Latin American Resilience
Can the region leverage its advantages to weather economic turmoil?
Image courtesy of YPF
In 2021, pent up demand fueled by government stimulus packages triggered a remarkable rebound in the chemical and petrochemical industries, as companies bounced back from the lockdown shock of 2020 to post record profits. However, whether such growth was sustainable in the context of a myriad of macro challenges was questionable. The Russian invasion of Ukraine in February 2022 upset an already fragile global supply chain, and as inflation began to ramp up, the backdrop was set for a looming recession which could lead to political and social turmoil.
The old Brazilian saying, ‘a calm sea never made a good sailor,’ seems apt in times like these. Many Latin American nations are used to volatility, and as such are better prepared to deal with dynamic change. Furthermore, two of the predominant themes to gain traction in the last two years – the re-regionalization of production chains and the acceleration of the green agenda – offer opportunities for a region with abundant natural resources, a large consumer market, and the world’s biggest economy in close proximity.
On one hand, a combination of high freight rates and political tension between the US and China position Latin America as an ideal candidate for nearshoring expansion to feed the biggest consumer market in the western hemisphere. Investments such as Braskem Idesa’s construction of the US$400 million Puerto Mexico Chemical Terminal in Veracruz in Mexico, a landmark project for Latin America’s petrochemical sector, highlight the potential for development in the region. “The current global situation reinforces this importance of establishing investments in Mexico. This is why Braskem Idesa decided to invest in Mexico initially, and the global focus on regionalization has reinforced our conviction,” affirmed Stefan Lepecki, Braskem Idesa’s CEO.
On the other hand, a failure to develop sufficient local production in Latam has left the region exposed due its reliance on US goods and feedstock. “Latin America will be significantly affected by how the US will perform in the next eight to 12 months,” stated Rina Quijada, VP industry executive advisory – Latin America, at S&P Commodity Insights.
Quijada explained that as high inflation in the US can probably only be fixed by increasing interest rates, the strength of the US dollar in comparison to devalued Latam currencies will impact purchasing power. “We know that from Mexico to Patagonia, no country in the region has hard currency available, and the region is very much reliant on imported goods.”
Quijada elaborated that producers now require more local currency for the same volume consumed, and as prices for many commodities are going down, such as PVC and polyethylene, we could see inventory buildup and selling before prices tumble further.
Edison Terra, VP olefins and polyolefins – South America at Braskem, Latin America’s largest petrochemical producer, reflected on the cyclical nature of the business: “We are currently seeing a reduction of all the petrochemical spreads on a general basis. In 2023, considering new capacities against demand growth, we will probably see a period in time where the margins will be lower than in previous years.”
Despite this outlook, Terra noted that there are many opportunities for innovation. He concluded: “In terms of sustainability, either through renewable sources or circular economy, there is a lot of room for expansion.”
While the short-term forecast appears turbulent, mid- to long-term demand projections remain robust. For example, the global market for ultra-high molecular weight polyethylene was valued at U$1.87 billion in 2021, but according to a July 2022 report from Straits Research, is projected to increase at a CAGR of 12.75% to reach U$5.51 billion by 2030.
Ana Paiva, ExxonMobil Chemical’s (EMC) regional commercial lead – polyethylene Latin America, discussed the factors EMC expects to drive PE growth in the years ahead, including global population forecast to increase to 9 billion by 2040, with chemical products essential to modern life, economic development and improving standards of living. Paiva noted that this should drive petrochemical demand at a rate projected by EMC to be approximately 4% a year over the next decade, worldwide. “Products that will likely be required to support these growth trends, specifically on the PE side, include all related to packaging and agri-products, as food is essential. On the durable side, there are also some products with higher demand potential, such as automotive parts and medical devices.”
“There are many aspects in the market which will lead to innovation and opportunities. In terms of sustainability, either through renewable sources or circular economy, there is a lot of room for expansion.”
Edison Terra, VP Olefins and Polyolefins, South America, Braskem
Nearshoring: Opportunities and Challenges
For decades, an increasingly globalized market for petrochemical and chemical products had driven multinational companies to establish production and distribution hubs close to the biggest consumer markets that have access to cheap feedstock and logistics capacity. The impact of Covid-19, from lockdowns to record-high freight rates and severe logistics bottlenecks, while unlikely to be the death knell of globalization, has highlighted the value of strengthening regional supply chains.
From a regionalization or nearshoring standpoint, Latin America holds significant potential. However, there is a pervasive feeling that the region is not fulfilling its potential, and governments need to establish a more business-friendly climate to incentivize long-term investments.
INEOS Styrolution America LLC, part of global chemical giant INEOS, has increased the acrylonitrile butadiene styrene (ABS) capacity at its Altamira production plant in Mexico, according to Ricardo Cuetos, VP Americas – standard products. Discussing the challenges of working in the country, Cuetos cited the proposed energy reform by the AMLO government and a lack of security when transporting goods.
“There needs to be an openness to the energy market, especially for the chemical industry, allowing manufacturers to generate their own energy for internal usage,” he said, commenting that less bureaucracy would help the industry grow – a common theme when conducting interviews for this report. Cuetos observed that high gas and energy prices have resulted in an increase in fixed and variable costs, adding: “In North America, you have to be competitive to achieve real growth.”
Despite the current challenges, Cuetos reaffirmed INEOS’ commitment to the region, stating: “We believe Mexico has a bright future, especially considering the reshoring and localization of production chains. I also believe that we will see significant growth in Brazil and Argentina.”
In addition to multinationals opening facilities in Latin America, the lure of nearshoring could stimulate M&A in the region. In December 2019, Pilot Chemical Company, the US-headquartered specialty chemicals firm, acquired Órgano Síntesis S.A. de C.V. (OSSA) located in Toluca, Mexico, representing Pilot’s first production asset outside of the US.
Richard Rehg, Pilot’s VP commercial, revealed that the OSSA acquisition has strengthened the company’s position in the biocide market in two ways. “Firstly, it provided an increase in industrial production capacity for our ammonium quaternaries [...] Secondly, it brought us new capabilities we did not have before, specifically with regards to cGMP manufacturing capability.”
Rehg added that this has allowed Pilot Chemical to supply a number of new products to the market, such as benzalkonium chloride, benzethonium chloride, and chlorphenesin, products used in hygiene, sanitization, and personal care applications throughout the world, expanding the company’s biocide business from more of a historic Americas-focused quat market to a global export market. Looking forward, he commented that the OSSA acquisition gives the company a platform for further organic and inorganic growth in Latam.
For countries such as Mexico, where APLA’s 42nd annual meeting will be held in November in Cancun, the hope is that governments will create the conditions for investment that match a number of inherent advantages, from geographical location, to free trade deals, natural resources and a skilled workforce.