HOUSTON — The North American PVC market found itself at a crossroads in 1999, and it's going to take some self-control to stay on the right path. The analogy comes courtesy of PVC analyst Rick Smith of Chemical Market Associates Inc. Barry Hendrix, Oxy Vinyls LP's purchasing vice president, provided some numbers to back up Smith.
"Some market segments, such as windows and profiles, are growing at a 20 percent annual rate," Hendrix said. "Right now, there's demand for about 41 [million] to 43 million pounds of PVC a day, and the industry's capacity is 44 million pounds a day. For all practical purposes, the industry is sold out."
"There was no margin in the vinyl industry from 1996-1998," Smith said at his firm's World Petrochemical Conference, held March 28-30 in Houston. "Whether the future is any brighter depends on how the industry manages the next two or three years to set up the next couple of decades."
The best way PVC producers can return to profitability is by resisting the temptation to add significant new capacity, said Smith.
"Producers need to be open in announcing their expansions, and they need to limit price increases," he said. "They need to avoid the desire to sell one more pound of PVC because their bonus is coming at the end of the year."
The temptation is there because of strong demand, which grew 7.5 percent in North America in 1999. Oxy Vinyls' Hendrix, speaking at the March 28-30 DeWitt World Petrochemical Review, said producers couldn't meet all of the 1999 demand, and that actual demand could have been up as much as 9.5 percent.
Houston-based Oxy Vinyls, North America's largest PVC maker, expects 2000 demand growth to moderate to about 3 percent. But the company also expects the industry to continue to operate in a sold-out mode. The construction sector, which accounts for more than 70 percent of sales, should remain strong, since North America's aging housing stock has led to a vibrant remodeling market.
This demand has helped push North American PVC prices up an average of 16 cents per pound since January 1999.
CMAI's Smith anticipates North American PVC prices will continue to rise until early 2002, at which point they would average almost 43 cents per pound. A subsequent drop-off would send prices below 35 cents per pound by late 2003. Smith currently places average PVC prices at 37-38 cents per pound.
North American PVC operating rates should approach 91 percent in 2000, before starting to drop, according to Hendrix. This decline will be accelerated when Shintech Inc. opens its billion-pound capacity plant in Addis, La., in mid-2001. Operating rates will dip below 90 percent before bouncing up again in mid-2002.
But Hendrix pointed out that the near-92 percent operating rate Oxy Vinyls expects for 2000 is dependent on yet-to-be approved expansions and debottleneckings from Oxy, Georgia Gulf Corp., CertainTeed Corp., Royal Group Technologies Ltd. and Borden Chemicals & Plastics LP. If these moves are not approved by management, the North American PVC operating rate will be higher.
Oxy Vinyls expects tight supply conditions to continue at least until 2003, even with the addition of the Shintech plant.
PVC producers' inventories stand at about 15-16 days after being in the 10-11 day range in August, but are still well below the 20-25 day industry average. Producers have not had more than 25 days of inventory on hand since early 1998, Hendrix said.
Hendrix said at least 35 percent of PVC production in 2000 will be consumed by captive processing or compounding companies. PVC makers Formosa Plastics Corp. USA and Westlake Corp. own their own pipe units, while PVC extruders such as Royal Group and CertainTeed Corp. also make their own PVC.
CMAI's Smith expects to see backward integration in the future, possibly among vinyl siding makers.
"Captive use is a double-edged sword," Hendrix said. "We can see how it can be beneficial, but also how it could jeopardize the industry. The fact that 35 percent is captive use indicates that those using it have very low cost positions, which is why so many other processors are consolidating."
There have been 109 joint ventures or acquisitions among PVC processors, including compounders, since 1992, according to an Oxy Vinyls study.
"The strong are consolidating, and those that aren't positioned for the long run are being purchased or bought out," Hendrix said. "At the end of the day, we're an industry with fewer suppliers and customers. We have stronger alliances with our customers, and everybody's challenged to take cost out and deliver the end product at the lowest cost."
Companies such as Borden and European Vinyls Corp. of Brussels, Belguim, could be the targets of mergers or acquisitions, Smith added. If that happens, they would follow a series of mergers that created Oxy Vinyls from Geon Co. and Occidental Chemical Co. and led Georgia Gulf Corp. to acquire the PVC business of Condea Vista Corp. in the last two years.
Smith also warned that high PVC prices could result in product substitution. He pointed out that PVC lost large-diameter pipe business to high density polyethylene, ductil iron and concrete during previous pricing spikes in 1987-88 and 1994-95.
PVC and HDPE prices could intersect again in 2000 and 2001, according to Smith.
Smith tried to mix optimism with reality when assessing the PVC market's post-crossroads condition.
"It would be nice to add just enough capacity to maintain the pace," he said. "But the industry has never been able to do it."