European PVC producers set to struggle to expand margins in September on weak demand

European PVC producers are likely to face a challenge trying to expand already razor-thin margins in September, due to a combination of poor demand, falling feedstock costs and a weak euro, according to producers and traders.

September is a key month for PVC producers and consumers alike, providing for a mid-year reset in budgets and stock off-take options.

It is a month in which typically resin buyers return from their summer breaks to replenish dwindled stocks governed by low stock order intakes, and when their units have restarted following summer maintenance works.

With PVC monomer costs for September due to be agreed next, the focus is now on how what could emerge in September when buyers are fully back from summer vacations and the summer maintenance period has ended.

Average naphtha prices have fallen around $27/mt versus the July average, according to S&P Global data Aug. 21. This implies a potential decrease in costs of producing ethylene, used to make PVC, for September delivery.

One PVC trader said a weaker euro was heaping more pressure on producers at a time when the ethylene contract is expected to be agreed, implying a further impact on costs.

A $27 decrease in September ethylene costs means the contract price "will go down by at least Eur40/mt," the trader said.

The value of the euro stood at $1.114 on Aug. 21, down from $1.082 on July 31.

The euro has fallen in value because the European Central Bank is expected to reduce interest rates, also a much-needed measure that market participants would welcome as a potential stimulus to stagnant construction demand.

The need to recover margins lost over the course of more than a year amid challenging conditions appear clear. While there have been signs of improvement in Germany in recent months, high interest rates are keeping demand sluggish.

High interest rates affect disposable incomes and spending on large-scale projects such as home improvements and high-end infrastructure construction projects, as governments also continue to restrict spending amid high financing costs. Sources said that although interest rates had fallen in recent months, more than just one interest rate reduction would be required to stimulate demand.

Feedstock price dynamics

With the cost of feedstock naphtha priced in dollars, derivatives such as PVC are sold in euros, which means producers are looking to offset the negative cost impact, given they have seen their margins crushed over the past 24 months.

"There's going to be pressure on producers and those that want to increase margins will have to increase prices, the trader said. "A rollover is what they will target."

Producers so far are only confident only of achieving an increase of no more than Eur20-25/mt in August contracts, in line with the ethylene delta.

"August is still a slow month," a producer said. "There is not enough demand, and some attempts for margin improvements are offered together with lower priced spot volumes."

Another producer said: "Of course, we are trying to increase prices in August above the partial cost increase by ethylene delta movement because margins need an improvement," he said. "Nevertheless, demand in August is not really supporting that."

Producers are hoping that September will offer a better opportunity for margin expansion than August. In July, there were some signs of this amid a perception of tighter supply, with antidumping duties now being applied on US and Egyptian imports. What's more, there was increased confidence of a more balanced market so that buyers would accept higher prices. That would enable them to recover margins eroded by the cost-of-living crisis in the past two years.

A fear of limited PVC supplies, a low stock inventory base and the start of scheduled maintenances upstream, coupled with the mothballing of some production this year also helped to inform that view.

Producers had pitched for the same high price hike and a hope-for-the-best strategy. But August is proving different. Given the Eur20/mt increase in ethylene monomer costs, some nominated increases of as much as Eur50/mt with the hope that anything above Eur20/mt would be enough to expand margins.

Platts, part of S&P Global Commodity Insights, assessed the FD Germany PVC freely negotiated August net contract price at Eur940/mt on Aug. 21, up Eur5/mt month on month, while FD Northwest Europe spot prices were assessed at Eur850/mt Aug. 21, up Eur10/mt week on week.