INSIGHT: International benchmarks gaining popularity in Latin America

09 May 2013 16:17  [Source: ICIS news]

By George Martin

Polyethylene pelletsHOUSTON (ICIS)--Following the behaviour of international benchmarks such as crude oil, naphtha, ethylene, propylene, benzene, etc is gaining importance in Latin America, as countries slowly move to adopt them to help set domestic prices for plastic resins.

Mexico adopted the use of benchmarks early because after the signing of the North American Free Trade Agreement (NAFTA) products started to move freely among the US, Mexico and Canada.

Commodity prices in Mexico were shaped by the need to remain competitive in all three NAFTA countries.

Petrochemical products from the US routinely enter Mexico, and some Mexican plastic resins are sold in the US, as is the case with polystyrene (PS) and expandable polystyrene (EPS).

The situation has been slightly different in South American countries. Those not having major domestic industries to protect, removed or reduced trade barriers to guarantee competitive imports for local converters.

Such was the case in Chile, Peru Ecuador, Colombia and most other countries in Central America and the Caribbean.

Imported polyolefins enter those countries with tariffs as high as 6% but in many cases tariffs are 0%.

Colombia has for several years employed a formula tied to international benchmarks to adjust domestic LDPE prices monthly. Imported PE products pay no tariffs, and PP products pay 5% for a limited period of time.

Brazil and Argentina, on the other hand, protect their industries with hefty import tariffs (14% for PE) that result in higher domestic prices. This, in turn, makes their domestic products less competitive in other countries.

In this age, when information flows rapidly, it is hard to hide the price discrepancies from converters who more than ever demand competitive raw material prices.

Braskem, Brazil’s sole producer of polyethylene (PE) and polypropylene (PP) is showing more willingness to follow international price guidelines in 2013, but has not reduced the import tariffs.

Braskem reduced the price of domestic PE in May by R100-150/tonne (about $50-75/tonne) following the behaviour of feedstocks and resins in international markets, but it was also responding to signs of weakness in domestic demand.

However, it has not done the same for PP, a commodity that still enjoys strong demand in Brazil, and is protected by a 20% import fee.

PP prices in Brazil are unchanged despite expectations of a third consecutive decline in May of the US Gulf propylene contract.

In addition, dumping claims have been filed in Brazilian courts to prevent the entry of PP imports from South Africa, India and other countries that allegedly are unfairly subsidising their products.

The Argentine market for plastic resins has different problems. The government imposes price controls to avoid inflation and frequently disallows legitimate price increases from manufacturers that see their margins eroded by higher raw material prices.

To compensate, when feedstock prices decline in international, free markets, frequently there is no equivalent reduction in Argentina.

This leaves converters in Argentina or Brazil ill-equipped to compete in the export market with their finished products.

Argentine converters can still send products to Brazil, where prices are usually slightly higher.

Product moves freely among Mercosur member countries. The Mercosur countries are Argentina, Brazil, Uruguay, Paraguay and, more recently, Venezuela which joined in July 2012. Chile, Colombia, Ecuador and Peru are associate members.

Bolivia and Ecuador have expressed interest in becoming full members, but their membership in the Andean Community of Nations, has complicated the approval process for Mercosur.

Venezuela is a special case because its internal PE and PP prices are set by the government and do not respond to price trends in international markets.

When Venezuelan prices are comparatively too low (eg for PE and PP), there is a risk that products may be smuggled into Colombia, where prices usually reflect international levels.

When prices are too high, as is the case with Venezuela’s PS resins, products cannot possibly be exported.

However, as production in Venezuela has become insufficient to cover internal demand, imports are purchased to fill the gaps and sold at a premium to domestic buyers.

This brings the average price closer to international standards, but puts plastics converters in a bind when they cannot transfer the extra costs to buyers in price-protected markets such as the food sector.

In all cases, international benchmarks are used to a certain extent, and are likely to continue to be embraced by countries seeking global competitiveness. But in some nations, politics will remain an obstacle.

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By: George Martin
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