Argentina


Inflation soars but Vaca Muerta offers a path to a brighter future

Image courtesy of YPF QUÍMICA

Argentina’s economy was already in turmoil before Covid-19 had wreaked its havoc. From February 2017 to February 2020, the Argentine Peso (ARS) devalued from 15 ARS to 1 USD to over 60 to 1. Less than two years later, the exchange rate is approaching 100 to 1. On July 15th, a report from the country's official INDEC statistics agency revealed that prices rose 25.3% in the first half of 2021 and were up 50.2% versus a year earlier.

Jorge de Zavaleta, executive director of the Chemical and Petrochemical Industry Chamber (CIQyP), explained that a verbal agreement with the Argentinian Government meant that companies should sell to the local markets as much as possible to reduce imports, but strict policies on trade management were imposed, which slowed down the importation process. This context has impacted Argentine chemical players. For instance, Gastón Cini, director of Copsa Combustibles, Químicos y Especialidades S.A. (Copsa), pointed to the shortage of raw materials and the increase in freight costs from Asia as the main challenges to business development. “Given the shortage of products and the significant increase in local demand, prices rose exponentially. The value of some commodities doubled,” he said, adding: “However, the demand level then plateaued and has been falling gradually, so we hope that the prices of raw materials goes back to what they were two years ago.”

Luciano A. Milito, CEO of Logística Milo, suggested that the most adequate way the government could improve the business climate is to provide companies access to loans to update their facilities and equipment, build more infrastructure and invest more in research and development.

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From a logistics standpoint, Milito elaborated: “A great solution would be to integrate truck and railway transportation to optimize costs as regards logistics. Therefore, one company can be in charge of loading the merchandise at the production plant, taking it to the railway logistics center, and then to the port and vice versa.”

For the largest, vertically integrated companies that do not rely on imports there were opportunities to capitalize on the rebound of domestic consumption. “In Q4 2020, as governments were paving the road to recovery and restrictions were lifted, both demand and prices recovered to even pre-pandemic levels by early 2021,” related Martina Azcurra, executive manager chemicals at YPF QUÍMICA, the chemical arm of state-owned energy giant, YPF.

On September 3rd, 2021, an Argentine central bank poll forecast that economic growth would rise to 7.2% in 2021, an increase on the 6.8% previously forecast, offering a ray of hope as the vaccine rollout gathers pace.

“For the paints, resins and adhesives industries we are making a conscious effort to boost exports to neighboring countries as Argentina is more competitive now due to the devaluation of its currency.”

Gastón Cini, Director, Copsa Combustibles, Químicos y Especialidades S.A. (Copsa)

How to capitalize on Vaca Muerta’s vast potential

The pandemic has highlighted the importance of domestic and regional supply chains that can produce their own raw materials. “The Chamber has made recommendations as to what Argentina can do to make progress in terms of petrochemicals as we do not believe petrochemistry should grow based on raw materials produced in refineries, and oil producers are concerned since they have to redesign their business due to decarbonization,” outlined Jorge de Zavaleta.

So, what alternatives are there? “As gas prices are competitive and can be kept at US$3.50, and analyzing the existing trade balance, there are opportunities to monetize the Vaca Muerta gas,” he said, noting that considering Brazil is the world’s biggest urea importer and Argentina has a world-class urea plant, there is a possibility to double its production facilities.

Ethane content in non-conventional gas is two times higher compared to conventional gas, and de Zavaleta pointed out that this presents an opportunity to monetize ethane to produce ethylene derivatives such as PE. LPG is commonly used in Argentina, which means more propane and butane could be produced, and the excess of propane could be used in a dehydrogenation plant to produce polypropylene (PP). “The content of LPG in non-conventional gas is also significantly higher compared to conventional gas,” he said, adding that Argentina always has an excess of LPG that is exported during the year, and more available LPG could generate an extra flow of propane to produce PP.

Martina Azcurra spoke of the evolution of Vaca Muerta in recent years, remarking how the field has become a rich tapestry of different companies producing more than 70,000 barrels of oil per day (bpd) and 50 million cubic meters (cbm) of natural gas per day. “Development of this world-class resource and of derivatives will enable the expansion of the petrochemical industry not only in Argentina, but on a regional and global scale, in a similar way to that which has occurred in the USA from the production of unconventional hydrocarbons.”

Gabriel Rodríguez Garrido, executive director of the Argentine Petrochemical Institute (IPA), weighed in on the subject: “Analyzing the current needs of the petrochemical industry, the circular economy (the plastics industry) and the importance of blue hydrogen, the added value of Vaca Muerta is evident. As of today, the chemical and petrochemical industry represents between 16% and 18% of Argentina's exports, and Vaca Muerta has the potential to boost these numbers in order to generate more foreign currency influx for the country.”

“Adopting new technologies is extremely important for a country that relies on agro exports. Many of the technologies being adopted are related to big data and data analysis, as an example.”

Federico Alonso-Hidalgo, General Manager, Gleba

Argentina’s booming agro-industry

One segment of Argentina’s economy that has been performing well throughout the pandemic is the agribusiness. Jorge de Zavaleta highlighted that the best performing chemical products in this period have been agrochemicals, nitrogen and phosphorus fertilizers, due to higher international prices of agricultural commodities, record planting and reap of corn and wheat.

In 2021, Profertil, the 50/50 joint venture between YPF and the Canadian fertilizer company Nutrien, celebrated its 20th anniversary since production started. Profertil produces 1.3 million metric tons per annum (mt/y) of urea, and, according to general manager Federico Veller, the company has developed a project to double its urea production capacity. “The drivers behind the decision to increase production are the Latin American fertilizer market which is growing incrementally, especially in Brazil and Argentina, and the availability of competitively priced raw material and natural gas in Argentina,” elaborated Veller.

To illustrate how domestic demand has increased, Veller mentioned that when Profertil started production in 2001, the 1.1 million mt/y it produced at the time supplied approximately 90% of Argentina’s urea demand and nearly 50% of production was exported. “Today we can only supply between 55% and 60% of the urea demand in Argentina, which reached 2.2 million my/y in 2020,” he related, and Argentina is thus required to import approximately 1 million mt/y of urea. “If the fertilizer market continues to grow at a rate of 3% per year, even our increased production capacity will not be enough to meet the demand,” he added, clarifying that Profertil aims to soon supply at least 80% of the Argentinian demand, with any excess going to the Brazilian market.

As well as investment into added capacity, catering to the evolving demand of growing populations also requires innovation. Federico Alonso-Hidalgo, general manager of Gleba, mentioned that the agro sector in Argentina is a leader in adopting new technologies: “Adopting new technologies is extremely important for a country that relies on agro exports. Many of the technologies being adopted are related to big data and data analysis, as an example.”