Economic uncertainty, the U.S. housing downturn, sustainability issues and the shift in the PVC manufacturing base to Asia continue to create challenges for the U.S. vinyl industry. But there was still plenty of optimism about the sector's future at the World Vinyl Forum, held Sept. 27-28 in Boston.
``Challenges are ahead, but I have a very good, positive growth outlook for vinyl,'' said Steve Brien, global practice leader for chlor-alkali and vinyls studies for Chemical Market Associates Inc. in Houston. ``We expect vinyl to have a 5 percent compounded annual growth rate over the next five years just as it did the past five years.
``We don't see any reason for that to change,'' said Brien. ``PVC and vinyl products have a very good long-term future. When you look out over the next 10 years, the outlook looks very good.''
That optimism is shared by producers, as CMAI projects worldwide capacity will increase from the current 33 million tons to 50 million tons by 2012.
Infrastructure projects will drive growth. Developing countries like China and India are investing in construction projects, and there is growing interest in updating infrastructure in the United States in the aftermath of Hurricane Katrina and the bridge collapse in Minneapolis.
``The infrastructure will continue to be a strong driver for PVC growth, and PVC will remain a leading infrastructure building product'' because of its low cost and durability, Brien said.
Still, concerns remain.
``Long-term, growth will continue,'' said Irving Leveson, president of ForecastCenter.com, a Jackson, N.J., consulting firm. ``But the global economy is going to be more volatile over the next several years and beyond, and we will continue to see fallout from housing'' in the United States.
One of the reasons? There is no sign of a letup in the 18-month housing slump.
``The housing crisis has a long ways to go,'' said Leveson, who is also an adjunct fellow at the Hudson Institute think tank in Washington. ``Past experience tells us things will get worse before they get better, especially as the past peak was an unusually high peak.''
The Housing Market Index of the National Association of Home Builders in Washington fell to a record low in early September as large home builders suffered serious setbacks in new orders and large increases in cancellations in August.
That presents a challenge as pipes and fittings account for 40 percent of PVC consumption in the United States, and window profiles and tubes for another 17 percent, according to CMAI.
In addition, Leveson said there is the ``probability of a recession in the U.S. sometime over the long term and inflation will become more of an issue - and we are not talking about just a couple of percentage points. While the timing of major changes is uncertain, a move into recession and a reversal of the cyclical rise in commodity prices and profitability during the next five years would be the norm.''
PVC resin capacity coming on-stream in the U.S. and a shift in capacity dominance from North America to Asia also will present some challenges.
By 2012, Asia is expected to account for 50 percent of the expected 110 billion pounds of global PVC capacity, compared with 27 percent in 1992, said Brien. Conversely, North America's share of capacity will decline from 28 to 19 percent.
``Capacity will be built in Asia, particularly China,'' and that will continue to keep prices for PVC and vinyl chloride monomer low, Brien said. ``China continues to add PVC resin and finished goods capacity. China will be self-sufficient by 2008, and by the end of the decade, they will be in a net export position.''
By 2010, a large amount of PVC will be shipped from suppliers in northeast Asia to customers in Africa and the Middle East, he said.
According to Li Jun, general manager of Shanghai Chlori-Alkali Chemical Co. Ltd. and chairman of the China Chlor-Alkali Association, China's share of world PVC capacity was 32 percent in 2006. In addition, China's PVC demand grew at a 13.3 percent annual rate between 2004 and 2006 - or nearly 3 percentage points faster than the 10.5 percent growth rate in China's gross domestic product, he said.
PVC capacity in China grew 32 percent and production 28 percent between 2004 and 2006, with respective increases of 15 percent and 19 percent expected between 2007 and 2009, he said.
``There is the potential for substantial overcapacity,'' Leveson said. ``China can't continue to grow at 10-11 percent forever. It eventually will moderate,'' creating the potential for a serious impact on emerging economies. ``A sharp downturn in China would create dislocations in competing nations and trade frictions from overcapacity.''
That could be alleviated to a degree, he said, by ``a very promising outlook'' for PVC in India and a ``strong economic environment in areas with large infrastructure needs'' which, he said, creates ``a vinyl demand that rises rapidly.''
PVC consumption in India has tripled every decade since 1970, and it is expected to double between 2006 and 2010, said Shreekant Diwan, general manager of Reliance Industries Ltd. in Mumbai, India. His company is responsible for more than 60 percent of that country's PVC capacity.
Even with good growth prospects globally, companies will be faced with other competitive issues.
``There will be a more difficult economic environment in the next three years'' in the U.S. and across the globe, Leveson said. ``There will be higher and more volatile energy prices and increased regulations in the United States and other places,'' he said. ``And most of the growth and competition will be coming from the developing countries.
``In addition, we are seeing a major change in corporate social responsibility - all of it wrapped under the umbrella of environmental sustainability,'' he said. That puts increased pressure on companies to assess the impact of their products on resources, damage to the environment and climate change.
At the same time, capacity increases in the United States - needed to meet long-term needs - will create short-term margin pressure for U.S. producers, Brien said.
``Short term, there is more capacity being added than demand, so we are entering a low-margin cycle,'' he said. That will be compounded by the challenge of higher capital costs, as raw materials used in construction have increased the cost of building vinyl monomer plants by an inflation factor of 1.6 to 1.8 compared with 2003.
``That makes it harder to get a good return on investment because you have a higher investment cost,'' he said.
``North America will struggle early in that five-year period and then recover later,'' Brien said. ``But the balance will shift more to the demand side by the end of those five years.''
In addition, he said growth in the United States in the short term will be helped because of current favorable pricing of natural gas, which he believes will trigger growth PVC demand of 1.8 percent from 2007-12, compared with 0.2 percent growth from 2002-07.
``Prices in North America got high and prices went up quickly the past five years, and that opened the door to imports of resins and finished goods,'' said Brien. ``But imports of finished goods won't be as great over the next five years because of the price favorability of natural gas. That means U.S. finished goods will be more competitive over the next five years compared to the past five years and that demand for imported goods will go down.''
Brien also expects PVC to take advantage of its price leverage compared with aluminum.
``The spread in pricing between PVC and aluminum is greater than it has ever been, and that is giving vinyl a boost,'' he said, adding that it also takes more energy to produce aluminum today comparedwith the early 1990s.
``The challenges will be greater than in the past,'' Leveson said. ``But the long-term global growth story of PVC remains intact.''