PVC Prices May Rise as China Extends Olympic Closures

By Yu-huay Sun and Wang Ying

Aug. 20 (Bloomberg) -- PVC, the oil-derived plastic used in construction and some Louis Vuitton handbags, may gain 10 percent as China extends a shutdown of factories to improve air quality beyond the Beijing Olympics.

Prices will probably reach a record $1,400 a metric ton this year because of production curbs in China, source of almost 25 percent of the world's polyvinyl chloride, said Danny Ho, an analyst at Yuanta Securities Co., Taiwan's largest brokerage.

China has closed some PVC plants because most of its factories make the material from coal, a process that pollutes air and consumes electricity. Reduced supplies may increase home construction costs because PVC is required at every building site as it's used to insulate electrical wires and for piping. Toys and raincoats may also cost more, industry officials said.

``PVC supply is falling,'' Ho said in an interview in Taipei. Many factories will stay shut after the Aug. 8-24 Olympics Games to meet tighter pollution regulations and because of shortages of coal and power, he said.

As much as 30 percent of China's PVC capacity may currently be idled by the Olympics, stricter environmental controls and higher raw-material costs, said Zhang Guomin, vice chairman of the China Chlor-Alkali Industry Association, which represents about 100 PVC producers.

Christmas Trees

``The situation won't change much after the Olympics,'' Zhang said in an interview in the northern Chinese city of Tianjin. Some plants will remain shut because of pollution curbs and inadequate electricity supply, he said.

``PVC prices should be on an uptrend'' because of plant closures and rising costs, Zhang said.

Asian PVC prices may rise next month because of demand from manufacturers of items such as toys and plastic Christmas trees before year-end orders, said Cindy Mo, a Shanghai-based director at consultants Chemical Markets Associates Inc.

That may benefit Tokyo-based Shin-Etsu Chemical Co. and Taiwan's Formosa Plastics Corp., the world's biggest PVC makers.

``Oil-based PVC producers should be able to raise prices because their coal-based rivals are under pressure to charge more due to rising costs,'' said Erik Chang, a Taipei-based analyst at Capital Securities Corp.

More than two-thirds of China's PVC production is coal based, the association's Zhang said. In Japan and Taiwan, PVC is mostly made from ethylene, extracted from oil.

Beijing Huaer

PVC-maker Beijing Huaer Co. is on a list of plants shut for the Games, China's official Xinhua news agency said July 15.

Environment Protection Minister Zhou Shengxian in May told provinces neighboring Beijing, including Hebei and Inner Mongolia, to close polluting factories and order power plants to cut emissions by the end of June in time for the Games.

``Most of the measures that we announced to improve the environment and cut emissions are long-term and will continue after the Olympic Games,'' Fan Yuansheng, director of pollution control at the environment ministry said at an Aug. 3 press conference in Beijing. ``We will continue increasing efforts to protect the environment and improve air quality in Beijing.''

Formosa raised its benchmark prices for customers in Taiwan by NT$1.5 (5 cents) a kilogram to a record this month, spokesman Jerry Lin said Aug. 1. He declined to give actual prices because they are confidential. The material's price was $1,275 a ton in the East Asian spot market in the week that started Aug. 13, according to oil-pricing service Platts.

Gains in PVC prices contrast with petrochemicals such as ethylene glycol, used in fabrics, which are dropping because of increasing production in the Middle East and China. ``Prices of 80 percent of petrochemicals are heading lower, but PVC isn't among them,'' Yuanta's Ho said.

Coal's Record

China, battling a sixth year of electricity shortages, mothballed almost 3 percent of its coal-fired generating capacity as of July 25 as fuel supplies dwindled, said the State Grid Corp. of China, its largest power distributor.

The shortage has reached 40 million tons, Wu Chenghou, adviser to the China Coal Transport and Distribution Association, told reporters in Beijing July 17. Benchmark prices at Qinhuangdao, China's largest port for the fuel, reached a record $168 a metric ton Aug. 8, according to the McCloskey Group Ltd.

China stepped up curbs on coal-based PVC plants in November, when the National Development and Reform Commission banned their construction in protected areas including near tourist attractions, sources of drinking water, railroads and highways.

PVC is the second-most common form of plastic. In 2007, global demand totaled 33.6 million metric tons, including 9.89 million tons in China, according to Taiwan's Petrochemical Industry magazine. The mainland produced 9.4 million tons of PVC.

Handbags, Shoes

The material is used in floors and in window frames as an alternative to iron, wood or aluminum. A more malleable form becomes synthetic leather for sports shoes and some handbags. Luxury goods producers including LVMH Moet Hennessy Louis Vuitton SA and Chanel SA use PVC in some handbags and shoes, targeting consumers seeking a lighter and easier-to-maintain alternative to genuine leather.

The most common plastic is polyethylene, used in plastic bags and packaging.

PVC's gains may be pared by slower growth in China's property market, said Zhang of the Chlor-Alkali association.

July property prices rose at the slowest pace in 14 months, according to data from the development commission, as the government tightened lending to rein in soaring property prices.

Growth in China's PVC output this year will slow to less than 10 percent from previous ``double-digit'' gains because of pollution curbs, Chemical Markets' Mo said.

Output may total 10 million metric tons in 2010, less than the 12 million tons estimated about two years ago, because of the measures targeting pollution and energy conservation, Capital Securities' Chang said.

To contact the reporters on this story: Yu-huay Sun in Taipei at ysun7@bloomberg.net; Wang Ying in Beijing at ywang30@bloomberg.net