Key factors in the formation of the production prices are: cost of a product, prices of competitors, supply and demand ratio. This article deals with one of these factors – supply and demand ratio that caused rise in prices of PVC raw material in 2005.

Russian companies and the population of the country have got used to a systematic rise in prices for the goods and services. Nobody will get surprised by 12% year inflation and 20% increase in costs for housing and communal services tariffs. But one can hardly get used to 40% rise in prices on PVC raw material for the past year. The price for a ton increased almost twice – from 800 to 1450$ for the last two years – which caused panic in the window market. In fact PVC-C is the basic component for window structure manufacture and its share in the PVC – structure cost makes about 65%.

Such situation has given rise to a number of questions that may be interesting to the market participants: How long will the price surge on PVC raw material continue? What impact will the price surge make on the window market? The Branch marketing center О.К.Н.А. marketing has made a research and studied the reasons for such price surge on PVC material. Thus they framed opportunities and threats for the window market development for several years. The result turned out to be optimistic enough.

The present day situation with PVC material

The basic reason for a dramatic advance in prices on the PVC material became a significant exceeding of demand above supply. Though plastic window market grows by approximately 27% annually and demand for PVC-C in other market increases, the production of PVC material shows much slower growth rates. As a result the demand for PVC-C in 2005 exceeded the volume of the Russian production by approximately 120 thousand tons, which makes about 20% of the consumption.

Consumption and production PVC-C calculation scheme, Russia, 2003-2010
 

Under these conditions it was quite logical for PVC-C manufacturers to regulate demand by means of price. It turns out that in 2006 the cost of imported raw materials in the world market became below the Russian PVC-C cost. Adding delivery and customs costs to the imported raw materials price it turns out that it equals the price for the Russian raw material within the country borders.

Regulating demand by the price only can hardly balance the deficit in the market. These days the world market does not experience deficit in the PVC material, since China, being the main consumer of this raw material, has launched its own production. Therefore the suppliers of raw material, for example from South Korea, search for other markets to sell their production. The company LG Chem is presently dealing with the import of raw material from South Korea. Such companies as Sayanskchimplast and United Trading Company will also supply the Russian market with the raw material form China. There are no other important suppliers of PVC-C in Russia yet. The price surge occurred so rapidly that the sales companies hardly have time to arrange constant deliveries of the imported PVC-C material. The manufacturers of polyvinyl chloride took advantage of the situation having established higher prices for PVC-C than anywhere in the world, thus gaining additional profit.


Specifics of the market

This article deals with the PVC-C only, since for example PVC-emulsion has nothing to do with the window market. The number of PVC-C manufacturers in Russia is limited – there are only five companies. One can distinguish only 3 companies among them. Those prevail in the market: Sayanskchimplast (Sayansk), Caustic (Sterlitamak), Plastkard (Volgograd), these companies take 90% of the Russian market.

In order to understand the following: Why does demand exceed supply? Why did not new players appear in the rapidly developing market? – it is necessary to turn to the specific features of PVC-C production.
Thus, polyvinyl chloride manufacturer depends originally on: chlorine manufacturers, as well as on ethylene or other hydrocarbon derivatives manufacturers. Having gained these components the vinyl chloride is subsequently got from them. Vinyl chloride is thus a source for getting polyvinyl chloride. Let us omit the details of chemical processes that occur during production and dwell in detail on the PVC-C material suppliers.

PVC-C production scheme



Chlorine’s share in the PVC-C composition is 57%, this, in its turn, is gained from the sodium chloride reserves of which are practically in non controlled volumes. As a rule, chlorine manufacturers are the companies that are the members of the united structure together with the polyvinyl chloride manufacturers, therefore they usually do not have problems with chlorine.

Derivatives from the hydrocarbon raw material are basically got from ethane, because of the lower price. It is widely known that this country is rich in this gas. The main manufacturers of ethylene or the hydrocarbon material derivatives are: Angara polymer plant (this presently belongs to YUKOS), Slavaoilorgsynthesis (is in the Gasprom trust management) and Volgograd – Oilrefinement (is a united holding together with LUKOIL).

Hydrocarbon Lifting (oil and gas)



Recently it has been a very difficult period for the company Sayanskchimplast. Since in contrast to Caustic (Sterlitamak) and Platskard, it does not get an opportunity to turn to alternative suppliers of raw material. Angara polymer plant and Sayanskchimplast were built in the times of the USSR as a united structure, connected by ethylene line. They are the so-called mono-partners. Now these companies turn out to be owned by different people.

Not sufficient supplies of ethylene hinder PVC-C production development. Indeed the basic share of Russian ethylene is used by its manufacturers for their own needs in polyethylene and polypropylene. These branches are economically more attractive. Vertical integration is observed in the companies that are processing hydrocarbon. There are close connections between the PVC-C and ethylene manufacturers, which hinders the development of these business spheres dramatically.

In order to increase production of polyvinyl chloride a manufacturer has either to persuade their suppliers to increase their output or to launch their own ethylene production, and then invest more money into polyvinyl chloride production. “Long and cheap money” is the problem of the branch. The payback period will take about 15 years and investments into the ethylene production will make up about 500 mln.dollars, the same investments are required to launch polyvinyl chloride production. Various administrative barriers impede going into the market.


Prospects

Practically all PVC-C manufacturers, with the exception of Novomoskovsk nitrogen (Tula region), would have long-term plans in respect of production expansion. Besides, some ethylene manufacturers are interested in this segment of the market and they are presently applying it in the packing branch. The deficit in raw material will be reducing in 2008 and it will have been covered by 2010 taking into account the window market development.


Summary

It is too early to speak about the future collapse of the window market in connection with the price surge on PVC-C material. Price surge on raw material will hardly make impact on the finished product. Price surge will make about 5%, which will not lead to demand fall.

The further price advance is unlikely to happen soon. Russian prices are now higher than anywhere in the world market. So, the polyvinyl chloride manufacturers are unlikely to rise prices in order not to lose a customer who will in this case go searching for imported goods. Further PVC-C price surge will be happening systematically, following price surge on oil, and as a result on gas, as for producing ethylene gas is used as the main component.

In contrast to the PVC-profile market, where the prices were originally formed in accordance with the world prices, PVC market in Russia has already existed, though in a rather poor state after the USSR break. Too rapid development of the market has at one moment outlined the raw material market growth, and the acquisition of the investments into the PVC material and ethylene production takes time. As a result of such event a dramatic price surge occurred in the Russian market. The fact that the prices on PVC in Russia are higher than anywhere in the world means that the polyvinyl chloride manufacturers take advantage of this situation. Indeed the aim of any commercial enterprise is to gain maximum profit. However, such a situation cannot last long, since in any case the market will put everything on its places. If there is demand there will certainly be supply. Especially in case when the balance between production and demand of polyvinyl chloride will be reached by 2010.