US polyvinyl chloride (PVC) and polyurethane (PU) market participants see little chance of improved demand in 2024 until Federal Reserve rate cuts begin to reinflate the housing market.
After a post-pandemic construction boom, the Fed's efforts to combat surging inflation by hiking borrowing costs starting in March 2022 began to weigh on the housing market by the second half of 2022 and pushed home construction and sales to multi-year lows.
Sales and prices of PVC, which is used for construction, fell during this time, before sales volumes stabilized and later improved over the course of 2023. But those improvements have been marginal, and December 2023 contract prices are likely to settle near to where they were at the end of 2022. This ongoing lackluster demand could pose problems for US PVC producers should it continue into 2024.
Fed policymakers lifted market participants' hopes in their last meeting of the year on 13 December by penciling in three likely quarter-point rate cuts next year, but it will take more than a year for the central bank to unwind the 5.25 percentage points of rate hikes it imposed through July of this year, raising mortgage rates to their highest in more than two decades.
Formosa recently delayed a 130,000 t/yr PVC expansion at Baton Rouge, Louisiana, to early 2024. Shintech, after some delays of its own, has the second phase of its Plaquemine, Louisiana, expansion coming in mid-2024. The Shintech expansion will put Plaquemine's capacity at 1.38mn t/yr once all three phases are complete. These expansions could oversupply the US PVC market significantly and put downward pressure on prices if demand remains at current levels.
A separate plan by Orbia to build a PVC plant in the US Gulf coast has not yet been realized. With weak US demand, any new capacity would be more reliant on an export market. But there is already ample PVC supply at lower prices coming out of China and few overseas markets to absorb it all.
Throughout 2023, prices across the polyurethane value chain fell steadily before leveling out near the end of the year. Prices for upstream products like isocyanates and propylene oxide (PO) derivatives are believed to have reached the bottom in the fourth quarter. Some bright spots have also been in propylene glycol (PG), a derivative of propylene oxide (PO), as seasonal demand into deicing fluid and cold and flu medicine have buoyed PG prices.
But homebuilding remains the largest demand driver for the polyurethane chain. Should price increases occur in the early part of 2024, market participants expect these would be driven more by upstream cost pressures and restocking needs than a robust return of downstream demand. Some market participants look to the new year with the belief that demand in the construction sector will improve by the second half of 2024 as the effects of interest rate cuts become more tangible.
Cutting interest rates would lower mortgage rates and incentivize homebuyers to jump back into the market. It would also make construction less daunting for property developers, which are reluctant to take out loans to build in a higher interest rate/lower demand environment. Producers and buyers in the PVC and PU markets still believe the US remains severely undersupplied for housing, but expectations are solidifying that demand for both products will recover on a slow path through 2024.
