PVC: Peak-season inventory replenishment demand is on the way.
2021-09-14
Inventory replenishment demand will drive prices higher.
Looking back at the smooth destocking process in the second quarter, we initially faced significant inventory buildup following the Spring Festival. At the same time, supply reached a robust 4.8 million tons—its highest level of the year. Yet by the end of the quarter, inventories were effectively reduced. In July, sample inventories in East and South China remained near their year-to-date low of around 200,000 tons, while both PVC producers and downstream manufacturers also maintained leaner-than-usual stock levels. The ability to reduce inventories despite high supply levels suggests that demand in the second quarter was strong, with supply remaining relatively tight.
Looking ahead to the third quarter, from the supply side, PVC production in China during August and September will primarily rely on existing capacity, with new capacity expected to come online mainly in the fourth quarter. Meanwhile, planned maintenance activities at production units remain relatively low—though Qinghai Yihua, Inner Mongolia Junzheng, and Ningbo Taishco collectively have maintenance scheduled for 1.4 million tons of capacity. However, PVC plants typically struggle to operate at full capacity during periods of extreme heat. Drawing parallels with the third quarters of 2016 and 2017, when output either matched or slightly fell below the second quarter levels, we anticipate this year’s average monthly production in Q3 to hover around 1.6 million tons. As a result, maintaining high operational rates may prove challenging in translating into significantly higher output. That said, we believe that if demand doesn’t weaken noticeably—and instead continues its current trend of destocking—this could provide robust support for prices.
PVC downstream applications—60% of which are used for pipes and profiles—are closely tied to real estate demand. In June and July, both real estate construction activities and PVC product manufacturers experienced disruptions due to weather conditions and environmental regulations. However, as the peak construction season for real estate approaches, PVC end-user demand is expected to improve.
Notably, earlier on, widespread concerns about a downturn in the real estate sector in the second half of the year—and the impact of U.S.-China trade tensions on end-demand—led to relatively low market inventories. Should restocking demand emerge in the near term, PVC prices are likely to exhibit significant upward elasticity.
Cost transmission in the industrial chain is smooth.
From an industry perspective, the upstream segment of the PVC market has already undergone consolidation, leaving 70 major producers in China, each with an average production capacity exceeding 300,000 tons. Meanwhile, the downstream sector remains less concentrated, though in recent years, rising raw material costs and stricter environmental regulations have led to the exit of many smaller and medium-sized manufacturers. As a result, downstream orders are increasingly shifting toward larger, more established companies, accelerating the consolidation process. Take the domestic plastic pipe industry as an example: In 2017, China’s total output of plastic pipes reached 15 million tons, representing growth of about 6%. Among them, Liansu, the leading player in PVC pipe manufacturing, sold 1.58 million tons of PVC products—up 15% year-on-year. Notably, large-scale manufacturers have been growing significantly faster than the industry average, with the top 20 pipe companies now accounting for more than 40% of total sales.
Downstream integration will have a profound impact on the industry: first, it will enhance product quality and boost the per-unit usage of PVC; second, it will ensure smoother cost transmission between upstream and downstream sectors, potentially easing upward pressure on raw material prices.
Overall, the primary driver behind the earlier rise in PVC prices was exchange rate dynamics. Following the depreciation of the RMB, PVC price levels will need to be reassessed. Looking ahead, with low inventory levels expected, seasonal restocking demand is likely to further push PVC prices higher during the peak season.
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