APLA '12: Growing Latin America market to be target for US exports

09 November 2012 21:34  [Source: ICIS news]

HOUSTON (ICIS)--The annual meeting of the Latin American Petrochemical Association (APLA) will begin on Sunday in Rio de Janeiro as the prospects for much of the region improve following several months of below-average growth.

However, the subsequent increase in petrochemical demand could be met by imports from the US, which is already enjoying a cost advantage from low-cost feedstock derived from shale gas.

Those imports could grow as US producers increase capacity to take advantage of their cost position.

“This is a structural change in the Americas,” said Robert Bauman, president of US-based consultancy Polymer Consulting International. “It is not something that is going away.”

The advent of shale gas, which has already given US producers a cost advantage for energy, will also provide an advantage for feedstock.

The result has been a flood of new crackers, which will rely on low-cost ethane as a feedstock. Downstream projects will soon follow the crackers, and Latin America would be the most likely market for those derivatives.

For future Latin American projects, their feasibility will depend on whether the plants can secure enough ethane at US Gulf prices, Bauman said.

Any proposed naphtha-based projects dependent on exports are unlikely to go through.

“Shale gas is going to be killing some of the projects that were solely export projects,” said Jorge Buhler-Vidal, director of Polyolefins Consulting.

Those products from the US could find a ready market in Latin America, if the region overcomes its slump in the first half of 2012 and grows as expected in 2013.

Brazil's economy began to slow down last year, and economists now expect that it will grow by less than 1.6% this year, according to a market report from the Brazilian central bank.

That compares with growth of 7.5% in 2010, according to the International Monetary Fund (IMF).

The government has responded with numerous stimulus programmes, from lowering interest rates and tariffs to a massive logistics programme.

Those infrastructure projects − as well as the nation's growing middle class − should jolt the economy, Buhler-Vidal said.

Altogether, the IMF expects Brazil's economy to grow by 4% in 2013.

For Brazil's petrochemical industry, the bigger challenge is not demand recovery, Bauman said. It is feedstock.

He estimates that 75-80% of Brazil's petrochemical industry is based on naphtha, giving its producers a disadvantage against those in the US, who have access to low-cost natural-gas-based feedstocks.

In fact, polyethylene (PE) imports made up 25-30% of the country's demand, Bauman said.

The increase in PE imports could threaten the Brazilian industry by lowering domestic demand for ethylene. In response, Brazilian crackers would reduce operating rates, which would lower production of ethylene as well as other naphtha-based derivatives, such as propylene and crude C4.

That would tighten feedstock supplies for downstream consumers of those derivatives. 

The Brazilian government reacted by raising PE import tariffs to 20% from 14%. Ethylene glycol (EG) rose to 20% from 2%.

“It is a strategic industry, and I think that it is a fair thing for them to do,” Bauman said.

“Brazil is putting strong emphasis on the internal market, as the removal of fiscal incentives to imports and the increase of some import tariff shows," said Raul Arias, senior consultant and manager for Latin America, energy and chemicals consulting, at Nexant.

In the short term, this should provide a boost to Brazil's petrochemical industry, offsetting some of the effects of slower global growth, Arias said.

“The medium-term impact will depend on internal and external factors, such as the further development of internal consumption and of the local cost structure, reactions by Brazil’s trade partners and the global economic scenario,” Arias said.

At the same time Brazil could develop its own low-cost feedstock, particularly the Complexo Petroquimico do Rio de Janeiro (Comperj), being developed by Petrobras.

The petrochemical portion of the complex will likely rely on associated gas produced from Brazil's pre-salt oil wells.

In Mexico, ethane will feed the Ethylene XXI project, being developed by Grupo Idesa and Braskem. They already have awarded a $2.7bn (€2.1bn) engineering, procurement and construction (EPC) contract for the project, which remains on track to start in June 2015. 

When finished, Ethylene XXI will produce 750,000 tonnes/year of high density PE (HDPE) and 300,000 tonnes/year of low density PE (LDPE), which will reduce some of Mexico's imports of the resin.

In addition to Ethylene XXI, vinyls producer Mexichem is considering a joint venture with Occidental Chemical (OxyChem), under which the US-based company would build an ethane cracker in Texas and use the ethylene to produce vinyl chloride monomer (VCM). Oxychem would then ship the VCM to Mexichem.

The OxyChem joint venture would be in addition to the pending VCM joint venture that Mexichem and Pemex are discussing.

Meanwhile, to facilitate natural gas imports from the US, Mexico plans to increase pipeline capacity by 38%. The country plans to build eight new pipelines, which would add 4,260km (2,650 miles). The project is valued at $7.8bn.

Mexico could rely on US gas imports for years, even though it has substantial shale-gas reserve, estimated at 681 trillion cubic feet (tcf, 19 trillion cubic metres), according to comments made earlier this year by Guillermo Garcia Alcocer, general director of exploration and production of hydrocarbons for the Secretaria de Energia, Mexico's energy department.

However, the scale of work required to develop Mexico's shale-gas reserves is huge, and third parties will be crucial, he said.

Mexican law limits energy production by companies other than Pemex. Equity stakes and joint ventures are prohibited, Garcia Alcocer said.

President-elect Enrique Pena Nieto had discussed changing Mexico's energy regulations during his campaign. Previous presidents made similar proposals during their campaigns, but nothing significantly changed once they took office.

For now, Pemex is concentrating on its deepwater oil production, so shale gas will have to wait, dimming the prospects for more ethane-based ethylene projects.

As such, Mexico will likely rely on imports to meet demand, especially given its outlook for growth. The IMF predicts that the Mexican economy will grow by 3.9% in 2012 and 3.5% in 2013.

In Argentina, natural gas supplies have become so stretched, petrochemical producers face annual cuts in supplies each winter.

These shortages persist even though Argentina has large reserves of both conventional and non-conventional natural gas.

Argentina has an estimated 774,000 billion cubic feet (bcf) of technically recoverable reserves of shale gas, the third-largest behind China and the US, according to the US Energy Information Administration (EIA).

However, government policies are discouraging shale gas development, Buhler-Vidal said, as it requires equipment that is not locally available.

Customs regulations make it difficult for foreign companies to bring equipment in and out of the country. Argentine currency controls make it difficult to exchange pesos for dollars.

In addition to regulations, Argentina had nationalised YPF, which was once majority-owned by Repsol.

The move will likely discourage foreign investors.

Although Argentina has conventional gas reserves, they are in the southern part of the country, far from the demand centres in the north, Bauman said.

With limited prospects for increasing energy production, Argentina will lack the feedstock to increase petrochemical production.

Already, shortages of natural gas in Argentina have led one company, Methanex, to make plans to move a methanol plant from southern Chile to Geismar, Louisiana. By the second quarter of 2013, Methanex should decide if it will move a second methanol plant from Chile. The Chilean plants had relied on natural gas from Argentina.

Meanwhile, the outlook for Argentina's economy is lacklustre.

After growing by 8.9% in 2011, the IMF estimates that the Argentine economy will grow by just 2.6% in 2012 and 3.1% in 2013.

Arias said such a slowdown, combined with limitations on imports, should create demand constraints, affecting utilisation rates and margins.

The APLA conference ends on Tuesday.

($1 = €0.78)

By: Al Greenwood
+1 713 525 2645

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