Demand for polyvinyl chloride (PVC) is off sharply this year as the housing and construction industries—the largest buyers for this plastic—have plunged in the U.S. Meanwhile, a giant new PVC plant is about to open in the U.S., even as North America is awash in PVC capacity. Such conditions would normally be a recipe for falling prices. But this is not a normal year, and, in fact PVC prices are trending upward. The reason: the surge in crude oil has pushed up pricing for ethylene, PVC's main feedstock, and this factor has trumped recessionary economics. But PVC rates can't defy gravity forever, say analysts, who predict some moderation in tags late this year, as the gap between excess supply and lagging demand widens.

The decline in volume demand for PVC in the U.S. this year has been about 13–14% over last year, reports Joel Lindahl, director of chloralkali and vinyls at Chemical Market Associates Inc. (CMAI) in Houston. He attributes the drop-off to the slide in housing, where PVC is used in pipes, windows, siding and fences.

On the other hand, exports of PVC by U.S. producers are riding high. In May, for example, PVC exports from the U.S. were some 97% higher than May 2007, notes Jerry Fordyce, a plastics market analyst with Townsend Polymer Services & Information, in Houston.

Part of the reason for the vibrant export situation, says Lindahl, is that domestic PVC producers enjoy an ethylene feedstock cost advantage. Most other countries derive their ethylene from crude oil, he explains, whereas much of the ethylene in the U.S. comes from natural gas. And while crude oil and natural gas have both shot up in price over the past year, he adds, natural gas has not increased quite as fast. Another factor promoting exports of PVC—and many other commodities—is the weak U.S. dollar, according to Fordyce. And while demand for PVC in the U.S. may be weak, it is quite strong in other regions. Lindahl cites South America, Asia and the Middle East (particularly Turkey) as places where PVC demand remains healthy.

Still, rising exports of PVC have not been enough to make up for the anemic domestic demand. As a result, total sales of PVC by U.S. producers to domestic and foreign customers are down by about 6–7% so far this year, compared to the same period last year, estimates Lindahl. The slump in PVC sales has induced at least one big PVC player to cut back production. Earlier this year, Georgia Gulf closed two PVC plants: a 227,000 metric tons/year facility in Oklahoma City, and a 204,000 metric tons/year unit in Sarnia, Ont.

But Shintech, a Houston-based unit of Japan's Shin-Etsu Chemical Co., is going in the opposite direction. The firm has plans to build about 600,000 metric tons/year of new PVC capacity at a facility near Plaquemine, La. The first phase of this project is expected to start up in late August or early September of this year. According to industry analysts, some of the output from the new Shintech unit will be channeled into the thriving export market. But Lindahl says since operating rates of PVC are already down from last year, the new plant coming online will make them even lower.

Even as North American PVC makers are reeling from overcapacity and waning sales, they have had to deal with huge jumps in their ethylene costs, ultimately linked to the crude oil hikes. (Even natural gas-based ethylene has been dragged up in price by the petroleum increases because natural gas prices are indexed to oil in the U.S.) "The PVC producers right now are in a box," says Lindahl. "They don't have a lot of margin, and for them to even exist they have to push through the price increases in their feedstocks."

To cover these mounting feedstock costs, producers successfully implemented a 4¢/lb PVC price increase in May. After nominating another 4¢/lb increase in July, the PVC suppliers got hit with another round of ethylene hikes, causing them to tack on another 4¢/lb to their July nominations.

"A lot of purchasing managers are upset" with that 4¢ add-on, says Fordyce, because it came with "very little notice." He doubts whether the PVC companies will get the full 8¢/lb they are asking for. "Buyers are telling me they expect about half that increase to go through," Fordyce says.

But any increase is often burdensome to PVC buyers, many of whom are hard-pressed to pass along these extra costs. They are enlisting various strategies to deal with the problem. At Resintech USA, a Miami-based custom compounder of PVC and thermoplastic rubber, Rolando Perez, a vice president who handles purchasing, says he buys larger quantities of PVC than ever before to get "some price protection" from his suppliers. He also saves money by buying off-spec resin and PVC regrind. All these practices have a down side, however. Maintaining a large inventory of expensive resin "can be risky if a sudden drop in prices occurs," Perez tells Purchasing.

Many of the lower cost resins are sold through brokers, who are already oversubscribed with other customers. And much of the "good" off-spec resin cannot be economically transported to Resintech's Florida plant. In addition, maintaining quality standards requires that Perez's firm not use more than about 10% off-spec or regrind in its compounded resins.

Another PVC purchaser is Viam Manufacturing, a fabricator of automotive floor mats, trunk liners and partitions. Greg Nomura, director of the company's Santa Fe Springs, Calif. production site, says he tries to blunt the impact of PVC price increases by asking suppliers to split them into smaller increments over a longer period of time. He is also looking at lower cost delivery options to get around producers' fuel surcharges.

But these measures have been only partially successful in staving off hardships. "We cannot pass on increases in raw materials without having data to support it," says Nomura. "And even then we are not very successful." Perez says that a large portion of his customers are government entities, which impose caps on price increases of their suppliers. The typically allowed price increase, he adds, "is always lower than what we need to cover."

Some relief, though, may be in sight. Slack demand for PVC in the U.S. should last at least another two years, according to a spokesman for the Vinyl Institute, an Arlington, Va.-based PVC trade group. But if Shintech's new PVC plant in Louisiana comes onstream this year as scheduled, there will be too much resin and too few buyers, according to Fordyce. And that, he believes, will cause a scramble among existing PVC suppliers for market share, with resulting price cuts in PVC in the latter part of 2008. Fordyce cautions that this scenario may not occur if the Shintech plant fails to open on schedule. Shintech has already delayed the opening several times, he says, "and might do so again if they decide it would hurt their bottom line."