INSIGHT: US PVC outlook becomes scrambled for H2 as trade fears escalate

09 August 2018 17:00 Source:ICIS News

HOUSTON (ICIS)--US polyvinyl chloride (PVC) market players had reasons for high hopes at the dawn of 2018: strong production levels; a seeming return to strong US construction growth, up solidly this year; rising domestic demand; and growing export sales opportunities.

But the promising signs that had lifted those bright hopes crashed quickly after the US embarked on a trade war with China and Turkey changed its policy on PVC imports from the US.

“What you don’t want is disruption,” said a producer preoccupied with placing material once bound for Turkey.

What no one wanted - and no one expected - were tariffs on US PVC sales to China. Neither did anyone expect Turkey to increase duties on US material - or to end the re-export exemption on duties paid on US PVC imports.

That elimination of the re-export exemption all but ended US shipments to Turkey, an important and promising market that had absorbed 122,000 tonnes of US PVC in 2017, up from 88,000 the year before.

China, the US’s second-largest export market after Canada, is prepared to retaliate with tariffs of 25% if the US imposes a second round of tariffs on $16bn in Chinese goods, a move that is now set for 23 August.

“Things weren’t just out of this world, but they were going pretty well,” said another PVC producer.  “Now everybody is side-tracked.”

Market prospects for the second half of 2018 have become clouded by these fast-changing challenges, as traders and producers search for new buyers to take material once bound for now-prohibited markets.

Demand in the US and Canada domestic markets remain firm-to-robust, with construction activity running at 4.5% higher in May than in the same month in 2017 gauging by an annualised rate, according to the US Census Bureau.

But US and Canada PVC manufacturers export one-third of their PVC production, or about 2.24m tonnes in 2017, as they boost output to leverage low-cost shale-based ethane to make feedstock ethylene, according to the American Chemistry Council (ACC) using data compiled by Vault Consulting.

US producers have worked to build their individual export businesses and expect a disruption to trade flows to affect their bottom lines.

The PVC trade route to Turkey dried up quickly in June with the change of duty treatment there, according to suppliers who operate in that market.

Some US market participants are holding out hope that the exemption will be re-instated as the presidential election held in that country in recent weeks fades in the rear-view mirror.

The proposed retaliatory tariffs from China are another impediment to US players’ market plans.

China threatens 25% tariffs on US PVC and for precursor chemical ethylene dichloride (EDC).

China is the largest export market for US EDC, taking 371,000 tonnes in 2017, down from 495,000 tonnes in 2016, according to data from the US International Trade Commission (ITC).

The 300,000 tonnes of PVC that buyers in China took last year was mostly re-exported to Southeast Asia markets, enjoying the same re-export exemption that producers had enjoyed in Turkey.

The question now is, if China puts 25% tariffs on US PVC, it will not matter much if the re-export exemption remains in place. But if it is removed, the China market will also dry up.

“If Turkey can work out how stop this re-export business, I am sure that China will figure it out very quickly, if they want to,” said a frustrated trader.

China has reduced tariffs from India and South Korea in order to encourage sales from these origins. That is not a hopeful sign to US observers of the current market changes.

“The market is a mess and it will take some time to sort out,” the trader added.

Photo by Hans Lippert/imageBROKER/REX/Shutterstock

Sorting it out may be a bit of an intra-company sport.

Some US producers, such as Shintech and Formosa Plastics, are divisions of companies headquartered in other market regions. So they may be able to coordinate adjustments quickly and without much disruption to sales and marketing efforts, according to market observers.

Westlake Chemical also has a specialty division in Europe, Vinnolit. That may allow Westlake to sell into Europe while Vinnolit provides some supply to Turkey and China, these observers point out.

OxyChem may be in the weakest position. It has a relationship with Mexichem, which the company might be able to leverage to shift sales efforts more smoothly than going it alone.

However it plays out, gaining sales in new markets will likely require competitive prices.

Additionally, selling into alternative markets is likely to require longer travel times and greater freight costs.

Both of those factors may work against proposed price increases.

But given the complications, the extra-market factors that come into play and the political nature of trade war, make the outcome difficult to gauge.

It may turn out that the tangling of trade flows may push prices higher if some markets are starved of supply.

"You can make all the plans and figure out what you're going to do, but it's really hard to know how this is going to turn out," said a major US producer.

Major US PVC  producers include Occidental Chemical, Westlake Chemical, Shintech and Formosa Plastics.

By Bill Bowen

By Bill Bowen