The European polyvinyl chloride (PVC) market is facing continued pessimism in the domestic construction industry, prompting buyers to reduce their contractual orders in light of poor short-term and medium-term demand outlooks.
September usually signals a need for European converters to restock PVC inventories after the quieter summer season, but such efforts have so far been noted lower than previous years as declining demand for finished goods such as pipes, profiles, vinyl floor tiles and cabling is keeping converters hesitant to procure additional PVC volumes. These demand segments are primarily driven by the construction industry, one of the largest end-users for PVC, which remains impacted by regional and global macroeconomic factors.
Rising costs, interest rates dampen industry confidence
Eurostat data shows that construction industry confidence across key European construction markets — where indices above 0 indicate optimism and below 0 indicate pessimism — fell to their lowest ever during the early stages of the Covid-19 pandemic, given social restrictions at the time and the subsequent pause of construction projects across the continent.
This was followed by a shift to industry optimism throughout 2021 and until mid-2022, where PVC supply shortages plagued global markets and consumers shifted spending towards home renovations rather than leisure and entertainment. In 2022, central eastern European countries noted decelerating growth in construction industry confidence with their proximity to Ukraine and the war there, with other European countries falling back into lower construction confidence during the second half of 2022 following the war, rising energy and input costs in construction and the consequent rise in interest rates.
This decline in construction industry confidence, and in turn PVC demand, was mainly driven by construction activity overheating throughout Europe in early 2022, leading to several construction firms across northwest and central eastern Europe halting new construction projects and delaying ongoing ones where necessary. The lifting of Covid-19 restrictions across Europe had also shifted consumer spending back towards leisure and entertainment at the expense of finished goods that use PVC.
The eurozone purchasing managers index (PMI), compiled by Hamburg Commercial Bank and S&P Global, reflected this contraction in construction activity in May 2022, when the PMI fell to 49.2 and then followed a consistent decline until today. A reading above 50 indicates expansion in construction activity, while a reading below 50 indicates contraction. Argus suspension PVC (s-PVC) and paste PVC (e-PVC) delivered contract prices fell, respectively, from their historic highs of €2,040/t and €2,170/t in April 2022, to €1,160/t and €1,415/t in August 2023. Argus PVC contract prices are reflective of gross contract prices before discounts are applied.
Will the tide change for the EU PVC market?
PVC contract prices are rebounding slightly in September with help from rising feedstock ethylene and power prices across Europe, but these are unable to cover producers' feedstock costs and help them to regain previously lost margins.
PVC contract prices are likely to increase alongside ethylene costs for the remainder of the year, but the demand outlook for the fourth quarter of 2023 remains bearish and the first quarter of a year usually has a decline in construction activity during the winter, which will limit buyers' intentions to commit to additional contract volumes for 2024.
The European PVC industry is likely to sustain this pricing pressure from buyers until a significant increase in construction activity, and hence PVC demand, returns to Europe, with many participants cautiously viewing the second half of 2024 as a potential turning point for the market.
European buyers could be inclined to switch some of their contractual PVC commitments with cheaper imports where necessary, and while these began to slow in recent months, they can remain a good alternative for converters as Europe shifts towards becoming a net importer of PVC in 2023.
