Building products demand remains very strong in the US, but the elevated lumber and PVC prices which appear impressively correlated right now are partly a function of supply chain issues. The housing market remains robust, but the winter storm in the South did damage to plants rather than structures – as opposed to Hurricane Harvey, which had a huge impact on building products. Because the housing market is strong, we are likely seeing speculators accelerate refurbishments to move properties faster, while demand lasts (anecdotally, the speculative renovation pace has picked up dramatically in Houston, where the housing market has bounced back quickly). But supply constraints likely are more of the driver – a random trip to Lowes yesterday found many of the shelves very light or empty in the building materials sections. As the chart below shows, building and construction is more than 50% of PVC demand.
Source: EIA, Bloomberg, C-MACC Analysis, April 2021
PVC has been one of our recurring favorite stories since the inception of C-MACC as we see more consistent fundamentals than we do for other polymers. While polyethylene and polypropylene have had spectacular runs of profitability since the middle of 2020 and while everything is suffering from supply dislocations in the US still today, PVC has the better medium-term supply/demand outlook in our view and as a consequence could be less volatile over the next 12-24 months. While the recycling risk to virgin polymer demand is low for most polymers – see our EGS and Climate piece published today – the durable nature of PVC end markets limits the availability of recyclable material. Our longer-term positive view of PVC drives our preference for the PVC-focused producers, such as Westlake and Orbia on the public side, but Ineos, Shin-Etsu, and OxyChem will also benefit. If Occidental would ever think about selling or spinning off OxyChem, now would be the time.
