INSIGHT: LatAm petchems threatened from without – and within

12 November 2012 16:41  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The greatest threat to the petrochemical industry in Latin America is not solely that from imports from low-cost producers further north. The region suffers from poor logistics and the costs of doing business are high. Addressing these issues will put local players on a much stronger competitive footing.

It is growth that gives the region the opportunity to improve logistics and to invest further in human resources and research, Brazilian economist Eduardo Giannetti da Fonseca, said on 11 November at the annual Latin American Petrochemical Association (APLA) annual meeting in Rio de Janeiro. The region needs to discover how to add value to products, he added.

But as often is the case, politics intervenes and state intervention causes road blocks.

"Changes [in the rule of law] are highly noxious to investment," Giannetti da Fonseca said. adding that prices need to reflect actual production costs, since price manipulation harms long-term investments.

The economist’s comments highlight just some of the obstacles regional petrochemical producers face at a time when they should be buoyed by opportunities and not necessarily hobbled by domestic political or regional trade threats.

Petrochemical demand has been strong, driven by expanding national wealth generation but growth has slowed and inflation regionally is running at about 20%.

Prior to the APLA meeting, which began officially on Sunday, petrochemical industry consultants were warning of the threat to some planned projects in Latin America from the shale gas revolution in the US.

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

Proposed liquids-fed projects, heavily reliant on exports, are unlikely to go ahead, he suggested.

PCI reckons that 75-80% of Brazil's petrochemical industry is naphtha-based and operating at a disadvantage to producers in North America who run on natural gas-based costs.

Brazil will have quantities of associated gas from development of pre-salt oil deposits. And the Complexo Petroquimico do Rio de Janeiro (Comperj), being developed by Petrobras, will benefit from that.

Grupo Idesa and Braskem’s Ethylene XXI project in Mexico will be ethane fed, with the ethylene output used to produce more than 1m tonnes of polyethylene. Natural gas pipeline capacity from the US to Mexico is set to increase.

But in a country like Brazil, which imports 25-30% of its polyethylene demand, the existing industry could be threatened by low-cost PE imports. An increase in polymer import volumes could put pressure on naphtha cracker operating rates if demand growth rates remain subdued.

“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," Raul Arias, a senior consultant and manager for Latin America, with energy and chemicals consultants Nexant said.

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

“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.”

From today’s standpoint, it really does look as though only the large, gas-fed projects in Brazil and Mexico will proceed anywhere near to plan.

APLA president Pedro Wongtschowski said as much on Saturday.

Becoming competitive with US shale-based players is the main challenge, he suggested when talking to ICIS. Brazil already suffers from high raw materials, energy, logistics and labour costs.

Local companies will have to be more efficient if they are to compete successfully and make the most of growth in Brazil over the next few years that could be as high as 7-8%, according to Wongtschowski.

“Brazil imports about $40bn (€32bn) in chemicals from the US annually. This could also be produced locally,” he said.

Making that change will be far from easy, but is made more possible by the expected continued high rate of economic and chemicals demand growth.

The APLA president believes that major petrochemical expansions in Latin America will be made mainly in Brazil and Mexico, home to the Comperj and Ethylene XXI projects.

“I don’t foresee any major production in Chile, Argentina, Venezuela or Colombia. There are also no indications that there will be large projects in Peru or Bolivia,” he said.

“I am sceptical about planned major projects in Peru, Bolivia and other countries. Some have competitive feedstocks, but lack the characteristics − such as local market size and infrastructure − to attract investors.”

($1 = €0.79)

By: Nigel Davis
+44 20 8652 3214

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