INSIGHT: Why South America prefers to shop locally for polymers

20 July 2010 16:57  [Source: ICIS news]

By George Martin

HOUSTON (ICIS news)--The large disparity found in polymer prices in different regions of the world suggests that import activity should be more prevalent in South American countries with high domestic prices. However, a closer look unveils strong reasons why many companies choose not to take advantage of cheaper imports.

Products from Asia and the US Gulf currently could compete favourably in Brazil and/or Argentina even after paying all import duties, ICIS pricing data suggest.

But potential importers who asked to remain anonymous for this story cited poor logistics as their main reason to stay away from imports.

Payment terms are normally cash in advance, a plastics processor in Argentina said, and even with regional suppliers the product is not guaranteed to arrive within 30 days.

“Our customers pay in 60 days, so there is a minimum 90-day wait to get our money back. That is an onerous financial cost for bad service,” the source said.

Sometimes a foreign supplier is asked for a quote and the answer arrives one week later, the converter added. “We would like to receive it on the same day.”

Additionally, when an order is placed, the shipment frequently loads later than promised.

When a shipment arrives, sometimes the paperwork is not complete or simply missing. This causes the containers to be retained at the port, and the customer has to pay extra charges for delayed pick up.

Compare this situation with the service provided by a local supplier, a converter said. It is possible to order a truck of a certain grade for one date, another grade for a different date and the product is always delivered on schedule.

But customers who import can count on some sort of retaliation by local providers. For instance, the local producer may not have the volumes to fill an order on schedule, forcing the buyer to pick material from the leftovers of a number of local distributors at a much higher price and perhaps with compromises in quality, the source said.

These situations are easy to find in Argentina and Brazil, because both countries have high domestic prices protected by steep import tariffs of nearly 15% even before counting internal transportation to the buyer’s warehouse and other minor expenses.

High import duties allow producers in those countries to price their products slightly above import parity, knowing that paperwork hassles and financial costs could still dissuade people from importing.

Some companies still go through all the problems of importing only to keep the domestic producers honest. But those are only a few.

“Once we used a surrogate buyer to bring imported material in in an anonymous way,” another converter said.

“But the local supplier somehow found out the material was ours, and confronted us about our reasons to import; it was an uncomfortable situation.”

Currently, there are still two domestic suppliers in Brazil for polyethylene (PE) and polypropylene (PP) and they face little competition from tariff-free Mercosur countries.

Argentina is practically the only Mercosur country that can export some volumes to Brazil, but little is left to export after supplying domestic needs. Additionally, Brazil gets its share back selling products in Argentina.

Plastics processors in Brazil worry about the lack of internal competition generated by the acquisitions that can make Braskem the only game in town if final approval of its absorption of Quattor is approved by the government.

Some believe that the government should lower import tariffs the way that Chile does, for instance, to ensure a sole domestic producer will at least face outside competition.

On the other hand, Brazilian producers are proud of the high level of service they provide and also about having a large research and development department to generate new products. They also have personnel dedicated to make sure their customers grow.

For this reason, producers think that slightly higher-than-import-parity prices for PE and PP polymers are justified.

They admit that high import duties on resin prices protect them from imports, but stress that manufactured plastic products enjoy similar protection.

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By: George Martin
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