Li Jingmin, Accounting Department of Sinopec Qilu Company

Domestic polyvinyl chloride (PVC) is mainly used in the field of building materials such as pipes, profiles, doors and windows, plastic flooring, wallpapers, wires and cables. The demand for PVC has increased sharply in recent years, benefiting from the fast-growing real estate and infrastructure sectors. As a result, PVC capacity has been increasing rapidly. In the end of 2021, the number of PVC producers in China added up to 71, with a total capacity of 27.13 million t/a.

The capacity of paste PVC accounts for about 5% of the total capacity of PVC. Despite the difference between paste PVC and general PVC in the production process, both of them are mainly fed by vinyl chloride (VCM). Apart from a small number of VCM being used to produce vinylidene chloride so as to be polymerized into produce polyvinylidene chloride (PVDC), the majority of VCM is used to produce PVC. Therefore, the correlation between VCM and PVC is very high. 

Industrial structure of VCM and PVC

There are two main VCM production processes by raw material - calcium carbide process and ethylene process. The number of ethylene-based producers is limited and they are mainly located in the coastal areas of North and East China. The abundant port resources facilitate them to import raw materials such as petroleum, ethylene, ethane, dichloroethane, and VCM, as well as to export finished products. Ethylene-based PVC producers have three sources of raw materials - self-made ethylene, externally sourced ethylene and externally sourced VCM, accounting for about 29%, 45% and 26% respectively.

China is rich in coal but short in oil, and thus calcium carbide-based process takes the leading position in the PVC industry, mainly distributed in Northwest and North China with affluent coal. Calcium carbide -based PVC producers have two sources of raw materials self-made calcium carbide, externally sourced calcium carbide, accounting for about 60% and 40% respectively.

Calcium carbide, as a traditional high energy-consuming industry, has been directly affected by the government’s control policy over both the quantity and intensity of energy consumption across the nation. As a result, some units were driven out of the market and the approval procedures of some new projects became strict. However, year 2018 saw a peak of 46.3 million t/a in capacity due to the start-ups of new projects, and the capacity has been declining since then. There were 120 domestic calcium carbide producers in the end of 2021, down by 50% from 2015; and the capacity was 41.5 million t/a, a decrease of 4.8 million t/a or 10.37% compared with that in 2018.

Affected by the sharp decline in the capacity of raw material calcium carbide, calcium carbide-based PVC capacity has been gradually decreasing in recent years, with the proportion down from 83% in 2014 to 77% in 2022. In the meanwhile, the ethylene-based PVC industry is more and more favored for its low energy consumption and excellent product performance, and the capacity has been gradually increasing, with the proportion up from 17% in 2014 to 23% in 2022, as shown in Figure 1.

Figure 1 Proportion of calcium carbide-based PVC and ethylene-based PVC in China

The majority of PVC plants are integrated with VCM units due to the high correlation between VCM and PVC. At present, all of the domestic calcium carbide-based plants are equipped with VCM units, while only six ethylene-based plants are not equipped with VCM and have to outsource VCM, four of which produce general grade and the rest two produce paste grade, with a total capacity of 1.59 million t/a, as shown in Table 1.

Withdrawal and capacity expansion of PVC plants

China's PVC industry has experienced a process from prosperity to decline and then back to prosperity in the past decade. There have been ups and downs in the number of PVC producers and capacity. The total capacity fell slightly in 2014-2016 and 2018 as the idled capacity exceeded the new capacity, but the capacity increased in the rest years, as shown in Figure 2.

Figure 2 Chinese PVC capacity and expansion projects in recent years

During the period, the abandoned capacity of calcium carbide-based PVC exceeded that of ethylene-based. According to statistics, a total capacity of 8.914 million t/a was driven out of the market from 2011 to 2021, of which 6.755 million t/a were calcium carbide-based general grade, accounting for 76%; 1.465 million t/a were ethylene-based general grade, accounting for 16%; 694 000t/a were paste grade, accounting for 8%.

Domestic PVC capacity is planned to increase by 1.5 million t/a in 2022, as shown in Table 2. So far, Dezhou Shihua and Cangzhou Julong Chemical have been put into production as planned for the first half of the year.

Development of paste PVC industry

Domestic paste PVC capacity and output have increased by leaps and bounds in the past decade. Especially since the outbreak of COVID-19 in 2020, the demand for medical gloves has surged, driving up the prices of paste-grade PVC and hence promoting the industry to grow fast. The domestic paste PVC capacity was 1.19 million t/a in 2019, and it increased to 1.27 million t/a in 2020. In 2021, the capacity hit 1.4 million t/a, an increase of 210 000 t/a or 17.6% from the pre-pandemic level in 2019.

However, the capacity has been surplus, as a large number of paste PVC projects were launched while the demand for medical gloves is shrinking as a result of the pandemic being eased in China. Accordingly, the operating rates have been decreasing sharply to below 70% since the second quarter of last year, with the lowest rate hitting 42%. 

Market changes in 2022

Domestic VCM and PVC markets have witnessed a sharp decline after a rise since 2022, as shown in Figure 3. The prices of ethylene-based PVC refer to the levels of S-1000 in Shandong, and the calcium carbide-based PVC prices refer to the levels of SG-5 in Shandong.

Figure 3 Prices of VCM, PVC and raw materials in China, 2022

Prospect of industrial development

In China, 1.9 million t/a of PVC capacity is expected to be put into production in 2023, and another 2.7 million t/a to be put into production in the longer term. Of the total capacity of 4.6 million t/a, all of which are VCM-PVC integration plants, 1.8 million tons are by calcium carbide process and 2.8 million tons by ethylene process. Table 3 shows the details.

The government started to implement the control policy over both the quantity and intensity of energy consumption in 2015 and it put forward the development goal for the control policy in September 2020. As a result, the calcium carbide production has been restricted due to high carbon emissions. The total capacity of calcium carbide is expected to keep declining in the coming few years, which will squeeze the development space of calcium carbide-based PVC market.

Compared with calcium carbide-to-PVC process, ethylene-to-PVC process generates low energy consumption and low pollution while making quality PVC, which is in compliance with the national policy direction, so the process has broad development prospects. There will be a sharp increase in the number of ethylene-based PVC projects in the future. In the meanwhile, the source of ethylene raw materials will be more abundant, and the proportion of coal to ethylene, ethane cracking to ethylene, light hydrocarbon cracking to ethylene and other processes will increase significantly.

In terms of paste PVC, it is expected that the market will remain oversupplied in the coming years and there will be little room for any expansion. Under the circumstances, producers should make efforts to expand downstream markets, develop new products and increase the operating rates of existing plants in the future.

Calcium carbide-based PV producers are in the red broadly, especially those outsourcing calcium carbide as feedstock. Some have reduced operating rates consequently. If the prices of PVC do not rebound as soon as possible, more and more of the calcium carbide-based producers will have to cut their operating rates and some will even shut down plants. Ethylene-based PVC producers maintain big margin room, as supported by a cost reduction due to sharply decreased feedstock ethylene prices, and their operating rates stay at a high level.

As for demand, the real estate sector accounts for more than 60% of the terminal consumption for PVC in China. The government’s real estate regulating measures and the influence of COVID-19 have quashed investment hopes in the industry since 2021. As a result, the housing transactions cooled down sharply and some real estate enterprises were stumbled by capital chain rupture. The Housing Starts index is decreasing, which signals lower demand for PVC.

The domestic real estate market has become increasingly weak since the beginning of this year. According to the National Bureau of Statistics, the real estate development investment in China marked a year-on-year decline of 5.4% from January to June, down by 1.4 percentage points; the area of purchased land marked a year-on-year decline of 48.3%, down by 2.6 percentage points; the area of newly started housing marked a year-on-year decline of 34.4%, down by 3.8 percentage points; the construction area marked a year-on-year decline of 2.8%, down by 1.8 percentage points. The weak real estate market has led to a sharp reduction in PVC demand and hence a price plunge in the PVC prices.

In the infrastructure industry, the construction of new infrastructures has been highly encouraged in the past two years. The so-called "new infrastructure works" refer to the construction of technology-based infrastructures, mainly in the seven fields - 5G base stations, ultra-high voltages, intercity high-speed railways and urban rail transits, new energy vehicle charging piles, big data centers, artificial intelligence and industrial Internet. It can be seen that the infrastructure industry is a niche market for PVC, with most of the PVC products to be used in wires and cables and a small amount in drainage and threading pipes. Therefore, the industry is unable to digest the PVC supplies left from the real estate market. 

The investment amount in commercial housing development and the area of newly started housing increased in June given a series of favorable national policies, but the overall domestic real estate market is still clouded and the outlook is gloomy in the coming years. As a result, there is more possibility that the PVC industry will step into a new declining round, and PVC producers, especially calcium carbide-based ones, may be challenged by more competition for survival. Against the backdrop, two calcium carbide-to-PVC projects that are set to be started up in the second half of the year are likely to be postponed, expansion projects for next year and onward will also be greatly affected, and some carbide-based capacity expansion projects may be put aside. Therefore, the proportion of ethylene-based PVC capacity will continue to increase.

Note: The chart and data in this report are sourced from www.oilchem.net and www.CCAON.com.