Polyvinyl chloride (PVC) prices in Europe ended the year at historical highs, as did margins over feedstock ethylene, supported by a lengthy period of limited availability and strong offtake. As market dynamics stabilise going into 2022, a forecast decline in ethylene prices could underpin potential reductions in PVC contract prices during the first quarter. But production margins will maintain some momentum as high utility costs, PVC demand growth and production maintenance schedules set the tone for negotiations during the first half of 2022.
This year proved challenging for the European PVC market, with supply chains stretched by a series of production constraints, inland logistics issues and reduced imports to the continent. Furthermore, strong demand from pipes, profiles and flooring converters has limited the scope for producers to restock, leaving the market vulnerable to supply issues while supporting increases in domestic prices and margins to unprecedented levels. The Argus preliminary PVC pipe-grade northwest Europe contract marker assessment for December currently stands at €1,780/t ($2,010/t), up by €760/t from January 2021.
As producers lift force majeure restrictions and converters begin to wind down before Christmas, PVC market dynamics are starting to stabilise and so are domestic prices to some extent. A decline in the December ethylene monthly contract price (MCP) and calmer market activity ahead of the holiday period prompted local producers to roll over current pricing mechanisms on PVC pipe-grade contracts, ending an 18-month period of price increases in Europe.
Buyers are seeing more availability across the board, but this is likely to be temporary as volume offtake strengthens in the new year. Construction markets — the largest consumers of PVC globally — typically regain activity in Europe during the January-June period. The extent to which this happens next year will heavily depend on how effectively producers can restock ahead of the peak spring construction season.
Three PVC producers in Germany, France and the Netherlands are currently operating under force majeure. And high electricity prices — a major input cost for the production of PVC via chlorine — will have eroded some of the margin gains across Europe as several producers cut back chlorine output during peak times, although this has yet to impact PVC production. Higher utility costs remain firmly on the agenda for PVC producers, as they look to implement clauses linked to these costs into supply contracts for next year.
Restocking efforts will vary among producers but are unlikely to be hampered to the same extent as early 2021 when the demand boost from easing Covid restrictions caught sellers off guard. For some producers, replenishing inventories will remain the top priority in the coming weeks given a heavy PVC maintenance schedule during the first half of 2022. Rising container freight rates and longer lead times on shipping will also keep PVC imports out of bounds for some buyers, removing a supply option that has managed to gain traction in Europe over the years.
European ethylene prices — a key indicator for PVC contract negotiations — remain supported by tight supply and strong derivative demand across the continent. But PVC spreads over the implied ethylene cost — 50pc of the ethylene MCP — exceeded expectations this year, averaging €932/t compared with €427/t in 2020.
Margin support
The effect of the Omicron variant of Covid-19 on upstream energy prices remains uncertain, but a deterioration of feedstock ethylene prices is anticipated in early 2022. While this will put downward pressure on European PVC contract prices, a delicately balanced European vinyls market will provide some support to PVC production margins. Furthermore, a heavy cracker maintenance schedule set to begin in early spring, coupled with the peak construction demand season for PVC, will likely help sustain some of the margin gains accumulated earlier this year.
