INSIGHT: Higher tariffs, end of subsidies cloud Argentina petchems

22 December 2011 16:15  [Source: ICIS news]

By George Martin

Argentine flagHOUSTON (ICIS)--Increased costs stemming from the elimination of subsidies and from higher tariffs cloud the future of the petrochemical industry in Argentina.

Argentina introduced these austerity measures to help combat inflation and balance its budget.

The government is eliminating subsidies to utilities such as electricity, natural gas and water that took effect on 1 December for industry. The measure comes into effect on 1 January for households.

A plastics processor said that in addition to eliminating the subsidies, electrical tariffs are going up by 34%. Such an increase is certain to affect production margins for resin producers and transformers.

The elimination of subsidies will affect the common expenses of people who live in apartment buildings and share utility costs.

Starting in January, there will be increases in the cost of city services in Buenos Aires, estimated to be from 66300%, according to local media.

In the provinces, there will be tax increases of at least 20%, while the cost of medical insurance will gradually increase, rising 15% by February 2012.

Taxi fares went up by 26% from 29 November, and higher tariffs for public transportation will follow.

The government has initially asked people in the richest neighbourhoods to voluntarily give up subsidies they may no longer need, but a transformer said that the number of volunteers has been small.

It is expected that business owners will seek to pass on part or all of their increased costs to consumers.

Everyone wonders what will happen to the inflation rate once all the tariffs, taxes and price increases are in place.

Plastics processors experienced diminished activity in November and expect a slow December, caused in part by the year-end holidays.

There have been no announcements for December price increases but there is growing uncertainty about January pricing.

In Argentina, price increases are monitored and sometimes disallowed by government officials bent on fighting inflation.

The result is diminished margins for producers, which must absorb higher raw material and production costs without the possibility of increasing sales prices for their products.

To compensate, industry members keep prices stable when raw material costs decline, in an effort to restore margins.

Some of the proposed subsidy eliminations are taking place gradually, and there will be some exceptions granted to sectors with lesser resources after sworn statements are submitted to government offices.

Trades unions will follow the procedures carefully to negotiate collective labour agreements with employers.

Industry members concede that the price of natural gas has been too low for years, and there has been a failure to attract new investment in exploration and production.

As a result, the country has been forced to increase energy imports to cover a growing domestic deficit.

Dollars have been hoarded by citizens and companies seeking refuge from growing inflation. With a dwindling supply of dollars in the government’s coffers, measures were adopted to prevent the escape of greenbacks.

The purchase of dollars is a more cumbersome process these days. Those seeking dollars have to demonstrate the origin of their funds with a sworn statement. This has discouraged many potential buyers.

Importers are asked to offset their transactions with equivalent exports.

All of this is adding uncertainties for the Argentine petrochemical industry in 2012, a year of belt-tightening policies that is certain to bring many challenges for all market segments.

By: George Martin
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