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PVC market recovering; PET still in overcapacity

By: Frank Esposito

November 18, 2013

CHICAGO ‒ North American PVC is telling a tale of two worlds – while the region’s PET market has seen some of the fizz go out of carbonated soft drink sales.

For PVC, the two worlds are the domestic market – which is still working to recover from the effects of the recession – and the export market, where PVC makers sent larger chunks of business when the domestic market waned.

The region’s PVC processors “were hit hard by the recession,” IHS Inc. PVC market analyst Steve Brien said at the Global Plastics Summit, Nov. 4-6 in Chicago. “That’s why we’re still seeing pipe and siding companies with operating rates of only 55-65 percent.”

“But PVC resin has operating rates of around 90 percent – and low inventories could tighten the market,” he added. Domestic PVC makers also could reduce the amount they’re selling as exports to meet rebounding demand from the domestic field.

Much of this growth will come from the U.S. construction market. The country’s housing starts peaked at more than 2 million before the recession, but plummeted to less than 500,000 before starting to rebound. They’re on pace for about 900,000 this year and should hit one million in 2014, Brien said, before climbing as high as 1.4 million.

But he cautioned that the recession “took a huge amount of demand out of the (PVC) industry, and it’s going to take a decade or more to get it back.”

Overall North American PVC demand growth is expected to increase from less than 1 percent in 2013 to almost 3 percent in 2014. Regional operating rates are expected to improve from about 87 percent to almost 90 percent in that same comparison.

The North American PVC field also stands to benefit from increasing development of shale gas in the region, which can be used to make PVC feedstock ethylene. There’s been much speculation that this increased feedstock supply could lead to more PVC capacity for North America. Mexichem is adding almost 400 million pounds of PVC in Mexico this year, while on the U.S. Gulf Coast, Westlake Chemical will add about 180 million pounds in 2014 and Shintech Inc. will add almost 700 million pounds in 2016. But Brien described these projects as “fairly small additions.”

He pointed out that there’s a gap of more than 6 billion pounds between the amount of ethylene capacity that’s set to be added and the amount of new polyethylene resin capacity that’s been announced.

“PVC would love to get its hands on the ethylene difference in the U.S.,” Brien said. “But that’s yet to be determined. [The PVC market] is set to expand and wants to expand, and it needs to get its hands on the ethylene molecule before expansions can be announced.”

Even without expanding, U.S. PVC has the advantage in cash costs. U.S. PVC makers “can make PVC here and ship it to any other part of world and be competitive,” Brien said. “I definitely think there will be more [North American PVC] expansions announced sooner than later.”

North American PET, on the other hand, doesn’t really benefit from shale gas, but is adding large chunks of capacity nonetheless, as the region’s major suppliers work to assert themselves through integration.

Announced expansions – including a major one by M&G Group in Corpus Christi, Texas – will add about 3.5 billion pounds of capacity to a North American market that currently operates about 8.4 billion pounds.

“The industry is highly competitive,” IHS PET market analyst Chase Willett said. We expect rationalization of older capacity, but we’ll have a very modern industry that’s much more competitive in the long run.”

But flat domestic demand growth means that the new PET capacity will serve to reduce the amount of resin imported into North America. The region “is in its flattest demand profile ever,” Willett said. “There’s year-on-year contraction in carbonated soft drinks (CSD). Bottled water is seeing 4.5 percent growth, but other markets are flat or slightly down.”

CSD “is still the biggest market, but it is being hit hard by healthy beverage choices,” he added. “We don’t see it growing next year, but the loss will slow.”

Water bottles also have become increasingly thin by using less resin per bottle. They’re now only 33-50 percent the weight of a CSD bottle, according to Willett.

And North America isn’t alone in having an abundance of PET.

“PET has been structurally long for a long time,” Willett said. “Operating rates are in the 60s on a global basis. Almost every region is in overcapacity. As a result, it’s going to become a very regionalized business with trade significantly slowing down over time.”