Analysts: Global Ethylene Supply in Tight Spot, Domestic PVC Market "Diverges"

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Source: Futures Daily

Since March, the impact of Middle East conflicts on the PVC market has been gradually shifting from “emotional” reactions to core links within the PVC industry, leading to profound changes in the overall market structure.

In an interview, Futures Daily reporters learned that as a key hub for global energy and chemical industries, the turmoil in the Middle East directly affects the ethylene supply chain. As the conflict persists, overseas refining companies have issued force majeure notices, with production cuts becoming increasingly common. This has led to a shortage of ethylene deliveries in the later stages, directly driving domestic ethylene prices to rise sharply, which in turn has forced ethylene-based PVC producers to reduce production.

According to data from Zhuochuang Information, as of the week of March 6-12, the overall operating rate of domestic PVC powder was 78.49%, down 0.93 percentage points from the previous week. Market participants believe that behind this seemingly small fluctuation is a clear structural divergence—an “up-down” contrast between calcium carbide method and ethylene method: the operating rate of calcium carbide PVC powder is 81.89%, up 1.48 percentage points week-on-week; meanwhile, the ethylene method PVC powder operating rate is only 71.00%, a significant drop of 6.24 percentage points, entering a substantial reduction phase.

Zhuochuang senior PVC analyst Yu Jiangzhong explained that raw material shortages are the core reason for the reduction in ethylene-based PVC production. As of March 12, the daily output of ethylene-based PVC in China was only 17,910 tons, down 3,170 tons from March 5, a decrease of 15.04%. “Cost inversion plus raw material constraints” have put many ethylene-based producers in a passive position.

“China’s ethylene supply is highly dependent on Japan and South Korea, and their crude oil supplies are heavily reliant on the Middle East. In the short term, there are no alternatives to increase supply. Coupled with planned maintenance of ethylene plants in Asia from March to April, the originally expected raw material shortages have now become a reality,” Yu Jiangzhong said.

According to Zhuochuang data, as of March 16, ethylene prices in East China were 9,750 yuan/ton, up 66.67% from 5,850 yuan/ton on February 28; CFR China ethylene prices soared to $1,325/ton, up 87.94% from $705/ton on February 27.

Market participants note that more critically, the increase in ethylene raw material prices far exceeds the rise in PVC prices, leading to ongoing losses for domestic ethylene-based PVC companies. Some are even considering halting PVC production, selling off ethylene or VCM to reduce losses.

Yu Jiangzhong believes that the reduction in ethylene-based PVC production has just begun, with limited impact so far, but raw material inventories at domestic ethylene plants are generally low, mostly enough to last until the end of the month. “If the situation in the Strait of Hormuz continues, production cuts will further expand: by the end of March, the operating rate of domestic ethylene-based PVC could drop to 40-50%; if the Strait remains closed for another 1-2 months, it could fall to 20-30%,” he said.

Centaline Futures analyst Liu Peiyang added that ethylene capacity in the Middle East is crucial—Saudi Arabia, Iran, Qatar, Kuwait, and the UAE together have about 33 million tons per year, most of which have been shut down due to the war. Meanwhile, maritime logistics routes are blocked, causing major ethylene producers like Japan and South Korea to reduce production due to raw material shortages, further tightening global ethylene supply.

Notably, overseas ethylene producers’ production cuts are escalating. Liu Peiyang stated that South Korea’s Yeochun NCC has decided to permanently shut down two naphtha cracking units, reducing ethylene capacity by 600,000 tons annually; Lotte Chemical also agreed to shut down a 1.1 million-ton-per-year naphtha cracking unit; producers in Japan, Indonesia, Singapore, and other countries have also issued force majeure notices, with ongoing risks of further reductions or shutdowns.

While ethylene-based PVC companies remain under pressure, domestic calcium carbide PVC producers are experiencing a rare opportunity. “Calcium carbide PVC capacity accounts for about 70% of total domestic capacity. As ethylene-based companies reduce production, the export window for calcium carbide PVC opens. Coupled with supply contraction expectations, the domestic PVC market is expected to enter a destocking phase in late March, with the extent of destocking possibly expanding if tensions in the Middle East persist,” Yu Jiangzhong said.

It is also worth noting that fluctuations in the PVC market are affecting the caustic soda market. Liu Peiyang explained that as ethylene-based PVC plants reduce or halt production, associated caustic soda producers will also passively cut back, which could help improve the oversupply and high inventory levels domestically. Meanwhile, disruptions in overseas supply are boosting export expectations, jointly supporting PVC and caustic soda prices to rebound.

“From a driving logic perspective, the direct impact of the Middle East conflict on PVC is greater than on caustic soda, with a stronger expectation of PVC supply contraction. In the medium to long term, by 2026, domestic PVC capacity expansion will be nearing its end, with only about 300,000 tons of new capacity planned, while domestic caustic soda capacity is expected to increase by over 2.5 million tons, about 5% year-on-year, indicating supply growth potential,” Liu Peiyang said. “Additionally, both domestic PVC and liquid caustic soda inventories are at historic highs. Whether the export expectations driven by the Middle East conflict can be realized smoothly will influence the destocking of domestic PVC and caustic soda. If these expectations turn into reality, prices are likely to remain strong.”

“Currently, the Middle East conflict is unlikely to end in the short term, and its impact on the market will continue to extend,” Liu Peiyang concluded. “Supply disruptions for PVC and caustic soda still carry risks.”