HOUSTON — PVC makers can peek out from their bomb shelters. The worst is over, according to industry executives and analysts attending a pair of petrochemical conferences held March 24-25 in Houston.
Overcapacity has hurt profitability at every step of the PVC chain — from raw materials such as chlor-alkali through to end products such as pipe — since mid-1997. Prices dropped an average of 8 cents per pound in 1998 before seeing a 2 cent uptick in late 1998 and early 1999.
``The bottom's been hit and we'll see some slow recovery,'' said Rick Smith, a consultant with Houston's CMAI Inc. who spoke at the CMAI World Petrochemical Conference. ``Producers have been able to move prices up on discipline, not on operating rates. They wouldn't be able to do that unless there's disaster in the rest of the chain.''
``It won't be like in 1987 and 1988, when rising prices made millionaires out of everyone in the chain, but profitability will improve,'' Smith added.
David DiPiero, vinyl resins and compounds business manager for Formosa Plastics Corp. USA of Livingston, N.J., agreed that the PVC market is on the upswing and that completely integrated producers such as Formosa will have an advantage over nonintegrated competitors as the recovery continues. DiPiero spoke at the DeWitt World Petrochemical Review.
``There's no question that the people who survive in the PVC business will have to be integrated,'' said DiPiero, whose firm ranks third in North American PVC production, with more than 16 percent of the market. ``There are fewer pipe, siding and window processors, and the remaining ones are becoming more sophisticated because they have access to the same global information that producers have.''
Formosa expects global PVC demand to grow at a 4 percent annual rate through 2005. CMAI's Smith added that global PVC operating rates, which currently are around 80 percent, will begin climbing later this year and reach the 90 percent mark in mid-2003.
The pending merger of the PVC businesses of Geon Co. of Avon Lake, Ohio, and Occidental Chemical Corp. of Dallas, which had been ranked second and third in North American production, looms as the biggest industry event in 1999. When completed, Oxy Vinyls LP will lead the North American market with more than 29 percent of available capacity.
OxyChem will control 76 percent of the new firm, while Geon will acquire OxyChem's PVC compounding business as part of the deal. That acquisition will cement further Geon's position as North America's largest PVC compounder, giving it a market share of almost 40 percent.
The Oxy/Geon deal is of tremendous benefit for both sides since ``both companies get to be what they want to be,'' said Smith. But he added that none of the other deals rumored among the industry's remaining PVC producers would offer the same advantages.
``There's talk about Georgia Gulf, Condea Vista, Borden and Westlake, but those names don't provide the strategic benefits to create a joint venture or a new company,'' Smith said. ``We don't see that much potential for other mergers to have that kind of impact on the market in strategic leadership and influence.''
The mix of public and private ownership among the remaining PVC players also could prevent further combinations, according to Dick Mason, controller at Houston-based Shintech Inc., which will rank second in North American PVC production after the Oxy/Geon merger.
``Oxy and Geon are publicly held, but we're not and Formosa's not,'' Mason said. ``Any further combinations would be done more out of economics than anything to do with the product mix. There are some possibilities out there, but nothing we'd look at and say, `That's the next big thing.'''