Housing Market Drags on PVC, Sends Caustic Soaring

Implications: The hopeless housing market puts US PVC makers in a very poor position.  Global PVC capacity is up, and prices and margins are falling.  New capacity will toughen the market conditions on a global basis.  In the meantime, falling chlorine consumption is sending caustic prices higher.

Analysis:  The largest PVC producer in the world, Shin-Etsu (4063.T), Shintech in the US, will bring on nearly 600 MmT of new PVC capacity some time soon.  They have delayed this addition for nearly two years due to supply commitments and the PVC market collapse.  Thankfully for other US producers of PVC, Shintech will send much or this production offshore.  Still, the woeful PVC market in the US will not benefit from this addition. PVC production was reported to be less than 1 billion pounds in April.  This puts operating rates well under 70%.  A seasonal uptick in housing starts just isn’t coming along to perk up the market.  Other major producers like Georgia Gulf (GGC), Westlake (WLK), Formosa Plastics (6505.TW), and OxyVinyls (OXY) are bound to suffer to varying degrees, based on their forward and backward integration. Shintech’s response is to use its enormous global presence to send PVC offshore.  Here, they will be dealing with the emergence of China as a PVC producer.  China is self-sufficient in PVC.  Some 80% of new capacity additions have been in China.  Now half of the global PVC capacity is in the Asia-Pacific region.  Some good news is that much of this capacity is based on acetylene VCM, not the chlor-alkali route. PVC producers who are back integrated to chlorine will get some benefit from that business.  The decline in PVC demand has stunted chlorine demand.  Chlor-alkali operating rates were down to 84% last month.  This results in a shortage for the co-product caustic soda.  OxyChem and Formosa are leading a $100 per ton increase in caustic soda prices.  Georgia Gulf and Westlake, both of which have some chlor-alkali capacity, will receive some of this benefit as well. The question is how much benefit will the forward integrated producers – Georgia Gulf, Westlake, and Formosa – get from this strategy.  All have a home for some of their PVC in their own pipe and profile businesses.  Formosa is a well-balanced, global business.  But for Georgia Gulf and Westlake, those downstream businesses are confined to North America.  Since North America is the source of the housing/PVC market slump, just how much advantage they will get from this is questionable. PVC producers are in for a tough time over the next couple of years.  Those with chlorine capacity, a highly consolidated market, are likely to fair better than those counting on profits from the fragmented downstream businesses.