US PVC set for margin gains in 2017, report says

HOUSTON (ICIS)–Rising demand and a lack of new production capacity over the next three or four years portends stronger pricing and margin strength for US and Asia producers of polyvinyl chloride (PVC).

Rising construction activity in the US and southeast Asia to house growing populations will sustain a rising demand trend for PVC, according to a growing consensus.

Wednesday, investment advisory firm Jefferies added its voice in a note to investors. Lead author Yoshiro Azuma said that US PVC producers, especially Shintech, the US operating division of  Tokyo-headquartered Shin-Etsu, are well positioned to expand margins during the period, continuing a trend that has seen global and domestic prices rise for PVC through the second half of 2016.

Natural gas from shale deposits is providing both an inexpensive raw material and cheaper energy source than found in almost any other region, giving US producers a production cost advantage, the report said.

Lower production in China as the result of higher coal costs will likely aid producers in the US and Japan as the changing regulatory and cost environment unfolds, the report’s authors said. The report also highlighted Japanese producers Tosoh and Tokuyama as additional beneficiaries to the current market trends.

In China, coal is used both as a fuel and a feedstock in the carbide-based process used to make PVC there. That makes the industry particularly susceptible to anti-coal initiatives.

US market participants are also optimistic about the domestic impact of any stimulus package that the incoming administration in the US might promote. That would likely include infrastructure spending that would consume PVC pipe for municipal systems and additional demand from other construction uses.

US and Canada domestic production and sales already began to rise in 2016, according to data from the American Chemistry Council (ACC) and Vault Consulting.

“If Trump cuts some of the red tape and we get a stimulus package, that will change everything,” a distributor said in December.

If the domestic market improves, it would add to the margin lustre already provided by US export growth.

(Source: ITC)

US producer output appears on track to tally about 7m tonnes of output in 2017 when December production figures are released later this month by the ACC and a final count is possible.

Of that, about 43% is likely to have gone to export sales, or about 2.7m tonnes, according to the ICIS estimate based on figures from the US International Trade Commission (ITC). US PVC exports are up about 4% through the first 11 months of 2016, according to the most recent ITC data. 

PVC exports from China have fallen off swiftly since September when the new regulations began to be felt in the market and domestic PVC prices rose there, according to Jefferie.

China is the second-largest destination for US PVC exports, having taken 256,000 tonnes through November, behind Canada’s 407,000 tonnes.

In the US, Shintech is in the process of adding 300,000 tonne/year production capacity at its plants in Louisiana with the second and final phase of that expansion set to launch at the end of the first quarter. Shintech is also building its own ethane cracker near its plants in Addis and Plaquemine to supply feedstock.

Other major US PVC producers include Formosa Plastics, Occidental Chemical and Westlake Chemical.

Focus article by Bill Bowen

INSET IMAGE: PVC pipes. (WestEnd61/REX/Shutterstock)