TOKYO -- Japanese producers of polyvinyl chloride face an unexpected hurdle as India's ban on high-denomination rupee notes slams the brakes on exports, hampering an effort to raise prices in Japan.
Big purveyors in Japan want domestic price increases for PVC resin, often used in pipes, based on price growth abroad. India had driven the strength in exports. But the slowdown in the key South Asian market will loosen the supply-demand balance in Japan, making higher prices a tougher sell to business customers.
Price hike plan goes awry
Taiyo Vinyl in November announced its first price hike in three years, citing rising prices overseas. The company also needs money to update its aging equipment. Price increases usually are driven by higher materials costs.
The company envisioned boosting lucrative exports first to raise prices in Japan on a tighter supply. But this scenario may not pan out.
"Negotiations on exports to India dragged on," an official from a major Japanese PVC provider said. December talks for shipments in January lasted more than 10 days, compared with the normal time frame of a week. Contract prices also slid for the first time in six months.
India's surprise ban on high-denomination notes in early November has forced people to exchange the nullified 500- and 1,000-rupee notes with new ones or deposit them at banks. This "crackdown on black money" in India's cash economy has hurt farmers, many of whom lack a bank account. Farmers are key consumers of PVC pipes and films, but many have refrained from purchases as they are unable to smoothly exchange old notes for new ones.
"The supply chain is short, and the impact manifested quickly," said President Mamoru Kadokura of PVC maker Kaneka.
Japanese PVC companies have counted on exports to propel growth in recent years amid a sluggish domestic market. Exports totaled 37% of shipments for the January-November period, up roughly 17 percentage points from four years earlier. India's aggressive infrastructure investment and sharply rising PVC consumption made the country a special focus. Japan's PVC output grew 13% in 2015 as exports helped facilities operate at high rates.
PVC prices in Japan have fallen about 20% since summer 2014 due to lower feedstock costs. But prices have risen in other Asian markets, based largely on the supply-demand balance, and have stood above those in Japan since spring 2015.
With shipments to India falling by half, companies are sending more PVC resin to China and Southeast Asia. The Vinyl Environmental Council of Tokyo said that November exports shrank 7% on the month, declining on the year for the first time in five months.
Big Japanese customers like pipe manufacturers, who face sluggish domestic demand, are opposing price hikes. A looser supply balance resulting from slower exports would keep PVC manufacturers from hiking prices. All eyes are on Taiyo Vinyl, which plans to increase prices in April, budgeting extra time for negotiations.