The Guest Who Never Left
Addressing market imbalances, four years on
According to the report Competition: The Missing Ingredient for Growth? published by the World Bank, Latin America and the Caribbean (LAC) has been slowly —but consistently— addressing the imbalances that the pandemic brought. It seems that Covid-19 is the unpleasant guest who never left.
When everybody thought the worst was far behind, the Ukraine-Russian war broke out, leading to an energy crisis in Europe. Meanwhile, China’s growth never manifested as expected. The world has not been the same since the pandemic, and neither have the chemical and petrochemical industries.
Just like a wound that never heals, the effects of the pandemic linger for both industries. The excess inventory led to falling prices, which, coupled with unpredictable markets and gaps in logistics, slowed the hopes of recovery. Although it may seem tiresome to blame the pandemic, as Juan Pablo Gazmuri, vice president of ASIQUIM, defined it: “Time is split between pre- and post-pandemic, explaining the current economic scenario.”
Leaving Covid’s consequences aside, there are other factors that contributed to the slow performance of the chemical industry over the last few months. According to Deloitte, a recession in Europe, inflation in the US, and a slow rebound in demand from China all hinder a recovery. Additionally, margins are shrinking due to an oversupply of some chemicals caused by increased capacity coming online and decreased consumption from overstocking in previous years. Stefan Lepecki, Braskem Idesa’s CEO, commented: “2023 was extremely challenging for the global chemical and petrochemical industries, especially for polyethylene, Braskem Idesa’s main product. Following the pandemic, significant investments were made in new plants in China and the US, increasing production capacity. Additionally, global inflation and higher interest rates to control it have impacted economies, which are not growing as expected. For instance, although China continues to grow, it is not at the rate seen in previous years.”
Daniel Mitchell, executive president of Acoplásticos, agreed with Lepecki: "The prices of raw plastic materials surged, and we saw a strong recovery in 2022 and 2023. Yet, 2023 also brought a price correction due to an oversupply, especially from Asia, affecting the industry values.”
Logistic companies noted the same. “In 2023, we observed many companies holding excess inventory, reducing demand for our tanks. Consequently, many tanks were left in storage or demurrage,” commented Jean Felipe Albuquerque, Den Hartogh’s Latin America general manager.
Price taker, not maker
Regarding polypropylene (PP) and polyethylene (PE), Latin America is one of the regions with the lowest production profile. Moreover, it is one of the regions that struggles with feedstocks, which are both expensive and in short supply, largely because of the dominance of state-owned energy companies struggling to meet national demand. These factors make the region a “price taker", not a “price maker”, as Simone de Faria, head for Latin America at Townsend Solutions, defined it, adding: “Imports from the US for PE and China for PP have broken records, driven by increased production capacities in those countries and weaker global demand, leaving them with excess supply. As a result, the regional petrochemical industry is facing higher levels of offers from abroad at lower prices, which together with rising feedstock costs, mostly oil and naphtha, have forced down operational rates.”
Asian imports have been facing rising tariffs from some countries, and are thus targeting those countries, like some in Latin America, with more lax import regulations. As such, the market is being flooded with foreign chemicals, damaging an already wounded industry. Take, for instance, Brazil: “Local manufacturers face competitiveness challenges due to protective measures in the US and Europe against low-cost imports from China, coupled with Brazil’s high gas costs. Improving Brazil’s gas distribution network is crucial for enhancing local production viability, and without protective measures, the influx of Chinese products based on variable costs alone undermines local industry growth,” explained Carlos Marin, Bandeirante Brazmo’s CEO.
As you will read in the following pages, local producers are trying to differentiate themselves by offering more custom-made approaches, being close to their clients, and by offering more sustainable solutions. “Our focus is not on the volume but on providing breakthrough or state-of-the-art solutions that contribute to end-products quality or improve manufacturing processes. Chilean companies aiming to differentiate themselves today are not competing on price alone —the era of “Bueno, Bonito y Barato” belongs to the past,” emplained Christophe Jacob, CEO of Austral Chemicals.
In this global context, and given Latin America’s “price taker” role, it remains an attractive destination for export-oriented chemical suppliers, but at the expense of the local industry, as Barb Mitchell, managing director at Townsend, lamented: “It is astonishing to consider that imported polyethylene now holds a 57% market share. This figure leaves domestic suppliers in a tough spot. How are they expected to compete against such a high percentage of imports? Clearly, they need significant support to address this imbalance.”
“It is astonishing to consider that imported polyethylene in Latam now holds a 57% market share. This figure leaves domestic suppliers in a tough spot. How are they expected to compete against such a high percentage of imports? Clearly, they need significant support to address this imbalance.”
Barb Mitchell, Managing Director, Townsend Solution
Prime time for technology
For Wagner Costa, partner at Bain & Company, there was a boom after COVID-19, when high commodity prices and margins led companies to pursue growth strategies and M&A activities. However, the current downturn is leading companies to emphasize performance improvements and cost reductions. Simone de Faria, head of Latin America for Townsend, said: “Besides dealing with more expensive raw materials, many of Latam’s plants are older and not as large as those in other regions. The lack of competitiveness is leading companies like Braskem to consider closing plants. The petrochemical industry is capital-intensive, so the high basic interest rates impact long-term investments.”
In Argentina, YPF implemented the 4x4 plan to quadruple YPF’s value and production in the next four years, however, according to Florencia Rodríguez, YPF Química’s executive business manager, the financial aspect has become critical: “We must maintain the company’s financial health and efficiency, even if it means divesting from profitable businesses and building the necessary infrastructure for transporting oil and gas. We are examining maintenance, services, and raw materials contracts to ensure we maximize value,” she said.
Renato Guimarães, vice president and president for Latin America at FMC, a crop protection chemical producer, the whole agribusiness chain also faces many challenges due to the consequences of the pandemic. As such, the focus is on efficiency, simpler processes, and more flexible structures: “FMC was among the firsts to recognize this need and commence a restructuring phase in July 2023, completing it by Q12024,” he explained.
In this volatile environment, technology and consultancy companies have been summoned to help mitigate risks, improve efficiencies, in an attempt to stretch margins that are already tight. Alex Muro, LATAM vice president at AspenTech, commented that the company has been focusing on enhancing asset utilization to help clients achieve better efficiency and cost-effectiveness while fostering circularity and sustainability: “In Latin America’s chemical and petrochemical markets there has been significant pressure due to global competitiveness, resulting in lower profit margins in recent years,” commented Muro.
In a conversation with Leandro Kruger, regional director for Brazil, and Ana Salmeron, the O&G and chemical sales manager, at Rockwell Automation, both explained that companies in the region do not have the luxury of time to adapt to inflationary pressure impacting energy and raw materials costs and a shortage of qualified labor. According to a report published by Accenture on the productivity of the chemical industry, around 30% of employees are 50 years old or older, with many due to retire within the next decade. In this context, Rockwell proposes automation and the use of data as the elixir. “This is a prime moment for investment in the chemical industry rather than expanding production. The industry faces a challenge from imported products that enter the Brazilian market at competitive prices, and technology has emerged as a crucial response to help the industry improve efficiency and counteract the impact of cost-effective imports,” said Kruger.
Wagner Costa from Bain & Co emphasized that no company, not even those with solid balance sheets and stronger performance metrics, should overlook the opportunities for further improvements that digital tools provide.
“Many chemical and petrochemical companies should focus on operational efficiency, especially in this current downturn. Even those with strong performance metrics could see opportunities for further improvement by leveraging digital tools and identifying inefficiencies.”
Wagner Costa, Partner, Bain & Company
Caught in the middle
“Covid-19 brought many lessons, especially highlighting the vulnerabilities in logistics chains and showcasing the importance of local products and local supply chains. Recently, we have seen a dramatic increase in shipping costs from China, with freight prices doubling. Such a trend has pushed companies to seek new local suppliers, and Latin America is emerging as an option, creating opportunities to set up and invest in local production,” commented Marizeth Pádua de Carvalho, general manager for Latin America South and head of global strategic marketing for industrial coatings at PPG.
Nearshoring is nothing new to Latin America. While some countries are harvesting its benefits earlier and with the advantage of geographic proximity, like Mexico, the whole of Latin America offers many opportunities to fill the voids caused by the US-China trade war. On the other hand, China has its own agenda for the region, especially in infrastructure for logistics.
Under the Belt and Road Initiative (BRI), also known as the New Silk Road, China has been working to extend its influence across various corners of the world. Take, for instance, the Chancay Port in Peru, a US$3.5 billion project led by Chinese COSCO Shipping, which is set to be inaugurated in November, with COSCO being the sole operator. On the other hand, a proposed project by Shaanxi Chemical Industry to construct a port in Tierra del Fuego near the Strait of Magellan (the most important natural passage between the Atlantic and the Pacific) fell through, and instead was given to an Argentine company, Mirgor—owned by Nicolás Caputo, cousin of the current Argentine Minister of Economy, Luis Caputo—and is said to have received approval from the US.
According to Martin Sack, Leschaco’s regional head for the Americas: “The US/China trade conflict will keep having an important impact on the global economy. It is interesting to see how Latin America strives to balance its interests rather than just aligning exclusively with one major global player. Over the last decade, the trade between China and Latin America has been growing significantly despite the US maintaining its position as the primary trade partner for most Latin American countries.”