APLA - Raw materials remain the weak link

15 November 2013 13:03  [Source: ICB]

Latin America is becoming more dependent on imported commodity polymers, as new plant construction cannot keep pace even with today’s sluggish demand growth


Copyright: Rex Features 

Although polyolefins demand in Latin America is expanding at roughly 1.3 times the rate of GDP growth, new production capacity is not keeping pace because of a lack of raw materials. 
Although plans for new polyolefin plants have been around for years, the region has 
little to show in terms of recent increased 
production capacity.

The exception is the Ethylene XXI projected being developed by a joint venture made up of Braskem and Idesa. It will produce ethylene (C2) and polyethylene (PE), and operations should start in the second half of 2015. The Ethylene XXI project will have a steam cracker to feed its PE plants.

Although Ethylene XXI aims to substitute resin imports in Mexico, its management is well aware that this will not happen in the first year or two of operations. In fact, the companies currently exporting resin to Mexico will not go away just because Ethylene XXI has started production.

Braskem-Idesa will likely export its initial surplus PE resins to other markets in Latin America, mitigating production shortfalls there, as lack of raw material is a common constraint in the region.

Hydrocarbon-rich areas such as Venezuela and Peru, with its Camisea gas fields, have not been able to get any projects started, despite the cooperation of Braskem. Braskem has a role in every regional project and will continue to be the most dominant company in Latin America. However, projects in Venezuela, Peru and Brazil are still labelled “under study” while the companies wait for appropriate conditions.

The entrance of shale gas as a new low-cost alternative for the petrochemical industry has already had a big impact in the region. Shale gas is one of the reasons for the delay of the Complexo Petroquimico do Rio de Janeiro (Comperj) project in Brazil, which was originally conceived to use oil-based naphtha as its main feedstock. Under Comperj, Petrobras will build two refineries, and Braskem will develop several chemical units, including a world-scale ethane cracker.

LATIN AMERICAN SHALE RESERVES
Braskem is now in talks with Petrobras regarding the pricing for the feedstock. The cost advantages of natural gas and NGL cracking over naphtha can no longer be ignored by companies willing to compete in the global arena.

Two countries with large proven shale gas reserves are Argentina and Mexico. The countries’ shale reserves are ranked among 
the largest in the world. According to the 
US Energy Information Administration, 
Argentina holds 774 trillion cubic feet of recoverable shale gas reserves, while Mexico has about 681 trillion cubic feet. However, substantial shale gas production in those countries could still be years away.

The shortages of raw materials are affecting PE markets more than polypropylene (PP) markets, because although Latin America is short of both products, the deficits are larger for polyethylene. The PP deficits in Latin America could be corrected when the propane dehydrogenation plants announced in the US and Canada start production, although there is much uncertainty about those projects and the use of their propylene production. Large players such as Indelpro, Propilco and Braskem have kept PP deficits manageable in Latin America.

LATIN PS: A DIFFERENT SITUATION
Polystyrene (PS) markets in Latin America face a different problem. Although there are only a handful of countries with PS production, regional supply of this commodity has been more than adequate. The main problem for this plastic resin has been that, as a mature market, its weak prospects for global growth have led to some key producers leaving the industry.

Chemical global giants Dow Chemical and BASF have been looking for more promising fields to invest in, selling their interest in Brazilian plants to Unigel. The remaining competitors have a less crowded field, but that does not change the low-growth picture of PS, affected also by growing competition from PP resins.

For this reasons, raw material costs have been the main driver of price volatility in PS markets. With crude oil markets losing steam, benzene and styrene monomer (SM) prices have gradually declined, making short-term price increases less likely.

PS prices in Latin America have not gone down because currency devaluations have forced producers to keep raising prices to maintain margins.

Colombia’s PS production is usually quickly sold out because most of the production of its two plants is consumed internally, leaving small volumes for regional exports to countries such as Peru, Ecuador or Chile, which have no domestic production.

Mexico PS producers face increasing competition from US imports. PS prices in the US and Mexico have been virtually on par because Mexico also exports PS resins into the US.

Production of PS in Argentina has been plagued with maintenance stops and labour conflicts that have idled the plant for more than 90 days this year.

In Brazil, Unigel owns two PS plants but has been running only one for some time, although nothing is wrong with the idled plant. The company would rather operate one plant at maximum capacity than two at 50% capacity.

Brazil’s PS producer Videolar has recently acquired producer Innova from Petrobras, and the sale is now in the hands of regulators. Cursory approval of this deal is widely expected, considering that the seller is a state company.

The trend is one of further consolidation of PS markets in the near future. Raw materials will continue to weigh heavily on prices until supply and demand are balanced.


 PET expects to pick up in warm weather

Copyright: Rex Features

Latin American PET – Looking to Asia for direction
Polyethylene terephthalate (PET) participants in Latin America are monitoring resin and feedstock prices in Asian and US markets in efforts to project direction for the fourth quarter, according to input from regional sources.

Participants note that Latin American markets usually lag Asian developments by several weeks, with direction in Asia and Latin America pointing to weaker pricing into year-end. In October, PET prices in Latin America are already weakening, tracking developments in Asia.

Although Latin American countries do not react to global market forces in exactly the same way or at the same time, there is a commonality in the region’s response to dynamics in other regions, particularly in Asia. However, despite the focus on Asia to gauge regional trends in the Americas, local factors also play a role in Latin American markets.

PET producer Mexico usually follows the neighbouring US market closely. Brazil and Argentina, also PET-producing countries, are closely aligned with each other and show some independence from other external markets, although eventually they also trend in line with Asia. Even in these Latin American countries, which are less directly exposed to dynamics from Asia because domestic production dampens the volatility in global markets, PET prices have been weakening, although more gradually.

Countries on the Pacific coast of South America are influenced more immediately by Asian PET markets because resin consumers rely completely on imports to fulfil requirements.

Demand varies depending on hemisphere, with North America including Mexico now leaving the peak soft-drink season at the beginning of autumn, while in South America, particularly in Argentina and Brazil, the high season is starting as warmer weather sets in.

PET demand in Latin America has generally been described as more sluggish than expected throughout 2012 and 2013, even for the peak soft-drink seasons. However, industry sources said that PET markets may be perceived as soft simply because there is global PET overcapacity, while in fact resin demand is rising.

New PET capacities are projected to come on stream in the Americas in the next few years. In Brazil, Petroquimica Suape’s new plant will have a capacity of 240,000 tonnes/year of polyester fibre and 450,000 tonnes/year of bottle-grade resin, with production slated to begin by early next year. In the US, Mossi & Ghisolfi (M&G) will be building a 1m tonne/year PET plant in Corpus Christi, Texas, for start-up in 2016. Indorama is expanding PET capacity in the US by 400,000 tonnes/year in Decatur, Alabama.

Regional sources pointed to several possibilities for softer than expected demand, such as reduced purchasing power, lower soft drink consumption because of health concerns, reuse of PET bottles, weak regional economies, slowing growth rates in China, greater use of recycled PET and soft polyester fibre business.

Several other factors around the world are also contributing to downward pressure on PET resin in the Americas, as well as globally. Participants point to plentiful supply of resin for the fibre and bottle markets, globally soft demand for textiles and bottled soft drinks, slowing growth in China, the eurozone economic crisis and satisfactory cotton crops which could otherwise require polyester resin as a substitute in yarn production.

PET was offered in early October 2013 at $1,460/tonne (€1,082/tonne) CFR (cost and freight) Pacific coast of South America. In early May 2013, PET was at $1,500/tonne CFR Pacific coast of South America.


STEADY BUT NOT SPECTACULAR DEMAND CHARACTERISES PVC MARKETS
 

 PVC demand in Brazil is strengthening on construction activity

Copyright: Rex Features

Industry participants are projecting steady polyvinyl chloride (PVC) domestic markets in Latin America for the near future, on balanced fundamentals. Major changes are not expected in Latin America through the end of 2013, according to sources, but market dynamics in Latin America will track markets in the US and Asia.

PVC demand is likely to decline in December as participants through the production chain shave inventories to reduce tax exposure.

Buying interest in Latin American markets should increase in the first weeks of 2014 as consumers purchase resin to balance depleted stocks. Business should then drop again, as the population in South America focuses on Carnival holidays on 28 February-4 March.

Commercial activity in Brazil, the major economy in South America, will decline significantly for Carnival. Business in Brazil should rise gradually through the remainder of the first half of 2014, and then improve notably the second half of the year on seasonality.

Early this year, the PVC industry in Brazil faced major challenges. Participants throughout the production chain in Brazil were caught with particularly low stocks in early 2013 because of the power outage in late October 2012. The blackout resulted in continuing technical issues which led to a maintenance shutdown at Braskem’s PVC plant in Camacari in late November 2012. Inventories in the country finally came into balance with demand during the second quarter of 2013.

PVC participants in Latin America monitor resin and feedstock prices in Asian and US markets in efforts to project direction for the region. Participants note that Latin American markets usually lag Asian developments by several weeks. Pricing direction in Latin America for the near future is less than clear, as much depends on developments in other regions.

Although Latin American countries do not react to global market forces in exactly the same way or at the same time, there is a commonality in the region’s response to dynamics in other regions, particularly in the US and Asia.

However, despite the focus on distant markets to gauge regional trends in the Americas, local factors also have a role in Latin American markets.

Although Mexico is a PVC producer, Mexican, Central American and Caribbean PVC markets usually track the US market closely because of geographical proximity. Brazil and Argentina, each a PVC producer, are closely aligned with each other and show some independence from other external markets, although they also follow developments in Asia and the US. Countries on the Pacific coast of South America which rely totally on resin imports to fulfil requirements are influenced more immediately by US and Asian PVC markets.

Latin America has been a target for US PVC suppliers who continue looking for export sales. US domestic demand remains soft amid the gradual and irregular recovery of the construction sector and the economy in the US, while US exports are suffering from slowing growth in China, from a weakening market in India and from the eurozone woes.

Colombia and Mexico also export resin. Colombia usually exports to Brazil and the rest of South America. Mexico targets exports to Asia, particularly China and India, as well as to Europe, and especially Turkey. PVC exports from Mexico to Europe and Asia are facing similar challenges as exports from the US.

Venezuela’s PVC manufacturer Pequiven has been having unspecified technical issues and is importing PVC to supplement domestic production. However, PVC supply is said to be extremely tight and no immediate solution is noted.

PVC demand in Latin America has been steady but not spectacular, according to regional sources. Industry participants in Mexico said the government has approved public works projects and demand could rise significantly as a result. However, local sources are expecting a sluggish start to these projects as red tape usually slows government initiatives.

Demand in Brazil has picked up in the second half of 2013 on seasonality after a weak first half, sources said. Activity is projected to continue improving on increasing construction for the soccer World Cup in 2014 and the Summer Olympics in 2016 to be held in Brazil.

In Argentina, business is moderate because of restrictions on imports of raw materials, capital goods, equipment and replacements, as well as on the availability of foreign currency to pay for the imports.

In late September, pipe-grade PVC domestic prices in Mexico were assessed at $1,070-1,120/tonne (€793-830/tonne) DEL and in Colombia at $1,250/tonne DEL. Import prices for pipe-grade PVC in South America were gauged at $1,050-1,100/tonne CFR Pacific coast of South America.


Author: George Martin Ron Coifman



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