Mission impossible in South America?

24 January 1994 00:00  [Source: ICB]

The outlook for South America's petrochemical sector remains somewhat bleak. However, there are still those who believe that a region-wide upturn fortunes is on the cards before the century is out. Faced with massive taxation, hyper-inflation and wider-spread corruption many players remain to be convinced.

By Sally Jones

DESPITE THE influx of 'hot money' from overseas investors and the frequent talk of 'Latin America's latest capital bonanza', any outlook for the region's petrochemical industry is still greeted with caution. And given the overwhelming problems which continue to surround the industry, 'it becomes even harder to find something to be positive about,' point out consultants.

These feelings were reiterated yet again during the recent Apla meeting of the region's petrochemical players in Rio de Janeiro, as delegates united to express the usual pessimistic sentiments.

Massive taxation, hyper-inflation and widespread corruption are rife at both a political and corporate level. In addition, the industry continues to confront a situation of worldwide and regional overcapacity, eroding prices and inadequate anti-dumping measures.

Yet as many an industry spokesman is eager to point out, 'few parts of the world offer as much potential as South America.' Dr Michel Hartveld president of Apla believes that 'if the economic and political changes that our countries are undergoing reach success it is not difficult to foresee a region-wide economic upturn similar to that experienced by the Asian Tigers.'

Despite the current hardships. Hartveld and his colleagues stand firm in their belief that they will be able to 'form a solid petrochemical industry on an international level by the beginning of the next century'.

By the end of this decade, Hartveld expects the region to hold an important international role given its expected annual growth rate of 5-6% as of 1995, resulting from a world petrochemical industry upturn by the middle of this decade and an annual regional economic growth of 4% on average.

These levels apparently correspond to a petrochemical production of $20bn, with exports of 15%. In order to reach this stage consultants have estimated that investments of around $8bn are necessary in this time span.

Argentina has experienced more than its fair share of problems in recent months and on the surface its condition continues to look tricky. Privatisation of state-controlled players Petroquimica General Mosconi (PGM) and Petroquimica Bahia Blanca (PBB) have failed to get off the ground, plants continue to be limited by their lack of size and technology, integration is poor, raw material costs remain high and a deficit continues in the trade balance.

However, Argentina is also enjoying a healthy economy with low inflation rates, a recovery in the level of economic activity and a reduction in state expenses.

This recovery is also set to extend to the country's petrochemical industry, according to Alfredo Friedlander, petrochemicals export manager of state oil group YPF.

Friedlander is pinning his hopes on several positive elements within the region. He highlights the plentiful supply of raw materials currently available, especially naphtha, olefins and LPG which are especially close to existing petrochemical sites or where future sites could be located.

He is also very positive about the creation of the Mercosur association which will inevitably create opportunities for both Argentina and its main trading partner Brazil. New production units are envisaged for a whole range of products for which either no facilities exist, such as in intermediates, or in sectors which are insufficiently supplied such as ethylene.

Furthermore, consultants say that the heavy restructuring which has already taken place has paved the way for future prosperity and even further rationalisation. ICI Duperial is currently in talks over the possible sale of its chemicals and petrochemicals business. Whilst other firms participating in the PBB complex (Ipako and Indupa) are in debate over integrating their interests (ECN 20/27 Dec). Friedlander has also suggested that the participation of economic groups from overseas, particularly Brazil, should not be disregarded. Discussions have already been taking place between the Brazilian player Copesul and PBB.

Turning to local and export petrochemical markets, Friedlander points out that preliminary data for the first half of 1993 indicate that for the present year local consumption is still expected to increase significantly. HdPE is expected to grow by 16%, PP 13% and ldPE and lldPE by 12%.

Another positive move is the decision by the Argentinean government, after months of pressure, to impose import duties on PVC from Mexico and the US - similar duties are expected to be placed on other products in the near future.

Brazil on the other hand, has started the year with renewed uncertainty and is still unable to report any concrete developments for its privatisation programme. Hiccups over the auction of the Sao Paulo-based cracker PqU continue because of a problem with state oil group Petrobras over naphtha pricing.

For cash-starved PqU, privatisation is imperative if it is to meet international standards. It also needs to raise $200m to increase ethylene capacity by 100 000 tonne/year to 360 000 tonne/year.

Privatisation of the rest of the country's petrochemicals industry also depends very heavily on what happens to PqU and although the BNDES has released yet another list of companies which are to be sold off this year, much of the industry remains highly sceptical over whether these will ever take place. High on this list are believed to be PP producer Polibrasil and coke manufacturer Petrocoque.

Further uncertainty also looms as the country prepares for the presidential election which is due to take place this year. To date the strongest candidate is the socialist 'Lula' Luis Silva, whose appointment could completely turn around the existing privatisation programme.

South America: domestic demand   forecast ('000 tonne)
	1992	2003
Thermoplastics	2795	5310
LdPE/lldPE	909	1770
HdPE	490	970
PP	512	1150
PVC	677	1110
PS	207	310
Elastomers	295	420
SBR	213	300
PB	82	120
Fibres	573	940
Polyester	362	610
Nylon 6/6,6	125	200
Acrylics	86	130
LAB	194	370

Privatisation aside, the industry also continues to fight massive production costs as well as sluggish demand and cheap imports. Dumping duties are limited here and prices high, although industry figures continue to meet to try and agree a fixed naphtha price with Petrobras.

Also of great importance for Brazil's petrochemical industry is the constitutional revision process which is just about to begin. Brazil currently has one of the largest and most cumbersome constitutions in the world, regulating a wide variety of legal, political and social factors. At this stage it is unknown how many reforms will be instituted but the chemical industry is certainly addressing potential changes throughout.

The free trade agreement, Mercosur, between Argentina, Brazil, Paraguay and Uruguay is also proceeding, although the current economic problems in Brazil may delay some aspects of it.

Currently, duty preferences between Argentina and Brazil are in the range of 45-55%.

The country's economic conditions - inflation levels of around 22-27% on a monthly basis, a foreign debt level of $100bn and the recession - have, however, taken their toll on the chemical industry during recent years reducing domestic demand significantly. And Robert Bauman of US consultancy Chem Systems believes that for this year overall demand will only be slightly higher than 1992-93 levels.

For Venezuela the mood is clearly aimed at continuing to reduce its mounting debt levels during the next year. It has a wide, yet still underdeveloped, potential to produce petrochemicals competitively, based mainly on its natural reserves and geographical location. But because the country's poor economic performance continued in 1993 and the political instability of 1992 remains, no major changes in petrochemical policies are expected in the short term.

However, Bauman believes that as the political situation stabilises and the global petrochemical environment improves, foreign investment in Venezuelan petrochemicals will increase.

Enrique Torres from state company Pequiven believes that opportunities are still present in ethane and methane derivatives. These developments, he points out, are linked to several factors such as economic and market growth and international trade. He also forecasts significant opportunities involving refinery streams, and other hydrocarbons, for companies with the technology and a market position.

Among the Pequiven projects already under construction are two methanol plants, with a combined capacity of 1.4m tonne/year, which will make Venezuela an important player in the methanol market. An lldPE plant is also under construction. Future developments include a project for a new ethane cracker and a PE plant in eastern Venezuela.

Hartveld, in response to 'What will the South American petrochemicals industry be like in the year 2003?,' says he expects industrial restructuring to lead to the creation of stronger, more integrated, multifaceted companies.

And changes are already transforming the whole of the region, but as consultants point out, they still have a long way to go and their outcome inevitable depends on the 'actions of the private sector, industry associations and governments and our ability to overcome the obstacles ahead of us.'

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