What are the main factors currently driving industry dynamics in Latin America’s petrochemical segment?

The petrochemical business is linked to consumer spending. Prior to Covid-19, I believed demand for petrochemicals in Latin America in 2020 would be slightly better than in 2019. However, the devastating impact of the pandemic, from Mexico to Patagonia, will make 2020 a loss year in demand, meaning no growth and in some cases a significant decline in demand. The surprise has been that Brazil, thanks to record performance from its agribusiness segment, is contracting at a lower rate than expected. In Argentina the new government is expected to continue developing Vaca Muerta. The big issue will be the macroeconomics of the country, because Argentina is in great debt.

One of the key differences we see in the region versus the US, Europe or Asia is that governments in the two largest economies, Brazil and Mexico, have not allocated large incentive resources to reactivate the economy. There has been very little stimulus, especially in Mexico. In the US we are about to see the third stimulus package, and the first package alone was worth US$7 trillion, which is equivalent to the GDP of the whole of Latin America.

How is the feedstock situation changing in this scenario?

The critical issue in petrochemicals is access to abundant and competitively priced feedstock. With lower crude oil prices, naphtha crackers have become more competitive (77% of feed in Brazil is naphtha-based, for instance). This means that the US’ competitive advantage has significantly diminished. Exports of LNG, LPG or ethane will continue –however, prices are expected to be somewhat higher. With lower production of crude oil (we went to 12-13 million bopd to 8 million bopd in the US), we have less gas production and less ethane available close to the crackers. In this changing environment those companies that have flexible feed and can crack ethane, propane or naphtha will have an advantage. Finally, another key factor will be the outcome of the US presidential election. If the Republicans win, the country will continue promoting fracking and hydrocarbon development. If the Democrats win, probably fracking will go through a challenging period.

What are the big issues affecting Latin America’s future petrochemical industry development?

First, available feedstock is not close to consuming markets or export facilities in the region, so infrastructure needs to be built and adjusted to help monetize that feedstock – pipelines, ports, terminals and storage. In Mexico you have the infrastructure but you do not have the feedstock available, so you have to import it. In Argentina you have the feedstock from Vaca Muerta, but you do not have the pipelines to take the product to areas of high local demand and exports. This said, once the infrastructure is built, then we expect to see a development of additional capacity in the region based on naphtha and gas in Brazil, and additional ethane and propane in Argentina.

Another important development is the significant change anticipated to take place in Brazilian industry. Petrobras has announced its firm desire to focus on exploration and production of crude oil and gas, and is in the process of selling their refineries. Also, Braskem’s owners (Odebrecht and Petrobras) have expressed their desire to sell the company. This transaction will have a significant impact on industry dynamics in the region.

What is the role of the chemical industry to fight the pandemic?

If you want a silver lining from this crisis it is that the biggest cities in the region, like Mexico City and Sao Paulo, are taking a break from pollution. Besides, we see an improved image of chemicals and plastics because of their utility to fight the pandemic. Nonwoven polypropylene, for instance, has become a very visible material as it is used in personal protective equipment. Even if 2020 will be a lost year in terms of growth in many of the industry’s segments, the industry has not seen the dramatic declines of crude oil demand, gasoline demand or automotive demand. The crisis has also strengthened the supply-demand balance, with the delay of new capacity projects, especially in the US.