APLA: Where did the good times go?

Economies in Latin America have struggled in recent years since the commodity-led boom faded, impacting the chemical sector directly and via a downturn in its end-use markets

In Brazil, much has changed in the past four years. Back in 2010, the nation’s economy hit a growth spurt and closed the year with 7.5% GDP growth. The Brazilian real at one point traded at Real 1.65 to the US dollar and Petrobras raised $70bn in what was then the world’s largest share offering.

The football World Cup, still four years away, had raised the expectations for the country, both in terms of economic growth and in infrastructure improvements. The games were preceded a year earlier by protests from Brazilians upset that the country was spending so much on stadiums instead of public transportation, health care and roads. Then, Germany eliminated Brazil 7-1 in the World Cup.

Since its record public offering, Petrobras has been mired in scandal, with the former director of downstream operations facing charges of laundering public funds in relation to the construction of a refinery.

After growing by 7.5% in 2010, Brazil could end 2014 with almost negligible growth. It started the year with back-to-back quarters of shrinking GDP, meeting the general definition of a recession. The real has since weakened considerably against the US dollar, trading at Real2.42 in mid-October this year.

So what happened? The country had coasted on high resource prices and consumer credit, according to a report by Americas Market Intelligence, a market research firm that studies demand and the competitive environment of Latin American business.

The commodity boom that fuelled so much growth in Brazil and Latin America has played out. Brazilian consumers, meanwhile, are overspent, the report says.

The International Monetary Fund (IMF) has warned that global demand for commodities could further weaken − especially if investment slows faster than expected in China.

Moody’s Investors Services has noted other troubling trends. Business confidence in Brazil reached record lows in July and August of this year. Brazil has not seen such bad levels of confidence since the global financial crisis of 2008.

DECLINE IN SPENDING
Since the third quarter of 2013, spending on investments in Brazil has declined for four consecutive quarters, Moody’s says. Private consumption fell by 0.2% in the first quarter of 2014 and rose by just 0.3% in the second.

While the economy is struggling, inflation will still be close to the ceiling of 6.50% for 2014 and 2015, according to a survey conducted by the Brazilian Central Bank. This puts the bank in a bind. Normally, central banks lower interest rates to encourage growth. Lower rates, however, can drive inflation higher.

The bank, in fact, voted in September to keep the key Selic rate at 11.00% − even after the country had back-to-back shrinking quarters.

The slowdown is already affecting chemical producers. Earlier this year, Brazilian specialty chemicals producer Oxiteno reported that Q2 domestic specialty chemicals sales fell by 3% year on year because the company’s customers had begun destocking.

For styrenics producer Trinseo, an overall slowdown in Latin American automobile production partially offset gains made in the company’s engineered-polymers segment.

In Brazil, automobile production has fallen by 17-32% year on year for nearly every month of the year, according to the trade group Anfavea. The only exceptions were February, up 17%, and September, down 5%.

Rio carnival in full swing Copyright: Rex Features

It is against this backdrop that Brazilians had to choose their next president in the 26 October run-off elections. The elections were too late to be included in this article, but the candidates had outlined some of the policies their administrations would pursue.

Incumbent Dilma Rousseff said she would continue to encourage public banks to lend to key sectors of the country, such as public housing, public transportation and agriculture, according to media reports.

Challenger Aecio Neves would likely adopt more market-friendly economic policies. For example, he will likely remove government controls on diesel and gasoline prices, according to a May presentation made by Alexandre Chequer, a partner with Mayer Brown.

The price caps have proven costly for the state-owned energy producer, Petrobras. The company has to pay international prices for fuel and has to sell it in Brazil at a loss. The price caps also distort the nation’s ethanol market. The majority of Brazilian automobiles are flex-fuel, so they can use either ethanol or gasoline. Because gasoline prices are kept artificially low, drivers choose it over ethanol.

For Brazil overall, the next president will have much to address. Consultancy Deloitte notes that labour laws are rigid, productivity is low and generous public policies and high minimum wages contribute to high production costs.

Brazil is not the only country to see its prospects decline this year. Argentina is mired in a recession, according to the IMF. The IMF expects Argentina’s GDP to shrink by 1.7% in 2014 and by 1.5% in 2015, after growing by 2.9% in 2013.

In the nation’s automobile industry, production has been down by 20-30% each month for most of the year, according to the trade group Adefa.

The economic slowdown is not being helped by Argentina’s default earlier this year on bond payments. This older default happened after the country was unable to resolve a dispute with a group of hold-out creditors.

These creditors held debt dating back to Argentina’s earlier default in 2001. When Argentina offered to swap out these defaulted bonds with new ones, the hold outs refused and sued the country in a US court. The US judge ruled in favour of the hold outs. Under his ruling, Argentina could not pay its other creditors without first paying the hold out.

While Argentina could afford the payment, it still refused, thus triggering the new default. As long as the dispute persists, Argentina will rely mostly on its trade surplus to obtain US dollars. That trade surplus is being threatened by energy imports, leaving the country’s dollar reserves dangerously low.

Argentina needs those dollars to pay for energy imports. Its foreign reserves are already at $27.8bn as of the first part of October, according to the nation’s central bank. They were $30.6bn at the start of January, before the country devalued the peso.

To preserve dollars, the country has imposed severe foreign-exchange restrictions. These restrictions, however, are making it difficult for the country’s petrochemical industry to import needed feedstock and equipment.

The restrictions also threaten the development of Argentina’s substantial reserves of shale energy, which it needs to develop to reduce the ruinous imports of liquefied natural gas (LNG). Energy companies will need to import equipment to develop the reserves. Moreover, foreign energy companies will seek to repatriate profits they earn from any oil and natural gas production. The foreign-exchange restrictions will make this difficult.

SHALE GAS POTENTIAL

Kirchner has taken a hard line on bond defaults Copyright: Rex Features

If Argentina does successfully develop its shale-gas reserves, it could end the gas cutbacks that it imposes each winter on petrochemical companies and other industrial customers. It could also provide the feedstock for a new wave of plants.

Unlike much of the world, Argentina already cracks ethane. If it can increase supplies of natural gas liquids (NGLs), the country could achieve a cost advantage versus much of the world, which relies on oil-based naphtha as a feedstock.

Economic woes are not limited to Argentina. Among the major economies in Latin America, Venezuela’s is in the worst shape, according to the IMF. Its economy is expected to shrink by 3.0% in 2014 and by 1.0% in 2015.

Venezuela is also struggling to preserve its foreign reserves. As a result, it has adopted exceptionally tight foreign exchange controls, as demonstrated by its multi-tiered exchange rates. These restrictions have caused several automobile plants to shut down because they cannot obtain the dollars needed to import necessary parts.

Tight currency controls are making it difficult for downstream chemical consumers to purchase materials when Venezuela’s petrochemical plants suffer from production problems. Earlier this year, polystyrene (PS) inventories reached historic lows after the domestic producer had interrupted operations.

Polymer markets received another blow when the El Tablazo petrochemical complex shut down several plants because of a drought.

Other countries are also struggling with slow growth − although not recessions. Growth in Chile and Peru has slowed considerably, as reflected by IMF forecasts. The banks’ April forecast showed Chile growing by 3.6% this year and 4.1% in 2015. Its latest forecast is now 2.0% and 3.3%, respectively.

The bank’s current GDP growth forecast for Peru fell from 5.5% and 5.8% in April to the current 3.6% and 5.1%, for 2014 and 2015, respectively.

Colombia’s economy, though, remains resilient and the IMF expects GDP growth to continue to exceed 4% through 2015.

Mexico has recently adopted several energy and economic reforms that should begin taking root as the decade progresses. Growth in Mexico this year should be 2.4% and expand to 3.5% in 2015, the IMF says.

Going forward, the reforms’ potential effects on Mexico’s economy could be huge, says John Price, managing director of Americas Market Intelligence. Starting in 2015, the reforms could add 1.5 points to GDP growth, bringing it to 5% in 2016. In fact, Mexico could reap a full decade of above-average growth, Price believes.