09 November 2012 11:34 [Source: ICB]
Pedro Wongtschowski, president of APLA, discusses the critical issues that face Latin America's petrochemicals sector today, from industry growth and feedstock sources to investments and regional competitiveness
This year, much of Latin America has struggled with slower growth and low-cost imports from the US.
Pedro Wongtschowski, president of APLA
Indeed, more exports could be on the way as US producers expand capacity.
Within Latin America, the fast growth rates the region has enjoyed since the global recovery have waned.
Brazil's GDP may grow by less than 1.6% this year, compared with a 2010 rate of 7.5%. Argentina's GDP will likely expand by 2.6% after growing by 8.9% in 2011.
Policy makers have responded aggressively, with Brazil lowering interest rates from 12.50% to a record low of 7.25%.
Pedro Wongtschowski, president of APLA, addresses these and other trends.
In general, growth in Latin America slowed during the first half of the year. How has this affected the petrochemical industry, and how did the industry respond to the slowdown?
The economic slowdown of Latin America during 2011 extended to the first six months of 2012, as a consequence of the world's volatile macroeconomics and the uncertainties for the upcoming years. The main drivers were the recession in the eurozone, the decrease of economic growth and of expected consumption in China, and the fact that the US economy has still not completely recovered.
This environment impacted the petrochemical industry's profitability by lowering operating rates and prices, which also affected the Latin American markets. In addition, because of the region's less competitive feedstock and energy position, local producers have been forced to reduce their spreads even further to compete against imports.
Brazil, the region's largest economy, has introduced a number of stimulus programmes since August. These include lower interest rates, lower electrical tariffs and a large infrastructure programme. Have these measures started to help both the Brazilian and the regional chemical industry?
The government has shown its concern with industry competitiveness by launching the incentive plan called "Brasil Maior", which includes tax exemption in payroll and a stimulus package for private investment in infrastructure. This stimulus package is part of the second version of the Growth Acceleration Program (PAC 2) that expects to [contribute] $475bn [€364bn] into the Brazilian economy until 2014.
Another trend is the maintenance of lower interest rates compared to the average of the last 10 years, which will foster demand growth of end-use products, influencing the demand for petrochemical derivatives within Brazil.
The recent reduction in the taxation on the electricity prices also shows the concern of the Brazilian government with industry competitiveness, which is particularly important for some sectors of the chemical industry, such as the chlor-alkali and industrial gases.
The government also recently published the Special Incentive Regime to the Development of the Fertilizer Industry Infrastructure. This measure is focused on promoting new investments and companies in one of Brazil's most strategic and trade deficit-ridden groups of chemicals.
Nevertheless, despite all the measures described above, the regional chemical industry still lacks important competitive advantages in comparison to the international petrochemical standard, such as a more competitive feedstock base, logistics and capital cost.
What is the overall outlook for growth for Latin America's petrochemical industry in 2013?
In the short term, the petrochemical market will keep facing important volatility in prices and costs. In Brazil, naphtha, the main feedstock, will continue to follow oil-price variations, which are strongly influenced by the macroeconomic environment.
Nevertheless, there is a more optimistic outlook for the region, with GDP growth forecast at 4%, and the petrochemical market following this trend. The main drivers for this growth are the preparations for the World Cup 2014 in Brazil, infrastructure investments, government measures to stimulate domestic consumption and continuous expansion of the middle class.
Recently, several Latin American petrochemical producers have created joint ventures or have acquired assets outside their own countries. For example, Braskem has bought several polypropylene plants in the US and Europe. Mexichem and Oxychem are considering a joint venture; Oxiteno is expanding ethoxylation capacity in the US and Mexico; and Idesa is pursuing the Ethylene XXI project with Braskem. Why are more companies looking to foreign countries for growth, and will this trend continue?
We believe that the general motivations for Latin American companies moving abroad are as follows:
In the case of Oxiteno, the investment in Pasadena, Texas, US, was also motivated by the acquisition of technology for the production portfolio as well as the application of specialty chemicals such as surfactants.
Mexico and Brazil continue to report large chemical trade deficits. Given the rise of shale gas in the US, could these deficits become even larger? Will low-cost US chemicals discourage Latin American producers from adding new capacity?
We believe that the development of shale gas as a feedstock for chemicals in the US will boost new projects for ethylene production and increase the pressure of imports into Mexico and especially Brazil, whose main petrochemical raw material is naphtha.
For instance, the American Chemistry Council estimates that around $25bn is being invested in about 30 expanded or new US production facilities because of the shale-gas advantage. In addition, China, an important American customer for petrochemical derivatives, is also investing in coal-to-olefins capacity, based on its ambition to expand its self-sufficiency in ethylene to 64% by 2015 from 48% in 2010.
All of these investments will directly impact world operating rates of petrochemical plants, and Latin America will be a target for US exports, therefore, discouraging producers in the region from adding new capacity.
This situation, associated with government measures to boost future demand, will contribute to increases in the trade deficit of petrochemicals, especially in South America.
What is the likelihood of countries such as Mexico and Argentina developing their reserves of shale gas? Could Brazil successfully use its associated gas from offshore oil drilling as a chemical feedstock?
According to the US Energy Information Administration's survey of technically recoverable resources of shale gas, Argentina (774 trillion cubic feet, tcf) and Mexico (681 tcf) have the third and fourth largest reserves, almost as large as the US (862 tcf).
Nevertheless, little or nothing has been developed so far in both countries. In Argentina, YPF and BP are investing in early exploration, but the local environment is not fully conducive to foreign investment. In Mexico, Pemex has the monopoly on gas production and Mexico's constitution prevents private companies from developing shale gas projects.
In Brazil, the associated natural gas liquids from pre-salt oil drilling will initiate production by 2014, and it will likely be used as one of the feedstock at the Comperj project in the future. Although, there are still several challenges related to associated natural gas concerning quality, transportation cost from off-shore, price regulation and the infrastructure required to make its use a reality for the domestic petrochemical industry.
In your speech last year at APLA, you said that Latin America needs to improve its transportation infrastructure. How is the current state of infrastructure affecting the petrochemical industry, and what kind of progress has the region made in improving it?
Infrastructure for ports, airports and roads are important challenges in Latin America and contribute to the region's low competitiveness. For instance, Chile is the best positioned country in the region but only occupies 40th place in the rank of transport and infrastructure for the World Economic Forum.
In the case of Brazil, carriage is highly dependent on road transportation, with around 60% of the volume. In this mode, the confluence of deteriorating roads and recent changes in labour legislation has pushed freight costs even higher. In addition, the railways are still not that competitive due to lack of integration, and public ports, which are important for a country with such vast coastline, are outdated and not enough efficient to compete internationally.
In order to develop and modernise the Brazilian logistic infrastructure, the government announced last August the "Investment Program in Logistics", which comprises a total investment of reais (R) 133bn ($16.2bn), being R42bn for highways and R91bn for railways. For other modes, another programme is expected to be announced shortly.
These government programmes will reshape the transportation network until 2025, when the transport by road, rail and waterway are presumed to be more balanced. But Latin America still has a long way to go in improvements in logistics.
Overall, what are some of the other trends affecting the region?
It is important to highlight two additional trends affecting the region, the first being the search for more competitive feedstock such as natural gas to support growth and provide competitiveness against American shale gas; and the second being the further development of bio-based chemical industry. The last one has the potential not only to replace some specific conventional chemical building blocks like oxo-alcohols but also to introduce new types of renewable chemicals in the market, such as biopolymers. It is an emerging industry although with big challenges to gain and consolidate scale.
What are the industry's biggest opportunities?
The industry's main opportunities come along with the potential use of pre-salt oil and gas in Brazil and future exploration of shale gas in Argentina and Mexico as new feedstock for these countries.
On an economic level, the rise of the middle class in Latin America should not go unnoticed, and it will drive the demand for petrochemical products higher. Also important sport events, the World Cup in 2014 and the Olympics Games in 2016, will take place and are expected to add demand for petrochemical derivatives both in consumption and infrastructure.
The sustainability concern is increasing around the world and consequently is impacting current and the new projects for petrochemical companies. This trend represents an important opportunity in the region as well, especially in Brazil, given its biomass availability.
What are the industry's biggest challenges?
The main challenge is related to the availability of competitive feedstock such as gas, naphtha, ethanol and energy to support the demand growth in the region. Current local prices of petrochemical feedstock - naphtha and gas - jeopardise competition against producers from the Middle East, Asia and the US.
Logistic bottlenecks are also important challenges in Latin America along with cost of capital in comparison with other regions. In order to increase Latin American competitiveness, the countries need to invest continuously to improve local infrastructure.
Another challenge is to improve the capability of local vendors, such as engineering companies, manufacturer of goods (such as equipment, pipes, pumps, gauges) and IT service providers.
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