Cost and profit analysis of PVC under different production processes
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The key point is as follows: First, the PVC production processes mainly include the calcium carbide method and the ethylene method. The production costs of PVC using the calcium carbide method involve coal, coke, electricity, and calcium carbide. The cost of PVC produced by the ethylene method includes crude oil, ethylene, EDC, VCM, etc. Since 2020, PVC prices have fluctuated significantly, resulting in large differences in profits among companies using different production processes. Those with an advantage in terms of raw materials enjoy substantial profits, while those that need to purchase raw materials may face losses. Second, when crude oil prices are low, pricing is based on the cost of the ethylene method ； Crude oil remains at high levels, with pricing based on the cost of the integrated calcium carbide method. Since domestic calcium carbide production accounts for 80% of the total, the price of calcium carbide has a more significant impact on PVC prices. In contrast, international crude oil only exerts a substantial influence on PVC prices when its prices reach extreme levels; significant fluctuations in oil prices create opportunities for import-export arbitrage. Third, the enterprises producing PVC-based products are relatively scattered, resulting in a low level of industry concentration; as a result, small companies are highly sensitive to PVC prices. When price changes cannot be properly transmitted to end-users, it leads to a reduction in demand. I. Cost and Profit of PVC Produced by the Calcium Carbide Method 1. Sources of Cost: In the calcium carbide process, the cost of calcium carbide accounts for about 50% of the total cost. Specifically, electricity costs account for about 60% of the cost of calcium carbide. Industrial electricity consumption is mainly generated by thermal power plants. Additionally, coke is derived from coal. When calculating the total cost of these three elements, the electricity consumption required to produce 1 ton of polyvinyl chloride is approximately 7,000 kWh, which corresponds to a coal consumption of around 3 tons. Generally, electricity prices in the northwest region are lower than those in the eastern region. (For ease of measurement, the costs of limestone and coke are usually converted into the cost of calcium carbide.) 2. Calcium carbide prices and profits: In the calcium carbide method, there is a strong correlation between the cost of calcium carbide and PVC prices. Generally, the price of PVC produced by this method rises as the price of calcium carbide increases. Taking 2021 as an example, during the Spring Festival, the sharp rise in crude oil prices, coupled with unexpected shutdowns of manufacturing facilities in the United States due to cold snaps, led to a significant increase in prices after the festival. However, the high absolute prices suppressed demand from downstream industries; yet PVC prices did not fall significantly but continued to rise. The main reason for this was the tight supply of calcium carbide resulting from control measures in Inner Mongolia, which provided support for price increases. Similarly, due to the differences in the PVC production process using calcium carbide, companies that integrate chlor-alkali production enjoy significantly higher profits than those that purchase calcium carbide from external sources. As a result, when the price of calcium carbide rises, some companies that rely on external suppliers may experience losses, which could lead to a reduction in production or even shutdowns for maintenance.
II. Cost and Profit of PVC Produced by the Ethylene Method: In China, the share of PVC production via this method is around 20%, but on a global scale, the ethylene method remains the dominant approach for PVC production. Fluctuations in international ethylene prices affect the prices of PVC produced using this method in China; before 2012, there was a strong correlation between the two. From 2012 to 2016, as the overall production capacity of PVC in China increased while downstream demand gradually weakened, PVC prices dropped. Meanwhile, other downstream applications for ethylene remained strong, keeping ethylene prices high; during this period, there was little correlation between the two in the domestic market. It can be seen that when crude oil prices are low, driven by cost advantages, domestic PVC manufacturers that use the ethylene process begin to seek imported raw materials with relatively lower costs. When crude oil prices are high, the calcium carbide process becomes more advantageous, and it is in this case that PVC produced via the calcium carbide process determines the pricing. Currently, crude oil prices remain around $60, giving PVC produced via the ethylene method a certain cost advantage. Furthermore, since our country imposes anti-dumping duties only on imported PVC, but not on EDC and VCM, some domestic manufacturers can import low-cost EDC and VCM from abroad to use in the direct synthesis of PVC. As a result, these upstream products also have an impact on the price of PVC. III. Profits from PVC imports and exports: In 2020, due to the impact of COVID-19, international crude oil prices dropped sharply, falling to around $10 per barrel in April. This gave overseas PVC produced via the ethylene process a price advantage, leading to an increase in imports into China. From December 2020 to February this year, force majeure factors abroad – such as a cold wave in Texas, USA – caused manufacturing facilities to shut down, resulting in rising prices for PVC overseas. This created opportunities for export arbitrage in China. Since both imports and exports are based on order-based systems, there is a delay of 2–3 months before goods arrive. It is expected that overseas manufacturing facilities will not resume operations until June, so there is still profit potential in imports. Although China’s monthly PVC exports reached nearly 240,000 tons in April 2021, current exports are based on orders placed around February. Due to the pandemic in India, overseas demand has declined, prices abroad have fallen, and the potential for export arbitrage has diminished. IV. Profits in the PVC downstream sector: The main applications of PVC are in pipes and profiles, with the cost of raw PVC accounting for over 60% of the cost of these end products. In terms of the gross profit on pipe profiles, manufacturing companies start to incur losses when the price of PVC exceeds 9,000. When the PVC price is above 9,000, downstream companies face significant cost pressures; as a result, their order intake is moderate, and they adopt a wait-and-see approach, focusing mainly on meeting essential demands. The profits of downstream enterprises generally move in the opposite direction to PVC prices; of course, these enterprises’ profits are also affected by other factors. For example, when demand from end-users is strong, pipe and profile manufacturers can pass on the increased costs to downstream parties through price hikes, allowing the product manufacturers to profit as well.
The electricity costs for the calcium carbide industry are set to increase
Overall, as long as crude oil prices remain at $80 per barrel or higher and the cost of electricity for industrial use does not increase significantly, the calcium carbide process for producing PVC will continue to be the dominant method in China. After all, this process is simple and well-established; although pollution is a concern, who can resist the temptation of higher profits and greater GDP?
It seems to me that as the United States has seen a decline in its crude oil imports in recent years, and countries such as Japan, Western Europe, and South Korea have not seen a significant increase in their demand for crude oil, China, on the other hand, has an extremely large capacity for oil refining and chemical production, resulting in high levels of crude oil imports. This situation puts pressure on international crude oil prices, thereby pushing back the use of the dollar as the currency for settlements. At home, there is also a focus on carbon neutrality and meeting carbon targets; there is no longer such an emphasis on coal-based chemical industries as in previous years, which suggests a shift toward oil-based chemicals due to their lower carbon emissions. As for control over international crude oil pricing, major buyers should participate in setting prices, or at least have an influence on them.
Another issue with the calcium carbide method is the use of mercury-containing catalysts; if mercury-free gold-based catalysts are used, the cost will be higher than it is currently. And it may involve equipment modifications; given the high energy consumption of calcium carbide, the ethylene method seems to be the more promising option in the future.
The calcium carbide method is too traditional; it has had its flaws since the advent of television. How about the plasma method?
The calcium carbide method is suitable for China’s situation of having abundant coal but little oil, but it currently needs to comply with international mercury conventions in the industry. The plasma method is unreliable. The production of calcium carbide still relies on large, enclosed calcium carbide furnaces.
Inner Mongolia has launched two large-scale TV projects. There are not many gas-based methods used in China; the process packages developed by Sichuan Chuanwei seem to be available only in two sets across the country