A Chinese avalanche is heading toward the world PVC market.
By 2011, China will have almost 32 billion pounds of PVC capacity, as a result of major expansions fueled by technology that uses coal rather than ethylene as a feedstock. Northeast Asia as a region will have more than 44 billion pounds of PVC capacity at that point - more than twice the amount of any other region in the world.
``The avalanche rests in China,'' market analyst Steve Brien said at Chemical Market Associates Inc.'s World Petrochemical Conference, March 21-22 in Houston. Brien is global practice leader for chlor-alkali and vinyls with Houston-based CMAI.
``The growth is mostly in pipe and fittings, but is strong in almost every end use,'' Brien added. ``China will be almost totally self-sufficient in PVC by 2011.''
``China's population is demanding more goods and services and infrastructure items. In general, this means more demand for long-term durable goods such as PVC,'' Brien said.
China's consumption of PVC is predicted to comprise 25 percent of the world total by 2010, up from 5 percent in 1990, according to John Cunningham, vice president for European olefins with Houston-based Dewitt & Co. Inc.
At Dewitt's World Petrochemical Conference, held March 20-22 in Houston, Cunningham said China started ambitious PVC capacity construction in 2000, aiming to meet domestic demand by 2005.
Previously, the nation had been the world's largest PVC importer. Almost half of the PVC used in China between 1999 and 2001 was imported. China brought in more than 4 billion pounds of material from outside the country every year from 2001-04.
China will receive 90 percent of the new PVC plants built between 2006 and 2011, causing PVC producers elsewhere in Asia to reduce capacity or seek new markets in central Europe and India, Brien said.
China's use of coal-based acetylene-carbide technology to make PVC allows the country to be competitive while using its own raw material. But Brien warned that drops in energy prices could negate the advantage that a coal-based process has over ethylene, which is based on crude oil or natural gas. Oil prices around $45 would reduce coal-based PVC production to cash cost, he said.
Quality issues also surround some coal-based Chinese PVC, some of which is off-white in color or has ``fish eye'' physical defects.
``Today, some Chinese PVC is very good and some is quite difficult, depending on the plant site and producer,'' Brien said. ``Some material has a hard time meeting some specs. Some also has residual vinyl chloride monomer content if it's not removed by steam-stripping.''
Cunningham also pointed out other risks association with China's reversion to coal-based technology.
The process of converting coal to VCM - feedstock for PVC - consumes a lot of electricity, which accounts for nearly half of the production cost. Meanwhile, power demand in China grows rapidly and governmental restrictions on electricity supply still occur. ``Any government control applied either in volume or price would therefore have an immediate impact on VCM production cost,'' Brien added.
Transport costs also pose a challenge to competitiveness, Cunningham said. Delivering raw materials or finished products in a large country can add a significant expense to otherwise favorable production costs. Pollution also may raise concerns in a country that's striving for a greener environment, particularly for the 2008 Olympics in Beijing.
Ultimately, all of China's new PVC capacity will create lower profit margins from the material in Asia between 2006 and 2009, Brien said.
A similar situation could occur in North America on a smaller scale. More than 2 billion pounds of new PVC capacity is on the way in the region. Shintech Inc. is adding 1.3 billion pounds by 2008; Georgia Gulf Corp., 450 million pounds by 2009; and Formosa Plastics Corp. USA, 395 million pounds by 2010. As a result, return on investments in North American PVC are expected to drop from 2007-10, after having high margins between 2004 and 06, Brien said. Margins also are expected to be down in Western Europe, he said.
In North America, lower prices are expected to lead to higher demand from 2007-08 after the region saw little or no growth in 2005-06.
``End uses outside of rigid PVC in North America were hit by imports of finished goods [in 2005 and 2006], especially in wire and cable and flooring,'' Brien said. ``Those markets are smaller, but they didn't have demand growth. Higher resin prices in the U.S. and Canada also meant that makers of finished goods had to raise prices.
``North America is still a fairly decent PVC market, but it didn't have the growth it normally would,'' Brien noted.