Falling plastic granule prices improve firms' profitability

Hanoi (VNS/VNA) - Plastic granule prices are expected to fall in the short term, a favourable circumstance that would drive plastic producers towards better profitability.

Vietcombank Securities Company Ltd (VCBS) forecast that Polyvinyl Chloride (PVC), an input material for plastic production, would remain at low prices towards year-end and into 2023 on rising global supply.

Its forecast prices of between 800-1,000 USD per tonne are projected to significantly improve domestic plastic firms' profit margins.

Specifically, giant PVC suppliers in China, India and the US have begun to expand their production to boost PVC output to 70 million tonnes per year by 2026.

The abundant supply is fuelled by the falling consumption of PVC in China, which a PVC-consumed realty sector in decline has caused. VSBC forecast that the weak demand would hold steady until late 2023 since not many new projects in the country would get underway.

According to Fitch Solutions, PVC prices correlate strongly with coke prices because a major portion of global PVC supply comes from China. As coke is projected to drop to 280 USD per tonne in 2023, China would have more room to reduce PVC prices to a level comparable to those in the US and EU.

Good news also comes from the demand side. In the first half of 2022, the number of apartments under construction in the northern region of Vietnam grew steadily, lifting domestic demand for plastic pipes.

VCBS forecast that the demand would remain high in the coming years as the country still has ample room for urbanisation, and many legal obstacles to realty projects are expected to be removed in 2023. As a result, VCBS estimated the growth rate of the building plastic industry at around 7-10% on the horizon.

The plastic industry comprises two main sub-industries: plastic pipes and building plastic materials.

In the former, Binh Minh Plastics JSC (HOSE: BMP), Tien Phong Plastic JSC (HNX: NTP), Hoa Sen Group (HOSE: HSG) and Tan A Dai Thanh Group JSC take up 90% of the market shares.

Meanwhile, the latter is more fragmented and faces stiff competition from China. Dong A Plastic JSC (HOSE: DAG) is a large producer in the sub-industry, holding roughly 20% of the market shares.

Vietnam is highly dependent on imported PVC because the only two producers in the country, AGC Chemicals Vietnam Company Ltd and TPC VINA Plastic & Chemical Corp Ltd, crank out 390,000 tonnes of the thermoplastic annually, about 700,000 tonnes short of domestic demand.

As PVC contributes to 70% of the costs of gold sold (COGS) incurred by building plastic firms, their profit margins are closely linked to global PVC prices, which, in turn, come under the influence of PVC supply-demand in China and the US. The two countries control 50% of the global PVC market.

Undoubtedly, PVC prices falling to 950 USD per tonne in the first half of 2022 were caused predominantly by the falling demand in China and the recovery of PVC production in the US.

VCBS believed the falling prices of plastic granules would improve BMP's and NTP's profitability in the second half of 2022 and 2023. Their better financial performance would act as a catalyst for their bullish stocks in the short term.

Their research and development on new plastic pipes, such as HDPE and PPR pipes, would further improve their earnings, adding to the optimistic outlook./.