Commodities 2023: Global PVC demand recovery in H1 hinges on China

Global polyvinyl chloride markets face uncertainty going into 2023 with sluggish demand seen lingering across the regions.

PVC prices in Asia and the US fell hard through much of 2022 and may enter 2023 having hit a bottom, market participants in both regions said.

However, Chinese demand has yet to rebound from periodic shutdowns despite minor steps to ease its zero-tolerance COVID policies. The US may see more interest rate hikes to combat inflation, which have suppressed domestic PVC demand. Both regions stepped up exports amid thin global demand.

And Europe enters the new year facing a recession amid high energy prices and inflation, and no end in sight to the Russia-Ukraine war.

"We don't see anything in the next year that will have a sustainable margin recovery other than shutting down," said Rob Stier, senior lead of global petrochemical analytics at S&P Global Commodity Insights. "If there is a recovery, it will be led by the US."

Europe faces recession impact

Sentiment for European caustic soda and PVC in 2023 was expected to depend on the severity of the recession and its impact on demand.

Along the chlorine chain, producer margins were driven by a balancing act between caustic soda and vinyls, with one compensating for the other's losses.

Demand for both was strong in 2021 with PVC ahead, but in 2022, PVC demand softened amid economic pain and high energy costs that forced chlor-alkali production cutbacks amid surging caustic soda prices.

Chlorine production issues tightened caustic soda availability, prompting hurried orders of US material that briefly pushed US export prices to an all-time high since Platts first began assessing the market in 2004. At the same time European spot PVC prices plunged but remained among the highest in the world going into 2023.

Market participants expected further weakness for European caustic soda and PVC in the first half of 2023 as consumers rein in spending and shun big-ticket purchases.

"High [caustic] prices are causing demand destruction," a caustic soda trader said in November.

Another trader said "a kind of normalization" was emerging in 2023, while in the interim, European producers benefitted from high caustic prices that cross-subsidized PVC.

US domestic demand slides prompting more exports

Integrated US producers were also entering 2023 running chlor-alkali plants at high rates to capture strong caustic soda prices, while PVC prices and demand softness were expected to linger amid mortgage interest rates inching below 7%, but remained volatile, market sources said.

US export PVC prices fell nearly 62% from May 2022, while export caustic soda prices climbed nearly 32% from May to November before retreating. US caustic soda capacity has fallen 9% since March 2021, largely on Olin's string of shutdowns, which has also supported caustic soda pricing.

However, the strength in caustic soda prices was expected to soften as well going into 2023, though a decline could be slow. Caustic soda demand and pricing took months to catch up to rising prices in the PVC production chain that began in mid-2020.

"It usually comes late to the party, and it stays a little longer," Westlake COO roger Kearns said in November. "We expect to see that again this time."

Westlake is among resin producers that have reduced rates and hiked exports in response to softening demand for durable plastics. While a slowdown in US interest rate hikes could prompt an uptick in domestic demand, market participants said a global recovery depends on whether domestic Chinese demand rebounds. That would prompt China to reduce exports, giving US outflows less competition in global markets as customers enter 2023 having destocked inventories in the final months of 2022.

"The real driver on this, though, is China. China demand is still quite slow," Kearns said in November.

All eyes on potential China demand recovery

Asia's PVC market could rebound in early 2023, but market sources said a comeback would likely be limited without a full demand recovery in China.

Asian PVC prices dropped sharply through 2022, and December offers came at the lowest since June 2020. Market sources said those levels appeared to spur spot buying, raising expectations that the slide could have reached its bottom.

Sources also pointed out spot Asian PVC supplies could hold at lower levels in 2023 compared with 2022 with operations running at reduced rates in line with lesser output by upstream steam crackers.

Trading sources expected US-origin PVC flows to Asia to slow down in early 2023. However, US sources said those flows could increase if China's demand rebounds, leading to fewer Chinese PVC exports.

China's PVC exports reached a record high 278,374 mt in April, according to customs data. Those outflows slowed later in the year as US PVC export prices fell in tandem with lower Asian PVC prices as well as plunging freight rates, which restored Asian PVC's global competitiveness.

By October, China's PVC exports stood at 96,630 mt, the lowest since August 2021, the customs data showed.

Some Asian market sources said China was expected to relax strict measures in 2023, but awaited any such official announcements beyond some minor changes in late 2022. Together with high utility costs, China's PVC plant operations declined from 70% to 56% in late 2022.