Document zd6pZ7d570mkrKQ7eZV9QporB

The polyvinyl chloride business has changed. Six years ago, there were 21 different PVC producers scurrying for a piece of a pie that analysts said was growing 12 percent per year. Only one company, long-time leader B.F. Good rich Co., Akron, OH, had more than 1 billion pounds of nameplate capacity and it was planning to build an addi tional 1-billion-pound plant. Goodrich never built that plant. PVC chugged forward at less than 3 percent per year, and imports robbed producers of potential growth. By 1986, only 13 players were left, four of them each with 1 billion pounds or more of PVC capacity. Total capacity also grew as large fish swallowed minnows. Markets have been fair, thanks to a good year for the construction business in 1986. Consolidation has opened the door to new competitors. Of the four billionpound producers, two are subsidiaries of Asian corporations. The fifth and sixth largest companies are leveraged buy-outs spun off from larger corpo rations. Overall, the industry is more integrated than ever before, but Good rich became somewhat more dependent on outside feedstocks when it sold its money-losing chlorine plant to Diamond Shamrock Corp. Still, Goodrich remains the most fully integrated US producer. Global PVC trade forms its own par adox. PVC is made by combining ethy lene and chlorine into ethylene dichloride (EDC), which is upgraded to vinyl chloride monomer (VCM) and polymer ized into PVC resin. Last year, the US exported 1 billion pounds of both EDC and VCM, but imported 100 million pounds of PVC and over 1 billion pounds of fabricated PVC goods. Fabricated imports have eaten away a large chunk of the domestic market; at least 1.1 billion pounds in 1985, ac cording to a conservative estimate made by Goodrich's manager of market re search Richard Roman. Most come from Pacific Rim nations, especially Taiwan and South Korea. Over 900 million pounds entered in the form of flexible film and sheet (260 million pounds), furniture parts PVC Is the Market Where Big Isn't Enough Rigid pipe accounts tor almost half of PVC sales; most ot the pipe sold is used in construction. (55 million), handbags (50 million), lug gage, footwear, curtains and flooring (40 million each), and scores of other goods. Another 180 million pounds were imported as components in automobiles, appliances and durable goods. World economics makes sense for imports of finished goods. Japan, Tai wan and South Korea must import ethylene or its feedstocks. Their elec trical power costs too much to justify an energy-intensive chlor-alkali plant, and chlorine is too volatile to be shipped overseas. When the dollar began weakening against the yen, most analysts felt the flood of fabricated imports would drop. It has not happened. That is in put because the dollar has not depreciated in relation to Taiwanese and South Ko rean currencies. "Besides," says one chlorine analyst, "that fabricating ca pacity has gone offshore. There's no capacity here to make some of those products." Ifproduction ofthose 1.1 billion pounds of fabricated imports had stayed at home, PVC growth in the US would OCTOBER 1966 CHEMICAL BUSINESS PACE 27 UCC 079621 Overly high pH sf t Imports com In." have averaged at least 5 percent an nually between 1978 and 1985. Instead, it averaged only 2.8 percent per year. Slow growth is a disaster for an in dustry building capacity to accommo date 12 percent annual surges in demand. In the case of PVC, unused capacity has flooded producers with red ink. "Over the past five years, every PVC producer lost money at one time or another, and some had a net loss for the entire period," says Alan Bailey, general manager of PVC resins at Oc cidental Chemical Corp., Pottstown, PA. The industry also grew more cyclical. Its largest end-use has always been rigid pipe, which accounts for 40 to 45 percent of total PVC sales. Most pipe is used in construction, for drains, sewage, water and electrical conduit. The smaller the diameter, the clearer PVC's economic advantage over com peting metal, asbestos and concrete pipe. It is easier to handle, and can be installed by semi-skilled craftsmen us ing glue, without heavy equipment or welding torches. Other traditional PVC construction markets include pipe fittings, flooring, paneling, roof membranes and vinyl wallpaper. Figure in two fast-growing businesses, home siding and window frames, and it becomes clear how roughly two-thirds of all PVC now goes into homes and offices. As a result, when interest rates fall and Americans start buying new homes, PVC booms. When interest rates rise, the housing market goes stale. The out look can grow pretty bleak even when interest rates remain flat. This year, for example, pipe demand rose when mortgage rates hit single-digit num bers. But pipe demand lags the overall PVC market, says Roman, because pipe makers had to work off inventory from a disappointing 1985, when interest rates stayed flat. Pipe makers must buy during the winter, and for the past four years, pro ducers have taken advantage of this industry feeding-frenzy to jack up prices. They raised tabs from 20 cents/ pound in August 1983 to well over 30 cents in the Spring of1984, recalls Rob ert D. Chow, vice-president, marketing, for Formosa Plastics Corp., Floriuun Park, NJ. After the pipe season ran its course, prices crashed to 18.5 cents. The following winter (1984), PVC rose into the high 30s, but was back down to 20 cents by September of 1985. This year, prices crested at 29 to 30 cents in January, but fell more quickly than usual. They had slipped to 25 to 26 cents by May. When prices fluctuate, it hurts the industry, Chow contends. "Overly high prices," Chow explains, "let imports come in, cause uneconomic plants to restart and make it easier for iron and concrete to compete." PVC remained comparatively firm this year, especially when the decline of oil-based ethylene is taken into ac count. Are seasonal swings going the way of $30/barrel oil? Roman suggests the pipe makers have learned to keep producers in line by buying PVC when it is cheap--building inventories before the start of the season. A second analyst disagrees with Chow, contending that price swings benefited integrated producers capable of profiting at different levels in the intermediate chain. Now that most producers are largely integrated, though, no one has much of an advan tage over anyone else. Of course, it could all be wishful thinking about stability. The 1986 sit uation may be due only to the turbo charged housing market, fueled by single-digit mortgages, which kept construction-related demand high well into the summer. In any case, many large PVC pro ducers are trying to squeeze into more specialized markets, such as injectionmolded siding and window frames. "That's the problem," laments Roman: "We're all in [these areas] and it's hard to make a decent buck." Roman still believes that selling PVC compounds (resin plus additives and colors) to custom injection molders will produce higher margins. "It's an op portunity to sell service," he says. But it means suppliers must compete with custom compounders who buy raw resin from the resin producers to serve their own customers. "We can't avoid that," says Roman. `They're redirecting their efforts to the same areas we're inter ested in." Besides, the market is small. All injection molding, custom and com modity, absorbed 465 million pounds of pohnner in the 6.4-billion-pound market in 1985. Rising exports, maturing markets and tight margins have led to larger, more integrated companies capable of profiting almost anywhere along the PVC intermediate chain. In that sense, each company's moves have been dic tated by feedstock considerations. That was certainly the case with Oc cidental Chemical Corp., now the na tion's number two producer. Oxy is also a major chlorine producer and its ex pansion in PVC, says Bailey, "pulls through our chlorine and ethylene feed stocks." Since most chlorine growth over the past three years has teen due to PVC, Oxy's PVC expansion shares in chlorine's only growing market. Oxy was only a minor producer of PVC bottle compounds prior to 1980, when it bought three plants from Fire stone Tire & Rubber Co., Akron, OH. An ethylene plant, now refurbished, came with its acquisition of Cities Ser vice Co. This year, Oxy purchased Tenneco Polymer's 800-million-pound PVC operations for less than $100 mil lion, or 12.5 cents/pound of annual ca pacity. It also plans to buy a chlorfllkali operation from Diamond Sham rock Corp., Dallas. Until it was acquired, Tenneco was one of two large producers with no PVC feedstocks. The acquisition brought MOE 2t CHEMICAL BUSINESS OCTOBER 1906 UCC 079622 Oxy's share of the pipe business to 15 percent, from under 5 percent. "You have to be in pipe if you're in PVC says Bailey. "We're not frightened by construction," he states. "We know the rules." Feedstock led Formosa Plastics into the US market, a decision made after the 1973 Oil Crisis, says Chow. "There were no feedstocks in Thiwan, so we decided to obtain EDC and VCM sup plies in the US and ship [them] back to Taiwan. Since we planned to [ship] feedstocks, we decided to do PVC as well." Formosa did it with several advan tageous deals. In 1981, it bought a 270- million-pound plant from Stauffer Chemical Co., for $12 million. ICI Americas sold it a chlor-alkali/EDC/ VCM complex that had lost $80 million over the previous three years, when Formosa agreed to assume its $27 mil lion debt. Formosa in turn paid off the debt when it sold part of its land to Exxon for $42 million. In 1982, it pur chased Johns Manville's ailing 450-mil lion-pound PVC pipe business. In 1983, Formosa opened its own PVC/ VCM/EDC complex in Texas, and it expanded the old Stauffer plant in 1984. Formosa is now the nation's third largest producer. Nameplate includes 1.2 billion pounds ofPVC, 1 billion pounds ofVCM, 560 million pounds of EDC and 395 million pounds of chlorine. The only other major expansion was Georgia-Gulf Corp., Atlanta, has ar carried out by Shintech, which ex guably benefitted the most from acqui panded capacity to 1 billion pounds. A sitions. When the business was operated subsidiary ofJapan's Shin-Etsu, Shin- by Georgia-Pacific Corp., nearly 75 tech's efficient technology makes it a percent went into pipe. In 1983 Georgia- strong competitor in commodity mar Pacific acquired two PVC plants and kets despite its lack of any feedstock two compounding facilities from Ethyl integration. Corp., Richmond, VA, one year after PVC has become the land of the Ethyl had bought one of the plants from giants, yet most of the big guys argue Diamond Shamrock. It also launched Siat size is not enough. "Size for its an expansion program of its own. Now, own sake goes back to the '50s and '60s, only 20 percent of its business is pipe, when people tried to build the largest and 25 percent is compounds. In 1984, facility to distribute overhead costs over Georgia-Pacific spun off the business the most pounds of products," explains as the leveraged buy-out, Georgia-Gulf Richard Flammer, vice-president of Even Goodrich picked up some ac < Vista Chemical Co., Houston. "Buying quisitions, one from Diamond Shamrock four more plants may change your in 1982, the second from Canadian joint- overhead, but it doesn't change your venture partners Diamond and Novacor manufacturing economics. Once you Chemicals. On the other hand, it closed have a 300-miSk>n-to-500-millicn-pound down a West Coast plant and sold its plant, you will be as efficient as anyone." large, modem chlor-alkali unit (it had Since Vista, an LBO, was spun off lost $37 million between 1982 and 1984) by E.I. de Pont de Nemours & Co., when it restructured in 1984. Wilmington, in 1984, it dramatically decreased overhead. "A large company typically supports lots of staff" Flam mer says. "We're dedicated to this par ticular business, and we have just the people we need to run it." More significant is the cost of con verting VCM to PVC, according to Flammer. He claims Vista's "thirdgeneration" plant has a 30 percent en ergy advantage and 35 percent pro ductivity advantage over competitors. According to Flammer, Vista has thei edge over "second-generation" tech-l nology used by Goodrich and Occidental! (and Tfenneco). "We've looked at others, 1 and we're convinced we've got the best," he declares. Other observers point out that Shin tech and Goodrich have brought on most of the industry's expansions in the past five years. Goodrich has successfully licensed its technology offshore, and Bailey says Shin-Etsu's system is "as good or better than any technology in the world." 133 UCC 079623 OCTOBER 1966 CHEMICAL BUSINESS MGE 29 (IcXfr'**-**-' * mSHMHCN ^ BY STEPHEN BARLAS PVC buyers wait for FDA ruling Polyvinyl chloride (PVC)buyers--both current and potential--in the food processing industry are wait ing for the Food and Drug Ad ministration (FDA) final rule on PVC. Most CPI companies believe the rule provides "a ra tional framework for ensuring the health and safety of the general public/' in the words of BFGoodrich, which uses PVC in conveyor belts sold to food-packing plants. (The com pany is also the number-one producer of PVC in the United States.) But a number of com panies want the FDA to make modifications in the rule, due to be finalized late in 1986. Briefly, the FDA rule sets ac ceptable levels of residual vinyl chloride monomer(RVCM) in food-contact products such as packaging, bottles, and food processing [ equipment. There would be a 10-ppb limit on rigid and semi-rigid PVC (bottles) and a 5-ppb limit on non-rigid PVC (food wrapping). For water-car-; lying pipe in rood plants, the limit would be 50 ppb. ' Despite quibbles industry may have with these numbers, they are far better than those proposed in 1975. The original limits proposed by the FDA forced many companies to avoid PVC, even though the FDA never finalized the 1975 rule. Borden, Inc. was one compa ny that acted very cautiously. Jerry Schindler, a Borden attor ney, says he always advised his company that PVC bottles for such things as maple-syrup and non-dairy creamer were okay. "But there were people inter- ^ nally who cautioned against ` Industry may quibble about new RCVM limits, but they are far better than those proposed in 1975 using PVC," Schindler says. "They were afraid of bad con sumer press if PVC was found to be a cancer problem." Schindler considered it "a gutsy move" when Proctor &. Gamble decided to use PVC in its Crisco oil. Now other companies, such as Borden, will presumably follow suit. Packaging companies can use PVC even more widely if FDA modifies the limits. Occidental Chemical Corp. thinks the 5- and 16-pptrlimits are too strict. "We find that many of our customers are currently producing articles having re sidual VCM in the 10- to ,20-ppb range," says J. Alan ^Bailey, vice president and gen eral manager of Occidental's PVC resins and compounds di vision. "Asking them to re duce by a factor of two will n doubt be difficult and costly in terms of manufacturing equip ment, productivity, and analyt ical requirements; in many cases it may not be possible." Borden's position is more flexible; it would like to see a uniform 10-ppb limit. Eugene Skiest, corporate technical di rector at Borden, points out, for example, that PVC film (slated for 5 ppb) is widely used for grocery products. VCM migration to fruits and vegetables would be minimal. Adds Skiest, "Most of the food-contact uses of PVC film are kept under refrigerated or frozen conditions, where any migration of RVCM can be ex pected to be substantially re duced." CPI companies are also wor ried about documenting RCVM levels. The FDA wants companies to use a testing method that was first publi cized in a 1978 issue of the Journal of the Association of Official Analytical Chemists. This method detects to 1 ppb, but it is very costly and slow. A number of companies are pushing an alternative, ASTM method D-4443. "It is certain ly more affordable for small business," says Borden's Skiest. "This ASTM method has been thoroughly studied and collaborated and is the ob vious method of choice for the regulation of vinyl chloride polymers." Stephen Barlas is Washington Editor of CPI Purchasing. He can be reached at 4611 N. 7th Road, Arlington. Va. 22203. Phone: (703) 528-0859. CPI Purchasing/July 1986 21 UCC 079624