The region has resources and a growing demand, but faces political and infrastructure challenges.

BY Matthias Lomas

Latin American Petrochemicals: Decision Making Time

October 31, 2018

The last few years have proven to be a period of difficulty for Latin American economies. First, the region had to deal with the end of the commodity super-cycle, a downturn that wreaked havoc in many commodity-dependent countries globally. More recently, other events have contributed to maintain a scenario of uncertainty, such as US president Donald Trump’s unpredictable moves in foreign trade, the election in Mexico that is seeing López Obrador being sworn in as new president, the polls coming up in Brazil, the region’s largest economy, and the political and economic volatility of Argentina, among others.

For the petrochemicals and chemicals industry, whose performance is strongly linked to sustained economic growth and that, particularly in Latin America, is deeply affected by political swings, all this has not been easy to swallow. Ignacio Torras, president of Tricon, a global player in petrochemical trading and distribution, elaborated on this: “There are major threats that make the liability management a delicate challenge; the economic crisis in Argentina, the major changes in political direction in Brazil and Mexico, and the further collapse of Venezuela, are all creating an unstable market which we need to handle on a day to day basis.”

The economic backdrop and the intertwining depressed oil prices have been consequential for Latin America’s petrochemical industries. The recession was so deep in Brazil that there was not enough domestic demand for its polyethylene production. The oil price had lost over 70% of its value from its June 2014 level, until it started to rise again in January 2016. Not only did this hit oil and gas producing countries in the region, it also meant there was less incentive to invest in their petrochemical industries, which in turn has resulted in a dearth of new projects.

In parallel to this, the shale gas revolution in the United States has had a far-reaching effect in product flows in the region. While Latin America has significant reserves upstream, over the last years the region has not created the right conditions to exploit them, and, with the noteworthy exception of Etileno XXI by Braskem Idesa in Mexico, there have not been major investments in petrochemical plants, while the US is seeing a boom of new projects across its value chain.  

“Today, the advantage of the U.S. through its feedstock availability is clear, and it is not going to be easy to compete to attract new investment projects. The current investment wave, that will take us through 2020, is creating a new offer of ethylene and derivatives – we are seeing important product flows reaching Mexico, and soon they will reach other Latin American markets,” said José Luis Uriegas, past president of APLA and CEO of Grupo Idesa.

Perhaps an illustrative example of this dynamic is Pemex’ first ever import of ethane, which took place in February, in a relationship that has become now a three-year contract with US supplier Vitol for up to 288,000 tonnes per year. While this is the result of Pemex’ declining production profile, the access to competitive feedstock from the US may actually offer an interesting opportunity to promote investment, considering Latin America offers a large and growing market for all sorts of products.

“North America will become one of the largest players in the global ethylene derivates, manly polyethylene and glycols. The Latin America polyethylene industry, which is net short, should benefit by having access to a more competitive resin. More importantly, converters and processors in Latin America should see this as an opportunity to grow and expand their business, thinking more globally,” affirmed Torras of Tricon.

Rina Quijada, senior director Latin America at IHS Markit, said: “The entire region has gone through difficult times in the last ten years from Mexico down to Patagonia, yet the next few years will present a better business environment for investors.”

Leaving aside the political aspects, Quijada believes the fundamentals are there for a sustained growth period of the industry: “Latin America has great potential for the industry because it has raw material, it has technology and there is strong demand in the market. Many companies in the region think that Brazil’s pre-salt reserves and Argentina’s Vaca Muerta are something for of the future, but they are a reality already.”

 

Logistics woes

On top of allowing more predictability from a political standpoint, Latin America needs to get its act together when it comes to infrastructure development, otherwise all the potential of its growing market is offset by its lack of logistics efficiency. This results in less profitable and less competitive businesses – an issue that has been an ongoing theme in APLA’s Logistic Meetings, whose 20th edition took place in Santiago in May 2018.

Fernando Reinecke, president of the 2018 Logistic Meeting and regional logistics and customer service manager at Methanex Corporation in Chile, affirmed that Latin America is one of the most inefficient regions due to the infrastructure deficit and the congestion at the terminals, and pointed to Brazil and Argentina as two countries with serious problems: “These issues affect smaller markets such as Chile, Peru, or Colombia, because the ship-owners have to pass through the main ports, having to face congestion,” he said.

Ignacio Torras of Tricon, who handles enormous volumes globally on a daily basis, argued that Latin America continues to suffer from poor and outdated infrastructure. “Importing and exporting from the region, whether it is bulk or containerized cargo, remains a challenge when compared to other regions in the world. Operational costs in the region remain high, draft is limited, not allowing bigger and more efficient vessels to call at these ports, internal transportation is mainly done by trucks, while river-ways and railways are underdeveloped and underutilized,” he said.

The poor state of much of the region’s infrastructure is actually the consequence of political instability, as infrastructure development requires long-term planning that goes beyond the political mandates of each particular moment. Meanwhile, the Lava Jato corruption scandal, with tentacles all across the region, has further delayed infrastructure development.

“For years we have heard talk of projects and plans for public-private partnerships to build new facilities in Brazil, but there is a problem with the bureaucracy involved. The role of the government, beyond controlling trade, should actually be facilitating trade, but in some countries that is not the case. This way, we see that lots of product enter Mercosur through Uruguay, because Argentinean or Brazilian ports are less efficient,” said Eduardo Praselj, president of the Logistics Association of Venezuela (ALV).

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