Key property developers defaulting on their borrowings amid a deep debt crisis, and a bleak sales outlook in the middle of a massive oversupply situation exacerbated China’s construction woes in 2023. Despite expediting stimulus measures, governmental efforts in curbing the situation proved largely unsuccessful, and no revival signs were observed in the sector, which makes up for a quarter of the country’s economic output. Overall, Chinese property investment in 2023 fell 9.6% year-on-year, while new construction starts plunged 20.4%, per data from the country’s National Bureau of Statistics.
Persisting Demand Slump: Challenges and Ambitions in China's Economic Landscape
Two months of 2024 have passed, and while the pace of the decline has slowed, the demand lull has prevailed. Soft property sales and construction delays have continued, and homebuyers are still grappling with low confidence. While much of market participants’ hopes for relief are now pinned on more interest rate cuts and loan forgiveness from the government, creating new demand will depend solely on economic recovery. Meanwhile, amid property woes dragging down its rebound, the government has set an ambitious economic growth target of 5% for the country in 2024.
The petrochemical industry is in no way exempt from the ripple effects of China’s construction downturn, although materials like polyvinyl chloride (PVC) have perhaps beared the biggest brunt. Nearly three-quarters of Chinese PVC volumes, both rigid & flexible, are employed in the construction sector for various applications, including pipes, fittings, tubes, profiles, floorings, wires, cables, and so on. With most of its downstream outlets this closely tied to the real estate sector, domestic consumption has suffered, thereby leaving its recovery reliant on government stimulus policies in the end-use.
Accordingly, domestic buyers have thus far maintained a lean inventory, leaving unabsorbed PVC supply to depart Chinese shores and enter the global market. Thanks to the massive supply additions that transitioned the country into a net exporter of PVC in 2021, export volumes since have significantly increased. Chinese shipments are also comparatively cheaper, primarily since majority of the producers in the country manufacture PVC using the cost-competitive coal-based feedstock, unlike ethylene-based plants in the rest of the world.
The influx of these heavy Chinese imports has heavily weighed on PVC value chains across the globe. In addition to threatened margins, producers have been forced to slash prices, halt expansion plans, and reassess strategies. Of India’s record-high 3.2 million tons of imported PVC volumes in 2023, a third of the shipments came from China, latest customs data show. Despite frosty relations between the two, volumes from the country have effectively doubled since 2022.
Such has been the extent of dumped cargoes, that the Indian Ministry of Chemicals and Fertilizers last month (February 2024) made the Bureau of Indian Standards (BIS) certification mandatory for PVC and polypropylene (PP) imports into India, effective beginning late-August to early-September this year. While some Chinese manufacturers are reported to have applied for the same, analysts and Indian market participants anticipate the overall process to be a rough sail, given the tensions between the two countries. Consequently, Chinese cargoes may experience a slowdown post the policy implementation. Meanwhile, the move is expected to provide some respite for the margins of Indian producers.
PVC shipments originating from China have also inundated North American and European markets. Unlike North America, however, where construction is at least well-oriented, the surge in cheaper shipments has worsened the situation in regions like Western Europe that are still contending with weaker demand in the aftermath of the war in Ukraine. The region, which would routinely ship sizeable PVC supplies to neighbouring markets, is now grappling with an oversaturated market intensified by the influx of foreign surplus.
In its Q4 2023 Earnings Call in February 2024, Mexico based Orbia, a key PVC manufacturer globally announced an indefinite suspension of its previously proposed PVC project in the US Gulf Coast. Blaming weakening global prices driven by increasing flow of cheaper Chinese cargoes and an oversupplied market, investment at the roughly 1 million tons/year plant will be paused until the company sees “markets supporting strong investment opportunities”. The company, however, is moving forward with its LiPF6 project and its joint-venture PVDF plant with Syensqo.
Although price prospects for exports brightened for the USA, which ships over 3 million tons of PVC annually across the globe, prices have nevertheless struggled to cross the USD 850 per ton threshold. This has made investing in a new plant unjustifiable for the company, which is expecting the same to be at least above USD 1,000/ton or in the range of USD 1,200/ton mark. Overall, Orbia’s polymer division, which constitutes for about a third of its sales and includes PVC, posted a 54% loss year-on-year in EBIDTA. Sales, meanwhile, plunged 21% Y-o-Y.
Conclusion
A well-oriented, robust construction sector, coupled with restrictive policies employed after the onset of the COVID-19 pandemic tightened the domestic Chinese PVC supply around 2021, driving prices up. Consequently, new capacity additions followed, quickly escalating into a supply glut situation. This, coupled with a real estate bust which began in 2022 and worsened in 2023 has left Chinese PVC manufacturers now shipping more than 2,000 kilo tons of volumes overseas annually. With excess supply in the country unlikely to be absorbed anytime soon, annual exports will continue to range above 1,500 kilo tons for at least 3-4 years. Stimulus efforts by the government is unlikely to immediately inject any meaningful aid in the domestic PVC consumption, although some respite signs have started to appear in the construction sector.
An overall environment of cautiousness currently surrounds the global PVC market, although the context differs with different regions. Plant utilization rates in China have already lowered considerably, and with tepid domestic demand, manufacturers are wary of bringing onstream new supply, prioritising margin recovery. Buyers in the country, meanwhile, are continuing to hold on to their purse strings amid deflation concerns, and are maintaining lean inventories. It remains to be seen how Beijing manages to avert this crisis, while meeting the growth target that it has set for 2024.
Overseas, market participants have adopted a wait-and-see approach. Although the overall mood for 2024 remains sombre, there is some cautious optimism for the short-term future, with expectations that demand growth will outstrip current supply in the next five to seven years. For 2024, only marginal improvement is expected, with some recovery in volumes.
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