APLA: Global economics affect regional prices

07 November 2011 00:00  [Source: ICB]

A host of factors, from high tariffs to a strengthening US dollar, are interacting with polymer markets to create individual price dynamics in Latin America countries

As a rule of thumb, polymer prices follow the direction of their feedstocks. This year, several other factors are playing a role. The slowing economies in the US and Europe have caused foreign demand to drop and have led outside producers to target Latin American markets.

At the same time, concerns about global growth have caused investors to seek safety in the US dollar, causing the currency to strengthen. These trends are among the factors determining prices in Latin America's polymer markets.

In Mexico, the weakening of the nation's peso (Ps) versus the US dollar gave Pemex, the state-owned producer, some space initially to increase prices without losing competitiveness. Pemex raised prices by 11% in the August/September period. However, further declines in ethylene costs had forced Pemex to reduce polyethylene (PE) prices by as much as 5% in October, under pressure from cheaper US resins.

Indelpro, Mexico's only polypropylene (PP) producer, has reduced prices by 14 cents/lb in October to match the decline in feedstock propylene.

PESO WILL STAY LOW

The Mexican peso has since recovered after its initial sharp decline against the dollar. It has stabilized in the Ps13.0013.50 range, where most economic observers predict it will stay in coming months. It will take a long time or unusual circumstances for the peso to return to its earlier level of Ps11.50 against the dollar.

Local demand for polyolefins is near the same levels as it was in 2010. However, demand could deteriorate if the US economy keeps weakening. Much of Mexico's plastics production at the border is destined for the US market.

Polymer prices have also eroded in countries such as Colombia and Chile, where low import tariffs have opened up their markets to imports. A similar situation is developing in countries such has Peru and Ecuador, where tariffs are either low or nonexistent.

The weakening global economy has had no noticeable effect in Venezuela, which has a closed economy characterized by prices that work only in the domestic market. Production shortages of some PE and PP grades are compensated with imports, but the logistics do not always work properly.

Resin producers in Argentina and Brazil are protected by strong tariffs. As a result, they have been able to increase prices in October despite a marked decline in international prices. Argentine producers increased prices to offset earlier periods when government price controls prevented them from doing so. Those price controls were in place even while feedstock costs increased. It is not clear if prices will continue to rise in November.

In Brazil, prices rose sharply in October to cope with a surging dollar that reached Brazilian reais (R) 1.90 before the government intervened and stabilized the currency in the mid-R1.80s range.

Brazilian plastic processors were fighting the large October increases (R570/tonne for PE and R400/tonne for PP) because the local currency had since recovered to the mid-R1.70s in mid October. Ultimately, higher prices in Brazil and lower feedstock prices in international market have created conditions that may attract a growing volume of imported resins to Brazilian ports.

For some, the October price increases in Brazil are hard to justify, but there is only one supplier in the country, Braskem, which is nearly 50% owned by Petrobras, the state energy producer. Such a lack of internal competition and strong import tariffs make such counter-intuitive price movements possible.

WEAKENING TREND FOR POLYOLEFINS

Another factor behind the price hikes is that, in South America, resin prices typically lag feedstock costs by a month. Additionally, a price increase in October may offset a looming price decline in November. In fact, polyolefin prices are likely to gradually weaken towards the end of the year because raw materials are down and buyers are keeping purchase volumes low. In addition, tax laws in many countries encourage stocks depletion at the end of the year.

Polystyrene (PS) prices have followed similar patterns in Latin America. In addition to weak prices for feedstock benzene and styrene, the decline of PP is also pushing PS lower because these resins compete with each other in some applications.

Only in Brazil is there an attempt to increase prices by R300/tonne in October. Most other countries see PS prices sliding in October, following feedstock costs.

The only support for polymer prices comes from crude oil, which has remained in the $75-90/bbl level despite global uncertainty.

Among other resins, polyethylene terephthalate (PET) markets in Latin America are facing downward pressure into November from declining feedstock and resin prices in Asia, according to regional sources. Participants in Latin America continue to keep an eye on the paraxylene (PX) Asian Contract Price (ACP), a key indicator for PET price direction, which has recently been softening.

However, earlier upward momentum is leading to October price increases in Latin America, although the initiatives have been tempered by current market direction in Asia. Resin buyers in Latin America continue to negotiate lower prices for late-October and November.

Polyvinyl chloride (PVC) offers into Latin America were softening, driven by uncertainties over the Eurozone and US economies as well as the weak construction market in the US, according to participants. The weak US market is causing that nation's producers to rely on Latin American markets to offset lower demand.

However, domestic resin prices in Brazil are rising this month on suppliers' initiatives, while prices are unchanged in Argentina and Venezuela, according to local sources.

Demand in Latin America is slow as declining prices for US and Asian resin dampen activity, sources said. Latin American consumers are buying on an as-needed basis and maintaining lean inventories.

Venezuela's producer Pequiven is importing around 4,000 tonnes of PVC from Colombia and 9,000 tonnes from the US to supply private industry, as the nation's subsidized low-cost Petrocasas housing project gains momentum.

The strength of the US dollar in international trading has had an impact on polymer prices in Latin America

To find out more about chemical market pricing information from ICIS go to www.icis.com/staticpages/prices.htm


Author: William Lemos, Ron Coifman, George Martin



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