The Industry Rebounds
Demand for chemicals in Latin America has risen despite ongoing challenges
The devastation caused by Covid-19 has arguably been felt more acutely in Latin America than in any other region. While global GDP fell by 3% in 2020, Latam and the Caribbean contracted by 6.8%, the worst of any region tracked by the IMF. Strict lockdowns in many Latin American countries failed to prevent high levels of contagion, a situation enflamed by the legacies of deep-rooted inequality, such as large informal workforces. As a result, in 2020 debt to GDP ratio rose over 60% in Mexico, and over 90% in Brazil and Argentina.
However, despite the unprecedented challenges faced since the start of the pandemic, the region has rebounded well in 2021, aided by high commodity prices and pent up demand. In July, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC, or CEPAL in Spanish and Portuguese) raised its average growth estimate for the region in 2021 to 5.2%.
The chemical and petrochemical industries have been key components of this rebound, having managed to weather the storm better than the majority of sectors in 2020, driven by the extraordinary global demand for hygiene-related products.
“Polyethylene (PE) and polypropylene (PP) products used for production of non-durable goods benefitted from people buying individually packaged products and increasing online buying,” explained Rina Quijada, VP business development – Research Latin America at IHS Markit, a trend that has continued in 2021.
“Even markets which experienced lower demand in early 2020, such as polystyrene and PVC, have now rebounded thanks to housing and construction,” added Quijada.
As markets have bounced back, increased demand has coincided with severe supply chain disruptions, including weather issues, unplanned plant shutdowns and limited supply of critical parts and products like microchips.
The unbalanced supply and demand paradigm has, in turn, caused prices to rise substantially. Simone de Faria, head of Latin America at Townsend Solutions, a market research and consulting company specialized in resins, discussed the remarkable upward trend in 2021: “I have been working in the petrochemical market for 27 years and have never seen prices rise as sharply as they have in recent months,” she reflected, noting that there is a huge difference between Asian and US prices due to the lack of materials.
Expanding on the issue, de Faria added: “Demand in the US has increased significantly over the past year and supply has not been able to keep pace due to a series of factors that affected production in the country, such as hurricanes last year and winter storm Uri. Until a balance is achieved, we will continue to see inflated prices.”
While a surging US economy has provided Latin America’s chemical export market with opportunities for growth, domestic demand has also been robust. Edison Terra, VP olefins and polyolefins – South America at Braskem, Latin America’s largest petrochemical producer, explained that Braskem’s excess capacity in both South America and North America is designed to complement the demand the company has in Europe. “However, due to increased demand in many of the Latam regions we have production assets in, we have decreased international flows and exports to serve the domestic markets,” said Terra, commenting that excess flows in South America are still going to markets within the region.
Analyzing why demand for petrochemical products remained resilient, Ana Paiva, regional commercial lead – polyethylene Latin America at ExxonMobil Chemical, observed that the pandemic resulted in people consuming food in a different way, such as buying from supermarkets where more packaging is needed, rather than going to restaurants which buy ingredients in bulk. “Film applications were boosted by food packaging, which grew above expected targets. Positive growth trends were also observed on industrial applications, such as stretch & shrink, as well as agriculture.”
“Latam will see increased activity in M&A in the coming years. Today, I believe both buyers and sellers are more closely aligned and as a result we should see transactions ready to close: there is an appetite for M&A in a thriving market.”
Rina Quijada, VP Business Development – Research Latin America, IHS Markit
Can growth be sustained in 2022?
The question now, as we approach 2022 and government subsidies come to an end, is whether growth rates are sustainable. Many Latin Americans previously part of the middle class are now low income population because of the pandemic, and for the region to achieve tangible progress in the years to come, rejuvenating this large section of society is of paramount importance.
Alberto Laveran, senior vice president Latam region for Vantage Specialty Chemicals, observed that although economies have been recovering, the recovery is extremely uneven. “Products that are export driven are growing by double digits, but local consumption is not growing at the same pace in some markets,” he said, giving the example of Argentina’s chemical market growing 5% year on year, but 90% of this growth is coming from exports.
One of the factors that has constrained growth in Latin America’s petrochemical and chemical industries in recent years is a lack of raw material feedstock, a situation exacerbated but the sharp rise in logistics costs which has caused the price of imports to increase significantly. “Increasing the added value of Latin America’s natural resources is a priority for the whole industry,” stated Manuel Díaz, executive director of APLA, giving the example the development of the Vaca Muerta gas reserves in Argentina as a source of feedstock.
Brazil, Latam’s largest market, has the potential to increase its supply. The development of the country’s pre-salt reserves, in addition to Vaca Muerta, offers a roadmap to less reliance on imports for the region.
In the meantime, investment into infrastructure and the use of technology to overcome logistics bottlenecks is necessary to receive imports at a more competitive price. Díaz observed that logistics issues and weather disruptions have highlighted the importance of strengthening Latam supply chains, before adding: “We must prepare for future crises.”
For Latin America, the hope is that a combination of a young and growing population, abundant natural resources, and significant upside potential for middle-class development will drive sustainable growth as normality resumes in a post-pandemic landscape. “Irrespective of economic uncertainties, in the non-OECD countries energy use will rise along with population growth, increasing access to modern energy and improving living standards,” concluded Ana Paiva, noting that this economic growth also drives petrochemical demand which tends to rise and fall at multiples of GDP.
“I have been working in the petrochemical market for 27 years and have never seen prices rise as sharply as they have in recent months. Until a balance between supply and demand is achieved, we will continue to see inflated prices.”
Simone de Faria, Head – Latin America, Townsend Solutions
A new wave of M&A
On August 16th, 2021, it was announced that Thailand-based group Indorama will acquire Oxiteno from Ultrapar in a deal worth US$1.3 billion. The transaction follows Indorama’s acquisition of Huntsman’s ethylene oxide, propylene oxide, surfactants and ethanolamines business In January 2020, a sign of the company’s intent in the region. “The acquisition of Oxiteno complements this business and creates a strong combination for Indorama in the surfactants business in the Americas,” stated João Parolin, Oxiteno’s CEO.
Speaking before the Oxiteno deal was announced, Rina Quijada stated she believes Latam will see increased activity in M&A in the coming years as changes in the region will make it attractive to invest in certain countries and businesses. She gave the example of the new gas laws in Brazil approved in April 2021, Brazilian state-giant Petrobras looking to sell several of its refineries, and the potential to adjust refineries to produce more petrochemicals in the long term.
In June 2019, LyondellBasell ended talks with Odebrecht to acquire Braskem in a proposed US$11 billion deal. In the two years since, the revenues made by Braskem and many of its peers in the industry indicate a healthy market that should be ripe for M&A activity. Quijada weighed in on the current climate: “Today, I believe both buyers and sellers are more closely aligned and as a result we should see transactions ready to close: there is an appetite for M&A in a thriving market.”
Gustavo Perez, regional director Latin America for LyondellBasell, spoke of future plans for the region: “LyondellBasell already has six plants in Latin America, but has the aim to expand its coverage and footprint in Latin America in the coming years, both organically and inorganically.”
The most attractive acquisition targets will likely be companies that can demonstrate growth independent of external factors. Latin American companies have become accustomed to socioeconomic and political volatility, and those that find their niche and can adapt in such a dynamic landscape offer exciting opportunities for investors.
