Low input material price to support profit margins of plastic businesses

Sep 27th at 08:54
27-09-2022 08:54:53+07:00

Low input material price to support profit margins of plastic businesses

Viet Nam is currently heavily dependent on the import of PVC resins - input materials in the construction plastic production chain. In the second half of this year and 2023, Vietcombank Securities Co (VCBS) forecasts that a low PVC price will support profit margins of businesses.

 

According to VCBS, PVC prices in the second half of 2022 and in 2023 will remain at a low price level in the range of US$800-1000 per tonne, helping the profit margin of plastic enterprises to stay positive.

The supply shortage in the US has recovered and the global supply has increased sharply due to the expansion plan of large enterprises. In the short term, major manufacturers in India, the US and China have invested in expanding PVC production with a capacity of millions of tonnes. From now to 2026, PVC capacity will increase by 17 per cent to 70 million tonnes per year.

The demand for PVC dropped sharply in China due to the sluggish real estate market, in which the demand for PVC for construction in this country accounted for 62 per cent. Until the end of 2023, VCBS believes that the demand for PVC will continue to stay low when the number of projects starting in China at present stays very low.

PVC prices have a strong correlation with coking coal because most of the production now depends on China. Production costs of coking coal are forecast to drop sharply to $280 per tonne in 2023, according to Fitch Solutions, helping PVC manufacturers in China maintain competitive prices with the EU and the US as these countries are facing a severe energy shortage and high input prices.

In the second and third quarter of 2021, the profit margins of enterprises such as The Binh Minh Plastic Joint Stock Company (BMP) and Tien Phong Plastic Joint Stock Company (NTP) were heavily affected due to the galloping increase in PVC input prices and the impact of the social distancing measures in key areas, reducing output and increasing costs.

However, the recent downward trend in input prices will be the driving force for expanding profit margins for BMP and NTP in the second half of 2022 and 2023.

"VCBS ​​believes that the business results of BMP and NTP in the third quarter of 2022 will grow well compared to the low base level of 2021, which may be a supportive factor for the uptrend of stock prices," VCBS report said.

Civil plastic pipes

In the first half of 2022, the number of real estate apartments constructed in the North showed strong growth after a long period of decline, which helps boost plastic pipe consumption in this segment in the second half of 2022 and 2023. Contrary to that, the number of new apartments in the Southern region showed a trivial amount, which will put pressure on consumption in the near future.

In the long-term, VCBS believes that sales volume still has great growth potential as Viet Nam's urbanisation rate is still low and legal problems for real estate projects are expected to be solved in 2023.

However, with a relatively high per capita PVC consumption rate in the region and close location to China, VCBS estimates that Viet Nam’s plastic growth in the next period will be at 7-10 per cent, much lower than 15-20 per cent of the 2014 - 2017 period.

The price of PVC input materials, after increasing from $900 per tonne to $2,000 per tonne in November 2021, has dropped sharply to $950 per tonne. After increasing the selling price to VND59 million ($2,486) per tonne in the first half of 2022, Binh Minh Plastic Joint Stock Company (BMP) has no plan to adjust the selling price in the second half of 2022, which will be the driving force to continue expanding profit margin.

In the second half of 2022 and 2023, consumption in the South will only recover from the low base of 2022, not seeing strong growth compared to before the COVID-19 pandemic because the new supply is quite limited.

In the long term, VCBS expects the supply recovery from real estate projects to be the main revenue and profit driver for BMP. BMP is also vigorously implementing its plan to increase its market share in the Northern and Central markets with attractive promotion policies.

Tien Phong Plastic Joint Stock Company (NTP) will directly benefit from the sharp decline in PVC prices in the second half of 2022. With the prospect of PVC prices remaining low in the near future, NTP’s business performance will be markedly improved.

Accounting for 60 per cent of the market share in the North, NTP's sales volume will be boosted when the number of apartments being built in the North recovers positively in the first half of 2022. 

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