets also divested into the smaller company VYNOVA.

In addition, the weaker Turkish market in 2016 and H2 2015 has also encouraged European producers to focus more on their domestic markets.

By Chris Barker 

Follow Chris Barker on Twitter