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European PVC markets unfazed by Red Sea crisis, will winds of change blow in H2 Jan?

by Manolya Tufan - mtufan@chemorbis.com
  • 18/01/2024 (02:13)
West European PVC markets have been mostly stable through mid-January despite the global trade rattled by the threats on the key Middle Eastern trade route. The Red Sea crisis showed no signs of abating, with the air and sea strikes by the US and UK on Houthi targets in Yemen deepening maritime logistics problems.

One of the reasons behind pretty unfazed markets has been mediocre activity in derivative sectors. Meanwhile, a lack of supply concerns also prevented suppliers from seeking increases, even though margins are in the negative territory, as Europe is traditionally a net exporter. While a number of factors have prompted regional suppliers to remain competitive in the first half of the month, an ongoing AD probe on US and Egyptian PVC, shipment snarls from Asia and soaring freight rates will eventually lead to tighter import availability and higher prices.

Americas remain main trade partners to the EU

The bloc has been witnessing an increased import pressure, particularly from the Americas. This took its toll on producer margins at a time when global economies were shattered by interest rates, lower growth, persistent inflation and geopolitical uncertainties.

A major market participant commented, “The Red Sea turmoil is not affecting the European PVC market as bulky tonnages come from the US.”

Indeed, imports from the US and Mexico constituted more than 60% of the union’s overall imports in the January-November period of 2023, totalling about 370,000 tons out of the cumulative imports of 608,000 tons. The combination of imports from these countries marked an increase of around 33% from the same period of last year. Egypt remained the fourth largest supplier with a market share of 7.3% or 44,410 tons.

The European Commission (EC) initiated a dumping investigation on S-PVC imports from Egypt and the US around mid-November. To track potential shifts in trade flows in case of an antidumping duty, please see ChemOrbis Plastics News US PVC may face exodus from Europe; trade flow shifts and rising competition to ensue.

PVC imports from Red Sea routes may not immediately hit Europe

Shipments from Asia and the Middle East have taken the largest hit as the Red Sea is the shortest passage to Europe. However, Asia constituted a relatively small percentage of the union’s PVC imports compared to the Americas, with imports from South Korea, Taiwan and China standing for 18% of the total amount through November 2023.

Taiwanese Formosa said it will terminate all of its un-shipped CIF cargos to Europe, effective as of January 12, 2024, amid the ongoing Red Sea turmoil that has taken its toll on maritime logistics, although this is expected to have little impact on Europe as Taiwan’s sales to Europe and Türkiye were already minimal.

A trader said, “There are some delivery delays as it takes longer time for containers to come back. Prices from Egypt rose slightly. Fresh offers from South Korea are also awaited higher, while there are no offers for delivery in March. Some suppliers were asking for upward corrections on previously sold cargos amid rising freight rates.”

Disrupted shipments from Asia may propel Europe’s exports higher

When it comes to exports, total PVC exports (915,000 tons) in January-November 2023 period did not exceed those of the same period in 2022, 2021 or 2020, when exports were above 1 million tons.

There is a chance to boost exports, particularly to the main export outlet, Türkiye, amid the Red Sea crisis hitting imports from South Korea.

Will PVC be ever back to the pre-pandemic league?

Given weak demand conditions, European producers had applied hefty drops over the past year to bring their offers to multi-year lows amid the wide gap between import and spot levels. Buyers showed tendency to buy import cargos when they were rather aggressive and limited their commitments from the domestic markets, blaming weak end markets. This has been one of the key factors shaping up regional producers’ pricing strategies.

As for 2024 contracts, starting levels for K67-68 were as low as €850/ton FD, a rather competitive level that European producers provided as this level falls in line with or below imported cargos.

Prices hit their lowest levels since Q4 2020 after following a mostly downtrend since May 2022, according to ChemOrbis data.

FD–Italy–NWE–PVC–K67

Spot PVC prices still stand slightly above the pre-pandemic normal, which is a reflection of high inflation contributing to the higher production costs and lower run rates amid the post-pandemic economic slowdown.

Meanwhile, local PVC grades no longer carry a huge gap over import materials, which along with the ongoing antidumping probes has been curbing interest in imported cargos for some time now. It would be fair to say that import prices will not be competitive as long as the Red Sea bottleneck leads to delivery delays and drive transportation costs higher.

Sellers gauge the bottom

In H1 January, participants were projecting slight drops on deals given weak consumption in end markets. Indeed, slight discounts were reported in some cases, which were interpreted as corrections on the upper ends when compared to the prevailing spot ranges.

However, there seems to be little room for PVC discounts during the rest of the month, regardless of the weak supply-demand fundamentals. Most players believe that prices are nearing the bottom level amid multi-year low levels, profitability issues and unattractive imports. As a side note, buyers in Central Europe are willing to pay higher prices for K70 given lower availability, as a trader put it.

What’s in store for later in Q1?

It remains to be seen if the tighter supply outlook will outweigh lower demand expectations. February may be too early to see price hikes if demand fails to improve, according to some.

Yet, there is no denying that fading competitiveness of imports amid logistics mishaps and soaring freight rates will encourage a firmer stance among European sellers. Since the regional markets are exposed to the higher production costs compared to other markets, PVC producers already mull over recovering their margins as soon as possible.

Although regional markets seem to be ill-prepared for a lack of import supplies, considering ongoing run rate cuts, demand will have the final say in setting the tone of the market.

Restocking activities may be seen as buyers have closed the year with low stocks. According to sellers, recent developments will likely increase demand for prompt material amid uncertainties regarding the import arrivals and higher freight rates from the US.

On the flip side, a prolonged conflict in the Red Sea may have devastating effects on the global economic recovery as the crisis rekindled inflationary pressures, disrupting supplies and propelling costs higher. High interest rates at major central banks may have to be maintained longer than expected if things get worse. The supply chain disruptions of both raw materials and semi-products from Asia would also hamper manufacturing activities in the automotive and construction industries and lead to order cancellations, as was the case during the pandemic.
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