The European polyvinyl chloride (PVC) industry is ending 2022 managing a potent cocktail of high inventories, elevated production costs, competitively-priced imports and low demand. Given uncertainty about 2023 pricing and output, the region's producers are choosing to lower operating rates across the vinyls chain, although the duration of such measures is unclear given the ever-changing nature of the energy crisis.
While supply availability of suspension PVC (s-PVC) and paste PVC (e-PVC) improved during 2022, rising gas and electricity costs supported higher contract prices in Europe during the first half of the year. The Argus PVC pipe-grade and paste-grade northwest Europe contract assessments hit records of €2,040/t and €2,170/t respectively in April, although there was then a gradual decline in demand during the second half of the year as buyers became more cautious about raw material costs, stock positions and underlying demand.
The home renovation and construction segments became more susceptible to higher raw material and utility costs, labour shortages and rising interest rates, creating a sense of pessimism over the long-term growth of PVC demand. Furthermore, the flow of lower-priced finished-goods imports to Europe, such as luxury vinyl tiles from Asia-Pacific made from s-PVC, became problematic for smaller domestic converters. Larger PVC buyers said similar concerns will arise should such imports flow more frequently in 2023.
The Argus preliminary PVC pipe-grade and paste-grade northwest Europe contract marker assessments for December are at €1,610/t and €1,725/t, respective €430/t and €445/t drops since April. But Europe remains the highest-priced region globally, mainly because of elevated electricity costs. Ethylene costs mostly mirrored price declines in crude and naphtha in the second half of 2022, and are unlikely to rise significantly in the short term given demand concerns, lower upstream oil prices and upcoming start-ups in global ethylene capacity.
Competitively-priced import offers into Europe from the US, Turkey, Egypt, South Korea and southeast Asia have weakened the spot market for s-PVC and exposed contract prices. Contract volume commitments and volatile demand requirements have limited buyers' ability to take advantage of such imports in 2022, but this could change as some contracts are reset in 2023.
Lower e-PVC exports to Russia, following sanctions related to Moscow's invasion of Ukraine, contributed to a prolonged supply glut in Europe that is leaving many domestic producers to look for new export opportunities in the US and Asia-Pacific. This is unlikely given the unfavourable prices.
As a result, PVC producers in Europe are reducing operating rates in order to manage inventories and the lower demand. Chlorine capacity utilisation in Europe fell from 69pc to 58pc between July and October, but some stability has been seen more recently because of higher netbacks on caustic soda, a byproduct of chlorine production. This support is beginning to crumble, as high prices cause caustic soda demand erosion. Caustic soda prices remain historically high, but weaker demand and imports may continue to undermine domestic producers' positions should power prices remain elevated in 2023.
With vinyl production rates and stock positions being adjusted towards a lower and uncertain short-term demand outlook, the chance of further PVC price volatility is probable should stronger-than-expected demand and restocking efforts coincide with tighter regional supply. Talks in the EU over price caps for natural gas are easing such worries, but with EU member states discussing different approaches the cost effectiveness of PVC production remains unclear among different European countries.
