Introduction
Latin America’s competitiveness critically tested during downcycle
Some have called it “the worst crisis since 2009.” They are probably not wrong. The global petrochemical industry goes through long cycles tied to GDP growth. The financial crisis of 2007-2008 wreaked havoc in the industry, but China’s record-breaking stimulus package the year after pushed demand for petrochemicals through the roof, polypropylene (PP) demand increasing by 35%, wrote ICIS. This time around, there seems to be no quick way out, and so the downcycle announces itself to last a lot longer. Global analysts predict we can probably talk about growth only from 2025 onwards.
Corrections in petrochemical prices have been long coming, yet the speed and sharpness of the relapse surprised the industry. A reduction in margins had started in 2019, but the pandemic distorted the cycle, putting on hold the construction of world-scale petrochemical plants and playing with consumption behaviors as economies closed and re-started. Today, those capacities in Asia and the US that have been years in the making have come onstream, oversupplying the market. These surpluses will take some time to be absorbed, especially since global demand has softened. China, at once the biggest maker and taker of petrochemicals, can no longer bankroll the industry, especially after China’s debt control program has deflated its housing bubble, sales of commercial flats falling by 43% this July. The Chinese real estate market represents almost a third of the country’s GDP and is therefore a key driver for petrochemical consumption. With China’s economic engine slowed down, and the rest of the world's economies cooled off by tighter monetary policies, high stocks of product, coming especially from Asia and the US, floats in the global market.
A sink for imports
As a net importer of chemicals, Latin America (Latam) is absorbing a fair share of that product, putting pressure on its own domestic producers. In the competition with Asian and American products, Latam producers are at a disadvantage due to a shortage of feedstocks, as well as more expensive feedstocks.
The biggest players in Latam are state-owned, integrated oil and gas companies like Argentina’s YPF (producer of aromatics and methanol), Colombia’s Ecopetrol and Esenttia and Mexico’s Pemex (large producers of polyethylene), or Brazil’s Petrobras (main producer of solvents and fertilizers), with the exception of Braskem, the region’s biggest player, which is part-owned by Petrobras. Other local private companies like Unipar and OCQ Group in Brazil, Pampa Energia and Petroquímica Rio Tercero (PR3) in Argentina, Alpek, Grupo Idesa, and Braskem Idesa in Mexico, are among the biggest local suppliers of petrochemicals in the region. Over the past 15 years, petrochemical production has been declining in the region, with the only sizeable grassroots investment being Braskem Idesa’s ethane cracker in Mexico, which added 1 million ton (MT) of ethylene and 1 MT of polyethylene (PE), to supply both local and export markets.
Higher costs resulting from feedstocks, energy, and also logistics have left the Latam’s petrochemical production vastly consecrated to itself. Local players preponderantly supply domestically, exporting only excess or selected product to neighboring jurisdictions. While the Latam industry does not have many other outlets for exports, its competitors have a global outreach and have crowded the Latam markets. Latam has always been a sink for US product, mostly via Houston. GBR spoke to John Moseley, chief commercial officer at Port Houston, the largest resin export gateway in the US and the main hub for US exports into Latam. Moseley said resin exports to Latam were 2% higher year-to-date, surpassing the record volumes of last year.
In 2022, 70% of its PE and PP imports for Latam came from North America, informs ICIS. But now, the region is also facing higher imports from Asia, given China’s inability to capture more of the stuff. The competition with Asian products is impacting local producers in more than one way: “It is not just the lower prices that our customers can find choosing Asian products, but also that the price of the finished products sold by Asian suppliers could be the same as the raw material that our customers purchase – this means customers can skip a step in the production process, buying the finished product or part of that finished product instead of buying raw materials. Therefore, demand for raw materials in the region is not healthy, even as demand for finished products is actually not necessarily slowing down,” said Patricio Gutiérrez, chairman and CEO at Grupo Idesa, a Mexican producer.
To Martina Azcurra, the executive manager for chemicals at YPF Química, Argentina’s biggest player, the final selling prices of Asian products do not add up. It is indeed difficult to crunch the numbers when one considers Asian players are transporting from the other side of the world, incurring high logistics costs, but that only goes to show their world-scale competitiveness. Nevertheless, Azcurra remains confident that YPF will continue to leverage its long-term customer relationships and quality products, while the price battles take place in on the spot markets.
The cards left to play
Competition with imported product puts the strength of the industry to a great test. With high stocks built during the supply chain disruptions of last year, and with margins compromised, it will largely be a volumes’ game. In the cost-first battle, Latin America lacks the cheap feedstock advantage of the Middle East or the US. Brazil, which has a majority naphtha feed, is particularly vulnerable, since naphtha prices are pegged to crude oil prices, which have been consistently high in the past two years. Additionally, the price of energy, and in particular of natural gas, is also up 10 times higher than in Asia, said Marina Mattar, director of corporate affairs at Unigel, the country’s largest ammonia producer and the only manufacturer of urea and ammonium sulfate: “We are paying around US$14 per million btu, while in the US it is between US$1.5 and US$2, and in Asia it is US$1.5 or even less. While there has been new regulation in the gas market, there is not enough infrastructure to distribute the gas, so new companies are not investing.”
However, ethane-crackers, which dominate in Mexico and Argentina, do bring a cost advantage over naphtha crackers. “As producers of PE from ethane, we have a very important competitive advantage against naphtha crackers, which represent about 70% of all global crackers,” commented Stefan Lepecki, CEO at Braskem Idesa, which supplies almost a quarter of Mexico’s PE.
Some countries have imposed import restrictions and anti-dumping duties to protect the local market, but the effectiveness of such policies is questionable, and has often backfired: “The Latin American market is heavily influenced by the political landscape, to a much greater extent than what we see in the US or Europe. In Argentina, the third largest consumer of PP and PE in the region after Mexico and Brazil, the current government has increased protection measures to limit dollars leaving the country; this has brought on a higher domestic products consumption, but it has also led to shortages of important feedstocks, not to mention, one of the highest inflation rates globally,” observed Simone de Faria, head of Latin America at Townsend Solutions, a US-based consulting firm.
At the same time, when the Brazilian government reduced the tax requirement for plastic resin imports from 11% to 3%, plastic resin imports went up by 136% over the following months, André Passos Cordeiro, president at ABIQUIM (Associação Brasileira da Indústria Química), told GBR.
Restricting imports is a tricky endeavor in an import-dependent region. Between 2019 and 2021, Latam chemical and pharma imports had quadrupled compared to what they were between 2000-2002, while exports within the same compared periods doubled in dollar terms, according to a study by Economic Commission for Latin America and the Caribbean (ECLAC). Feedstock shortages render the region dependent on imports, since many of its plants run below capacity without enough feed. The Mexican industry runs at around 60-70% capacity, inform leaders in the country.
Braskem Idesa, a Mexican-based PE producer, has managed to ramp up 86% capacity utilization this year, the highest in six years, only after implementing an import “fast-track” program to supplement ethane supply from Mexico’s national company, Pemex. This, of course, reinforces a vicious cycle, with more imports on the horizon. According to the Oil and Gas Journal, the region imported 4.9 bcfd of gas, a deficit that is expected to widen to 7-12 bcfd, forecast various sources.
In the current environment, there are few cards left to play. Investments have narrowed in on productivity improvements. Latam has been notorious for one of the lowest productivity levels globally, with annual productivity growth since 2000 between 0.2-0.5%, versus over 2% in other developing regions like East Asia. The region has prioritized job creation over digitalization, as one can see in trivial examples on the streets or in the supermarkets where people fill menial jobs that could be easily automized. But companies are starting to pay more creed to digital solutions to optimize their production and reduce costs. For example, Brazilian chlorine and caustic soda production leader Unipar managed to improve capacity utilization from 70-75% average before the pandemic to above 80% in the first semester of this year through an operational excellence program that involved the use of AI and data.
Capex investments have not been completely scrapped either. Unipar continues with a new plant construction in Camaçari, in the state of Bahia, with a capacity of 20,000 t/y of chlorine and 22,000 t/y of caustic soda, expected to come onstream in 2024. This year, the Brazilian company has increased its capex allocation to a company record of R$178 million, by far beating last year’s record of R$75 million. Commenting on the company’s strategy, Unipar’s CEO Mauricio Russomanno said: “We are a capital-intensive company and cycles of low and high prices are part of the company’s multi-year plan.” Modernization work is also carried out by BASF at its São Bernardo do Campo unit in Brazil, with R$35 million spent to localize the production of nylon salt intermediates, used in the polyamide 6.6 chain, as part of a program to boost the polymer’s supply capacity in south America by 15%.
“With new capacity coming onstream and relatively weak consumption patterns, it seems we are at the bottom of the cycle, South America itself being a net importer and therefore a direct recipient of excess supply.”
Edison Terra, VP Olefins and Polyolefins – South America, Braskem
Differentials matter
In a low-commodity market, better-off are those companies with clear differentials and added-value solutions, that can offer something different instead of chasing buyers for the same molecules. Oswaldo Cruz Química (OCQ) Group, a Brazilian conglomerate with interest in 21 production and distribution companies, has recently completed the acquisition of Elekeiroz, the market leader in oxo-alcohols, plasticizers, phthalic and maleic anhydrides, and sulfuric acid, which products OCQ will integrate into its wider network. “As producers of chemicals ourselves, we face difficulties in this tighter-margin market, but as buyers of basic chemicals, we also benefit. This double market exposure gives us a balanced performance, with one side of the business doing better than the other. For that matter, the acquisition of Elekeiroz proved highly advantageous,” said Francisco Fortunato, CEO of OCQ Group.
For specialty players, the current downturn could also be an opportune time for co-creation with their customers. With an eye on more value-addition, Dow has also recently inaugurated its first innovation center, which the company calls “Inspiration Center,” in the region, in Jundiaí, close to São Paulo. With more than 50% of the company’s portfolio focused on specialty plastics for the packaging industry, Dow is leaning in on close-knit collaborations with customers.
In the end-markets, from packaging to agriculture, food, pharma, automotive, construction, and others, demand is not altogether that bad. In fact, there are pockets of opportunities in selected markets, with broad variations between durables and consumables, the former category naturally being more reactive to high interest rates, whereas the latter remains generally steady. Growth in the region is expected to speed up in 2024, with positive GDP growth projections in the top largest economies at 1.2% (Brazil), 2.1% (Mexico), 1.1% (Argentina), and 1.8% (Colombia), according to OECD.
The US’ Inflation Reduction Act (IRA), which is the largest climate investment in the US history, is also expected to bring a demand stimulus in the areas of energy transition, including EVs, but also renewables infrastructure, which, we must not forget, uses significant petrochemicals. But its impacts may not be immediate: “We know US$ billion are invested. Demand should permeate into many industries and indirectly boost demand for selected petrochemicals. The industry should follow IRA progress closely and look for emerging opportunities," said Rina Quijada, VP industry executive advisory for Latam at S&P Global.
Differentiated products allow local companies to make bigger strides outside of the region. YPF exports specialty products to the US and Europe; Ecopetrol has opened new offices in Houston and Singapore, Asia absorbing 60% of its crude exports; and Braskem made headlines with its new partnership with Thai company SCG Chemicals to build the first-of-its-kind green ethylene plant in Asia. The more local players develop a presence outside of Latam, the stronger they will be at home.