Economic growth for 2019 was disappointing for Mexico, as the country had to revise its initial projections downwards throughout the year. As per IMF data, the GDP barely expanded by 0.4% last year – a lack of pre-pandemic economic growth that will cause the post-Covid recovery to be “modest”, according to a Fitch report released in September 2020. The ratings agency expects the country’s GDP to contract by around 9% this year, following a strong fall of nearly 19% over the second quarter.

The last years have not been easy for the chemical industry either, as low petrochemical prices have put pressure on margins, while the lack of feedstock, a persistent problem in Mexico, has forced some producers including Braskem Idesa to be creative and recur to imports to maintain their projected levels of output.

The pandemic is adding to the challenges. Mexico’s chemical industry association ANIQ predicts that the contraction in the chemical industry will be 4% this year –not as bad as the overall economy, but still significant enough to create some financial stress on operations. Miguel Benedetto, general director of ANIQ, expects a challenging scenario for the next 18 months, as the industry will only recover to pre-pandemic levels by the end of 2021 or early 2022.

In April 2020, Pemex became a so-called “fallen angel”, as its bonds culminated the process of descending from investment grade to junk. The heavily indebted national champion is struggling to get back on its feet, and this affects the whole value chain. “Before the pandemic, the industry could not go beyond a 70% utilization rate because Pemex was not able to supply enough feedstock,” says Benedetto of ANIQ, who advocates for a strong alliance between Pemex and private players. “We must incorporate new technologies, develop new production and successfully exploit deepwater offshore fields as well as shale gas. All that cannot be done by Pemex alone,” he said.

The López Obrador (AMLO) administration is not so favorable to public-private partnerships and wants to revive Pemex’s former national glory, but it is failing to do so. “We have a shortage of gas and products like ethane, propane and butane, so they need to be imported, primarily from the US,” explained Benedetto. “Last year alone, Mexico imported US$32 billion in petrochemicals to feed the chemical industry value chain, as well as an additional 7 billion cubic feet per day of natural gas.”

Eugenio Manzano, executive director of large chemical distributor Grupo Pochteca, offers more figures on the current scenario: “At one point, Mexico´s chemical industry accounted for as much as 4% of the country’s GDP; now it only represents 1.7%. The shortage of gas, ethane and methane negatively impact the competitiveness of our chemical industry and many downstream industrial segments. There is strong competition from foreign manufacturers.”

An illustrative example of the feedstock constraints that Mexico faces is the US$4.5 billion Etileno XXI facility, the largest petrochemical investment made in Mexico, operated by Braskem Idesa, and which has an annual production capacity of just over 1 million metric tons per year (mt/y). To reach that rate, the complex needs to be fed 66,000 barrels per day (bpd) of ethane, but Pemex has only been supplying 74% of that, so the company has to import ethane, a process initiated with a ‘fast-track’ temporary procedure.

Stefan Lepecki, CEO of Braskem Idesa, provided more details: “The ethane arrives in a cryogenic ship to a temporary facility in the port of Coatzacoalcos, and we transfer it to a carousel of trucks between the harbor and the Braskem Idesa facility. We are now importing 10,000 bpd and we plan to increase that to reach full capacity at the plant. Because Pemex’s recovery will take time, the solution should be a large-scale import terminal, and we expect to implement this in 2.5 years.”

The world-scale size of the Etileno XXI facility and the versatility of the company’s polyethylene were vital in navigating the low-priced polyethylene market of last year, when the addition of new capacity in the US and Asia outpaced demand growth. Mid-2020, the spreads between ethane prices and polyethylene prices have already improved, said Lepecki: “We export to more than 40 countries. It is very difficult to predict how the economies will recover, but we continue to be optimistic with respect to our capabilities and the advantages of our polyethylene.”

Despite the challenges, Mexico has several strategic advantages it can capitalize on, such as a large internal market, a strategic location neighboring the US, and a wide array of free trade agreements with many of the world’s most important markets, allowing companies like Braskem Idesa to import feedstock needs and have very healthy export sales. These factors could help attract investment during this period where sourcing and trade paradigms are being redefined.

According to Martín Toscano, managing director of Evonik Industries in Mexico: “A positive development from the Covid-19 pandemic is an increasing trend in the relocation of supply chains from other world regions to Mexico to support further growth in North America. As frictions between the US and China rise, and as the Covid-19 pandemic is forcing some US companies to rethink their supply chains, Mexico can only benefit.”

Toscano also downplayed the influence of the current administration on the business world: “Mexican industry continues unhindered by politics,” he said, adding that more foreign companies are entering the Mexican market. “Many long-term investments look beyond current government policy, and the country’s distinctive role as global manufacturing platform for many sectors supports interesting opportunities for further growth,” he concluded.

Image courtesy of Ramy Loaiza.