Slowing Chinese plastics demand spells trouble for foreign producers

Slowing construction activity in China is having unexpected consequences in the global plastic sector, where the sudden downturn in demand for PVC pipe, laminate and other polymer products is pushing local manufacturers to unload inventory overseas.

Image courtesy Concrete Forms: 5% decline in Chinese homebuilding activity last quarter has reportedly translated into a slowdown in sales of plastic home fittings.

And with enough unsold apartments in the pipeline to keep Chinese homebuyers satisfied through at least September, it’s unlikely that construction companies are going to launch any aggressive new building projects soon.

Chinese plastic makers have pulled back on their own production in order to ride out the slowdown, while in neighboring Vietnam a similar downturn has curtailed PVC sales by 30% from this time last year.

Right now, these companies — difficult to trade in the United States — are diverting their remaining production to household products for retail customers, or are simply idling their plants.

However, if the slack Asian construction climate continues, local manufacturers are going to look hungrily overseas for sales.

Brazil, in particular, looks vulnerable to plastic dumping. The country’s construction sector is enjoying a bit of a revival and as the Olympics and World Cup loom, more and bigger projects are on the horizon.

That would ordinarily be a boon for Braskem (BAK, quote), which dominates the local petrochemical feedstock industry and PVC production in particular.

But should unwelcome Chinese imports start arriving on Brazilian shores, the already-fragile margins on PVC — not the most profitable business in the plastic world even in the best of times — will collapse.

Brazil can let its currency deflate in order to help domestic industry better compete against cheap foreign rivals. Given recent monetary policy moves, that seems to be in the cards.

Buying dollars naturally floods the world with reais, depressing the value of that currency and making foreign imports — including Chinese plastic — more expensive to domestic consumers.

Whether this can keep BAK’s profits above a flood of cheap PVC dumping remains to be seen. But for a company already wrestling with high oil costs and diffident pricing for its own products, every bit helps.

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