Steadying the ship

22 November 1999 00:00  [Source: ICB]

This year's Apla conference in Venezuela called for a firm foundation for the Latin American chemicals industry to allow it to compete globally in the next millennium, as Susannah Johnston and Carmen Garcia report

The need for economic and political stability was at the top of the agenda at the recent 19th annual Latin American petrochemical association (Apla) conference on Margarita Island, Venezuela. Here, major regional players assessed how they would compete in the 21st century, despite the continuing uncertain investment climate.

Brazil's devaluation has strongly affected the economy in Argentina and the newly elected president Fernando de la Rúa now faces problems such as low GDP, increased unemployment and a reduced dynamism in exports, particularly to Brazil, said Pedro Wongtschowski, managing director of Brazilian ethylene glycol producer Oxiteno.

Nevertheless, the recovery in Brazil has been less painful than originally forecast. 'In the chemical industry, domestic production is currently increasing as imports have declined, particularly of consumer goods. This has caused an increased demand for intermediate petrochemicals.'

The Latin American chemical industry accounts for 5% of global chemical industry sales. Brazil accounts for 60% of total chemical sales in the region, Mexico for 20%, Argentina for 14%, Venezuela for 4% and Chile for 2%.

However, all major Latin American economies have a negative chemicals trade balance and they account for only 2% of global chemicals exports, Wongtschowski told delegates. This compares to the EU which accounts for 51% of all global chemical exports.

Trade

Latin America has a chemical trade deficit with the US of $11bn, or 57% of the $19bn US chemical trade surplus. Wongtschowski stressed the need to increase investment in the region in order to tackle the trade deficit problem in chemicals.

Brazil has the largest trade deficit in chemicals of the major producing countries in the region, at $5.1bn in 1998, excluding trade in pharmaceuticals, synthetic fibres and photographic material. In fact, Brazil's trade deficit for all chemicals has grown from $1.3bn in 1992 to $6.4bn in 1998.

Mexico and Argentina have trade deficits of $4.3bn and $2.7bn respectively. Mexico blames its current deficit on a lack of investment in petrochemicals due to the government's failure to privatise the industry over the last six to seven years. 'Nobody invested in the industry in the expectation that privatisation would occur,' Hose Luis Zepeda, head of Mexico's polyols producer Polioles, part of the Alpek group, told delegates.

At the heart of Mexico's problems is the lack of integration in its industry, which makes it difficult for it to compete with the new breed of global player. For example, Zepeda said, the country's MEG production is only 30% integrated with ethylene oxide production compared to the US where production is completely integrated. For PS, PP and PTA/DMT, there is no integration with the respective feedstocks at all, compared to 71%, 53% and 45% respectively in the US.

Since the Mexican government has said it will not privatise the industry in the next two years at least, the industry in now looking at ways of attracting investment to help solve the integration problem with strategies which effectively simulate integration.

Examples of this would be increasing the ethylene capacity of state-owned petrochemicals monolith Pemex Petroquimica combined with long-term feedstock supply contracts with private industry in order to stimulate private investment in ethylene derivatives and reduce Mexico's dependency on imports. The ethylene debottlenecking is expected to cost $1bn, but this should be looked at in terms of Mexico's $4bn chemicals trade deficit.

Chile

Whereas Mexico has suffered from a lack of investments over the last ten years, the Chilean petrochemical industry has invested almost $800m in new chemical projects in 1998. This represents 38% of all industrial investment in Chile.

Recent investments include Chilean state-owned petroleum company Enap's new PP plant, due to be inaugurated early next year, and Methanex's third train of its methanol complex, Chile III.

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New investments being considered are a new naphtha-based ethylene cracker in the petrochemical complex of Talcahuano - 50km from the capital Santiago and the site of Petroquim's new PP plant - or an ethane-based cracker in Magallanes in the extreme south of the country, together with associated derivative plants.

Talcahuano is in Chile's industrial heartland. Whereas the majority of Latin America's petrochemical complexes are generally on the Atlantic side of the continent, Talcahuano is on the Pacific side, allowing for easy access to the Andean pact countries, such as Peru and Ecuador, and also to the markets of the Far East.

Chile has recently inaugurated its gas pipeline, Gasoducto del Pacifico, an investment totalling $360m in which Canada's Nova Chemicals is a major shareholder.

In Venezuela, where a 120 000 tonne/year PVC plant was recently inaugurated in the El Tablazo petrochemicals complex, the construction of an ammonia and urea complex, known as Fertinitro, is currently under way and is expected to come onstream by quarter four 2000. Nevertheless, economic activities in Venezuela declined considerably in 1999 although the current recovery in oil prices is temporarily benefiting this heavily hydrocarbon-dependent economy.

Eduardo Prasilj, president of Venezuelan state-owned petrochemical company Pequiven and vice president of PdVSA, the state oil company, confirmed plans to construct a second complex, dubbed Fertinitro II, of a similar size to Fertinitro and with a similar shareholding structure, by 2005. Fertinitro is a venture between Koch (35%), Snamprogetti (20%), local consortium Empresas Polar (10%) and Pequiven (35%). The complex, which is located in the Anzoategui petrochemical complex in Jose, will produce 1.2m tonne/year of ammonia and 1.5m tonne/year of urea.

With the two complexes, Venezuela's production capacity of ammonia rises from 800 000 tonne/year to 3.2m tonne/year and of urea from 1.1m tonne/year to 3.9m tonne/year.

With a population of nearly 500m, a GDP in the order of $1700bn, an average annual GDP growth rate of 4% and per capita consumption of plastics and chemical products well below developed countries, the enormous potential of Latin American markets remains unquestionable. The conditions for growth are in place and the petrochemical industry's greatest challenge in the 21st century will be to take advantage of these opportunities.

21st century

Raymond McGowan, president of Mobil Chemicals, gave his views on what is required of the world-scale chemicals company if it hopes to compete successfully in the 21st century. He said leading petrochemical companies must have the ability to compete globally. They will have global resources and the best competitive costs among other factors. 'Leaders will demonstrate a relentless pursuit of performance excellence in all that they do.'

As scale increases, so do the capital requirements for investments. 'World-scale companies must have the financial muscle to provide this capital,' McGowan said. 'Leaders of the next decade must be able to capitalise on change. They must see the increased speed of change in technology and markets as an opportunity to excel.'

In the 21st century, partnerships are likely to form between companies, their suppliers and customers, possibly in the form of joint technology development. 'Successful chemicals companies will also forge partnerships in the developing petrochemical industries of the large emerging markets, particularly Asia. However, there will also be continued investment growth in hydrocarbon-rich countries and the entry of new export players such as Venezuela and Nigeria.'

SALES OF THE LATIN AMERICAN CHEMICAL INDUSTRY 1998, $BN

Country	Sales
Brazil	46
Mexico	15
Argentina	11
Venezuela	3
Chile	2
Total	77

SOURCE: ABIQUIM, CQYP, PEQUIVEN, ANIQ, ASIQUIM

LATIN AMERICAN CHEMICALS TRADE BALANCE* 1998, $BN

Country	Imports	Exports	Deficit
Brazil	8.2	3.1	5.1
Mexico	7.3	3.0	4.3
Argentina	4.0	1.3	2.7
Venezuela	1.3	0.6	0.7
Chile	1.3	0.8	0.5
Total	22.1	8.8	13.3

*Does not include pharmaceuticals, synthetic fibres, photographic materials

SOURCE: ABIQUIM, CQYP, PEQUIVEN, ANIQ, ASIQUIM, OXITENO ESTIMATES

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