APLA: Volatile markets hit producers

Commodity polymer markets in Latin America are suffering from shortness in supply and the impacts of slow growth in global markets

Low polyolefins supply and high prices are creating a volatile mix for depressed economies in Latin America. A year ago ICIS commented that polyolefins demand continued to grow in Latin America, a market of roughly 600m people, but that supply of raw materials and local production of polyolefins was not growing accordingly.

In 2014 we have to add that production of low-density polyethylene (LDPE) has declined further with the permanent closure of a 46,000 tonne/year plant in Chile, coupled with the closure of Enap’s Talcahuano cracker with a nominal capacity of 60,000 tonnes/year.

Maintenance turnarounds have continued to erode effective production capacity in the region, and the only visible improvement in supply remains the Ethylene XXI project in Mexico, being built by Braskem Idesa (see page xx).

That project is being boosted by impeccable timing. With a start-up date in late 2015, production will hit the market ahead of a wave of ethylene crackers and polyethylene (PE) plants coming on line in the US, being built to take advantage of cheap natural gas – a consequence of increased shale gas production.

The diminished supply situation in Latin America has caused olefins and polyolefins prices to stay high this year, avoiding the peaks and valleys seen in previous years. Historically, olefin prices go up in January – because of cracker maintenance turnarounds – to decline and hit a low by mid-year.

Then prices start to go up gradually until the December lull brings prices down again because of diminished market activity and tax policies that penalise inventories.

Last year did not have much of a dip in December and prices continued to go up in January 2014. Since then, we have seen significant erosion only on propylene prices. Ethylene prices have remained high, keeping PE prices from falling, as expected by most market observers.

Tight supply has also been a factor in keeping PE prices up in the region. Prices in the US Gulf – considered to be the regional benchmark for Latin America – have stayed at high levels, even when that prevented more buying from Latin America.

Volumes from South Korea and the Middle East have filled the voids in the region, which has also received some European PE shipments from time to time.

The shortages of PP in the region have been modest, with producers such as Braskem, Indelpro and Propilco competing with Asian producers to place volumes in Central and South America, as well as the Caribbean.

But there has been another important factor weighing in the region’s demand for polyolefins. The wheels appear to have come off the economies in many regional countries, with a consequent impact on demand.

The World Cup did not provide the expected boost for polymers and the economy Copyright: Rex Features

Brazil has provided the largest surprise. As one of the so-called “BRIC” nations with high potential for development, Brazil has disappointed the economists that initially predicted an economic boom for this nation. The football World Cup, hosted this year in Brazil, never provided the boost for business and industry that most observers initially expected.

Since the end of the event, demand has experienced a slow recovery from the slump. The continued lull in demand has been attributed in great part to uncertainties about the presidential elections held in October, but a depressed economy that failed to grow at the expected rates has been the main factor.

Growth is expected at just 0.3% this year and about 1% in 2015, far below earlier expectations.

Large problems have surfaced also in Argentina, a country that is struggling to cope with its sovereign debt payments while still trying to attract investment for the Vaca Muerta shale gas formation in the Neuquen basin, largely seen as the only way out of substantial energy deficits that have a great impact on Argentina’s hard currency reserves.

The US dollar has gained considerable ground over the regional currencies, forcing upward price adjustments that exacerbate the problems of the regional economies.

Buyers have responded with a slowdown in purchases of plastic resins and they are more than ever looking for cheaper alternatives of any origin.

Countries with shale gas potential such as Argentina, Mexico and Brazil have a promise of cheaper raw materials in a not-so-distant future, but this production can be years away in most cases.

Argentina has the most advanced plans on shale gas with YPF active in many wells. The appropriation of YPF from Repsol has taken a positive turn as Argentina tries to show the world that these arbitrary actions are properly compensated.

The most evident problems are shortages of capital, technology and adequate legal frameworks to provide guarantees to investors willing to put money at risk in these countries.

Mexico has taken an important step by approving legislation to open its borders to foreign investment in exploration and production of natural resources, actions long forbidden by the Mexican Constitution.

Venezuela is another country with tremendous energy potential, but the shortages of hard currency are exposing the fact that current policies applied by the government are unsustainable.

With gasoline practically given away for a token price to all Venezuelans, the country cannot pay for the large number of products that the country needs to import to fill domestic demand and, as a result, the economy is coming to screeching halt.

POLYSTYRENE MARKETS TROUBLED
Polystyrene (PS) markets in Latin America have been affected by different circumstances. The shale gas explosion has had a negative impact on production of aromatics and this has affected the entire styrenics chain, starting with record values this year for feedstock benzene.

Regional supply of PS has been more than adequate, but higher prices in depressed economies have not been a good receipe for better sales. In Brazil, Unigel owns two PS plants but has been running only one most of the 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 made a bid to buy producer Innova from Petrobras, but the approval of the transaction has remained all year in the hands of regulators, defying early predictions of cursory approval of this transaction.

The trend is one of further consolidation of PS markets in the near future. Raw materials will continue to weigh heavily on prices.

PS markets are some of the slowest-growing markets for plastic resins in the world, with PS consumption shrinking by 0.2% in 2013 figures, according to the ICIS supply and demand database.