Demand for PVC seen as weathering Asian downturn

Nov. 23, 1998
World PVC Growth [87,023 bytes] Global PVC Operating Rate Comparisons [84,730 bytes] Worldwide demand for polyvinyl chloride is expected to grow 4.6%/ year during 1996-2002. That growth rate will occur despite the short-term slow growth forecast for 1998-99 resulting from financial and currency crises in Asia, says Chemical Market Associates Inc. (CMAI), Houston.
Worldwide demand for polyvinyl chloride is expected to grow 4.6%/ year during 1996-2002.

That growth rate will occur despite the short-term slow growth forecast for 1998-99 resulting from financial and currency crises in Asia, says Chemical Market Associates Inc. (CMAI), Houston.

Demand for PVC grew at an average annual rate of 4.6% during 1992-96. PVC markets experienced strong growth in 1996, with world demand increasing by 7.4% from the previous year, said Rick Smith, CMAI's director of chlor-alkali and vinyls. He spearheaded the company's 1997-98 world vinyls analysis.

CMAI's analysis says world trade will be particularly hard hit by Asia's financial problems. However, the study says, longer-term demand for PVC will be led by the construction industry in all regions of the world.

Regions that have lagged in terms of industrialization and have large populations will show the strongest growth in the 6-year period, CMAI's study shows.

The study determined that PVC demand will remain healthy during the forecast period. But the industry faces short-term issues of overcapacity; slow demand growth through 1999; and weak operating rates, prices, and margins during a span that CMAI calls a period for survival.

The company adds that industry consolidation and rationalization, from a global perspective, are likely.


There are strategic issues that CMAI says may affect the vinyls business during the next several years:
  • Low negative margins for vinyls producers during 1996-99 will limit reinvestment during 2000-02. This lack of capacity expansion by the industry will allow demand to catch and surpass supply early in the next decade, creating a fly-up in prices because of tight supply/demand balances worldwide. CMAI believes that large, integrated producers will expand capacity to meet the longer-term demand for vinyls. Further, the company expects these new capacity additions will occur in the lower-cost regions of the world by global producers that have a captive feedstock position.
  • If China does not build the infrastructure of import terminals, tanks, railways, and pipelines to import significant volumes of vinyl chloride monomer (VCM) and ethylene dichloride (EDC) to support domestic production of PVC, "our forecast for PVC imports into China and world trade volumes is significantly understated," CMAI said. Its study forecast that China will be a major importer of EDC and VCM starting in 1998. It bases the forecast on a lack of China's chlor-alkali capacity and the lack of joint ventures that rely on imported product.
  • The financial and currency issues in Asia are forecast to result in a significant decline in vinyls imports into this region in 1998 and 1999. While this is a major issue for the vinyls industry, particularly those major exporters that supply Asian markets, the effect will be felt in the chlor-alkali industry. Reduced trade in vinyls will cause chlor-alkali operating rates to decline, potentially causing tight supply/demand balances and much higher prices for caustic soda.
  • The chlorine molecule may well be the key to the future of the vinyls industry. The PVC producers that have captive chlorine, are in a low-cost production area, and have maintained low fixed costs will be the producers "we believe will expand and potentially provide discipline and leadership to the market," CMAI said.
  • Pressure by environmentalist lobby groups on chlorine and vinyls will remain prevalent. However, scientific data coupled with strong commercial programs by producers worldwide will continue to defuse this issue.
  • "We forecast continued rationalization of the vinyls industry," the company said. However, this rationalization might begin to be global rather than either regional or country oriented-the case thus far. Low margins and profitability over the next year or 2 might create opportunities for some vinyls producers to develop a global business rather than a regional business through acquisition, alliance, or joint venture. "We believe some producers will emerge with global strategies, which have not been previously seen," the analyst said.
  • Cost competitiveness is a major strategic issue, as are feedstock integration and integration downstream into fabricated products. "If you believe the vinyls industry will continue to be an industry run on a country or regional basis without global strategy and without more fully integrated producers upstream and downstream, we could suggest this strategy be reconsidered," CMAI noted.
  • The VCM/EDC market internationally is in the process of change. Large, integrated producers are developing new production facilities for VCM and EDC in low-cost areas of the world. These facilities are designed for international markets.
  • North American vinyls producers will continue to be the world's largest vinyls products suppliers to world markets. Vinyls exports from North America are forecast to reach 4.2 million tons by 2001.

    This represents almost 43% of the total volume of vinyls products traded in the world. The total volume increase in exports by vinyls producers in North America during 1996-2002 is expected to be 876,000 tons. This increase is expected to follow a sharp decline in exports from North America in 1998 and 1999 because of the financial and currency crisis in Asia and slow economic growth in North America in 1999.

PVC supply/demand

World PVC operating rates during 1996-2002 are forecast to remain below operating rates for U.S. PVC producers (see chart, this page).

These low operating rates through 2000 will stem from capacity expansions that exceed demand in the early part of the forecast period and the decline in demand in Asia because of financial turmoil.

As demand catches and surpasses supply in the latter part of the forecast period, operating rates escalate rapidly, the study says.

There is always the possibility that PVC capacity could be expanded further after 2000, the study points out. However, with cash margins forecast to remain low through 1999, it will probably be the large integrated producers with captive feedstock in the lower-cost areas of the world that expand.

While capacity additions are noteworthy, totaling projections of nearly 7 million tons during 1996-2002, or 3.3%/year, demand is projected to increase at a rate of 8.4 million tons, or 4.6%/year, during the same period. Increasing worldwide operating rates to a forecast level of 90% in 2002 from 84% in 1996 reflects this.

The key issue, CMAI says, will be the decline in operating rates to 80% of capacity in 1998 and 1999 and the resulting low prices and margins.

PVC net trade flow

North American exports will continue to dominate world PVC trade through 2002 because of increasing demand in many regions of the world, the study shows.

A decline in world trade during 1998-99 will be due to the decline in demand for PVC in Asia.

Of interest, the study notes, is the apparent declining demand in the longer term for PVC imports into the Asia-Pacific region. This region is the fastest-growing one in terms of local demand, but this demand will be satisfied by increased supply from within the region.

Imports, or net trade, into the region from other parts of the world are forecast to decline early and then increase later in the forecast period. Those PVC producers that are not captive in chlorine and not cost-competitive may have a difficult time competing with low-cost, integrated producers, the study says.

Market restructuring and rationalization are likely in some regions of the world. These conditions may result in the emergence of large, fully integrated global producers that not only dominate their domestic market, but export markets as well.

VCM, EDC outlooks

VCM capacity additions during 1996-2002 are expected to increase at a rate of 3.9%/year.

However, demand for VCM for PVC production is forecast to grow at a rate of 4.4%, which will push operating rates to 89% in 2002 from 86% in 1996.

EDC capacity expansions during 1996-2002 are projected at about 11.7 million tons, or 3.4%/year.

These capacity expansions lag demand growth for EDC production of 4.4% during the period.

The Asia-Pacific region will continue to import the world's largest volumes of VCM and EDC, the study shows.

By 2002, U.S. exports of VCM are expected to represent 55% of world VCM trade.

And by 2002, North America and the Middle East are forecast to represent almost 70% of the world trade in EDC.

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