Discovery and development of North American shale gas is propelling new investments and profitability for U.S. vinyls producers, while other regions face overcapacity and tight margins, as per a report by IHS. Pronounced slowdown in Chinese construction sector and sluggish growth in developed regions will exacerbate global PVC overcapacity. PVC, a versatile, durable and low-maintenance material, is the third most widely produced plastic following polyethylene and polypropylene, and is used extensively in construction. Some of the primary applications include vinyl siding, gutters, flooring, decking and window frames, but it is used most often for underground freshwater and sanitation pipes. Other uses of PVC include signage, clothing, furniture, medical devices and tubing. According to a IHS, abundant North American shale gas resources are driving lower energy prices for U.S. chlor-alkali and vinyls producers, enabling them to achieve profitability despite a persistent global oversupply of polyvinyl chloride (PVC) that is expected to peak at more than 20 million metric tons (MMT) in 2014. IHS estimates that global PVC demand growth will average approximately 3.5% pa during the forecast period. Nonetheless, the company projects an average oversupply of 18 MMT of PVC annually during the next 10 years. Chlorine and vinyls demand is driven primarily by the construction sector, while caustic soda demand is largely determined by the manufacturing sector. In the aftermath of the global recession in 2008 to 2009, government-backed economic measures and stimulus packages in several countries supported a recovery and boosted vinyls demand, as many of the measures were targeted at infrastructure and public construction. Since that time, however, the pace has eased considerably and growth in the sector will be anemic. Between 2013 and 2018, year-on-year growth for PVC is expected to be closer to 4%. A wave of capacity additions – the majority located in China, is exacerbating the current weaker demand growth environment.

Since 2008, Chinese producers have added significant chlor-alkali and vinyls capacity and as a result, there is considerable oversupply in the global market. An oversupplied market could be the ‘new normal’ for the vinyls industry for the next 10 years, until the global economy improves significantly and vinyls demand picks up in key sectors such as construction. Some improvement in demand is being seen in the U.S. housing sector, but there is still too much global capacity. China, with the largest capacity, output and demand, is now the leading producing country in the global chlor-alkali and vinyls market. Rapid demand growth during the past 20 years has encouraged massive investment in Chinese chlor-alkali and vinyls capacity, enabling the country to move toward self-sufficiency. However, as this new capacity is coming online, the Chinese economy has lost some of its momentum, and a pronounced slowdown in the Chinese construction sector, combined with still sluggish growth in developed regions, has led to a ‘huge capacity overhang today. Global operating rates for vinyls production will drop to near 65% in the short term,” Brien of IHS added, “which means pressure will remain on cash margins for the vinyls sector in most regions of the world, with North America being the one major exception. North America has retained some of its margins primarily due to cost advantages from the development of shale gas. The region not only has enjoyed better margins, but a favorable outlook has translated into new capital investments. You have two different realities in today’s chlor-alkali and vinyls industry - one for producers operating outside North America, and the other for companies operating inside North America who are able to leverage the low-cost energy from shale gas. For operators outside North America, prices have increased in response to rising energy and raw material costs, and even integrated producers of PVC in most regions will, on average, barely break even. For non-integrated producers, the outlook is even worse. They will likely incur extended losses, which could lead to additional capacity rationalization and consolidation in the near-term.” “Costs in the American chlor-alkali and vinyls sector are benefiting from the relative low price of electricity in the U.S. compared to most other parts of the world,” said Russell Heinen, senior director, technology and analytics, at IHS Chemical. “According to our new IHS Chemical Cost Curve Service, which provides a deep-dive cost analysis on key chemical products at the plant level,  U.S. production costs for the chlor-alkali and vinyls chains are the third lowest in the world - with only a few plants in Saudi Arabia and Iran registering lower costs. This reality, combined with the low cost of producing ethylene in the U.S., provides integrated producers with a big advantage over most of the rest of the world.” Improved margins and a favorable outlook in the chlor-alkali and vinyls chains have translated into new investments in North America. Several producers, including Dow/Mitsui, Shintech and Westlake, have announced new integrated vinyls projects in the U.S. Other recent investments involve upgrading existing chlor-alkali units through the conversion of mercury cell or diaphragm cell technology to membrane technology, which is being done by Canexus, Erco and Olin.
For Europe, the reduction in West European chlor-alkali demand in recent years motivated some producers to permanently shut down production capacity. Other companies have shut down mercury cell plants and have voluntarily replaced them with more environmentally friendly, energy-efficient membrane plants. Furthermore, environmental concerns, government regulation and technological developments, including a hydrogen peroxide route to produce propylene oxide (POX), will limit chlorine demand growth in the region. Said Brien, “Superior economics in some regions suggests a greater flow of material around the globe in the form of chlorine derivatives and caustic soda. The U.S. producer's superior cost position will enable them to compete for caustic and vinyls export business almost anywhere in the world, and net trade between regions will expand as material moves from cost-advantaged areas to the global demand centers.”