USES

More than 98% of vinyl chloride monomer (VCM) in Europe is used to produce polyvinyl chloride (PVC). The rest is consumed in polyvinylidene chloride and chlorinated solvents. There is only a small spot market for VCM in Europe, except in the event of planned or  unplanned maintenance shutdowns.

SUPPLY/DEMAND

European producers closed a considerable amount of upstream chlorine capacity in the second half of 2017 due to the phasing out of mercury cell production in December. However, this is not likely to affect the  production of VCM in Europe for the short term, because producers have switched to importing intermediate ethylene dichloride (EDC) on a contractual basis to continue producing PVC.

As a result, potential VCM capacity has so far remained constant in 2018. Inclement weather in the first quarter of 2018 has negatively impacted VCM availability for producers and introduced logistical complications. Two of KEM ONE’s PVC plants in France had production limitations due to high water levels making feedstock transport difficult.

Downstream PVC demand is expected to be healthy in 2018, on the back of the healthier growth forecast for the European economy, with GDP growth predicted to be close to 2% by the European Commission. PVC demand is driven by construction and technical applications and is therefore strongly connected to overall GDP growth.

PRICES

European VCM prices are driven primarily by upstream ethylene and downstream PVC trends. There was very little spot business in  Europe in 2017 and early 2018, although buying interest did increase in the first quarter of 2018 as a result of the upcoming shutdown season for chlor-alkali and vinyls producers.

Estimated achievable VCM prices trended upwards in the first half of 2017, in line with upstream and downstream trends, before reaching a low point in the middle of the third quarter, due to the global decrease in PVC and feedstock prices. However, spot prices recovered later in the fourth quarter and in early Q1 2018 as global PVC prices rebounded and feedstock prices also trended upwards.

TECHNOLOGY

Most commercial production in Europe is based on ethylene, which is reacted with chlorine to make EDC. This is converted into VCM using thermal cracking. Hydrogen chloride byproduct can be recycled to an oxychlorination plant to make more EDC. The acetylene route dominates in China because of the abundance and cheap cost of coal feedstock. Several attempts have been made to develop ethane-based processes, but without commercial success.

OUTLOOK

VCM prices and demand are expected to track the trends in downstream PVC and upstream ethylene from 2018 onwards due to the lack of any significant spot market for the product and the heavily integrated European market. Feedstock prices are expected to be slightly firm compared to 2017 because of an upward trend in crude oil prices. Europe will change from a net exporter of EDC to a net importer from 2018 onwards; however, any volumes lost for PVC production have been structurally replaced by contracted imports from European and non-European sources.

Dow’s EDC/VCM plant at Schkopau, Germany lacks an accompanying PVC plant, which leaves some spare capacity available in Europe. As a result, VCM availability is not expected to shrink significantly in 2018. There have been new membrane-based chlorine plants  announced by several producers, which might ultimately return the European market to a more balanced situation regarding EDC. European producer INOVYN also announced a VCM  capacity expansion of 70,000 tonnes/year at Rafnes, Norway for 2019, supported by new membrane-based chlorine capacity.

The forecast for PVC is for a balanced market in the first half of the year and steady growth on the back of the forecast for the European economy to return to GDP growth of close to 2% per year. The current high price of chlorine co-product caustic soda is likely to incentivise the production of chlorine in Europe for at least the first quarter of 2018, which could lengthen the market for derivatives such as EDC and VCM, at least in local areas of high caustic soda demand such as the Mediterranean.

Overseas VCM markets such as the US are becoming more integrated, with limited spot business expected in 2018. The US market is balanced for domestic production, with very  little spot export business taking place. Shipments from the US to Australia are no longer a factor due to production in the latter closing in late 2015. Global PVC demand, which consumes the vast majority of VCM production, is expected to continue to grow healthily on the back of the expanding market in India, as well as the relatively strong outlook for construction and manufacturing in Europe.