Interviews with S&P and with Opis
Rina Quijada, VP Industry Executive Advisory LATAM
S&P Global
What vulnerabilities does the current supply downcycle expose in the Latam chemical industry?
If we look at Latin America, we notice that from Mexico to Patagonia, production capacity in the chemical industry has been declining over the past 15 years, Braskem Idesa’s investment in Mexico being the only grassroots capacity addition during this time. Across the region, although there are large reserves of crude and gas, we have not seen large investment to tap into these natural resources and supply competitive and abundant feedstock to support additional capacity in recent years. Latin America is a net importing region for thermoplastics and most petrochemicals and derivatives. Hence, lower resin and petrochemical derivatives prices due to oversupply should support growing demand of finished products for regional demand, albeit somewhat limited by lower economic growth in most countries in Latin America.
What do you make of the effectiveness of import control measures imposed by countries in the region?
Most countries in the region have, at some point, introduced import control measures when they have felt imported product entered their domestic market at a very discounted rate, making local production less competitive. On the other hand, when unexpected local shortages of selected products occurred, import controls were eliminated, hence, reducing import barriers to meet local demand of a specific product that was not locally available. I personally think that markets, at the end, will self-adjust, given a long enough period of time to adjust.
The COVID-19 pandemic, geopolitical and social unrest, as well as climate change, among other external issues, have caused a tremendous impact on world economic growth and have disrupted supply chains and global fuels demand. These changes resulted in an unprecedented level of uncertainly when trying to foresee market trends.
Dewey Johnson & Carlo Barrasa, DJ: SVP & Global Lead, Chemical Market Analytics CB: Vice President Opis, A Dow Jones Company
What are the main disruptors for the industry in 2023?
DJ: The main spotlight is commodity fundamentals; people ask how broad and how deep the current downcycle is, and what the recovery looks like?
But when we come out on the other side, it is going to be a different world. Carbon is a massive disruptor with several implications on feedstock availability, cost structure, and even the reconfiguration of refineries. All of this means change across different dimensions, and with change comes market volatility. As fuel demand declines, energy companies will look for another outlet. They find it in chemicals. The other element of the energy transition is the decarbonization of energy and of the industry itself, driven by goals and aspirations at the country level; these measures will create operational constraints. Then, the valuation of carbon, be this in the form of taxes or incentive structures, will affect the competitive positioning of chemical companies.
CB: Plastics represent another significant disruptor. Currently, the recycling rate across all the high-volume plastics is at 7% worldwide. In our base study, by 2050, this may increase to 15%. The world has spent 50 years optimizing scale and technology in traditional plastics production, so we are very early in the development of circular technologies; but the industry is responding. At CMA/Opis, we are tracking over 100 technologies in chemical recycling at different development stages.
Finally, another key disruptor is geopolitics. Different regions are generally separated by freight and duty in terms of commodity pricing, but with trade restrictions (via cross-border carbon mechanism, self-sufficiency policies enacted by different governments, etc.) the world’s geographies will separate further in terms of pricing, the market becoming more opaque, less efficient, and with a higher arbitrage between regions, which raises the risk level for market participants.