Market Outlook: US cost advantage hits Latin America

APLA ANNUAL MEETING IN CANCUN, MEXICO – NOV 2015

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North America enjoys a feedstock advantage over many Latin American peers Planet Observer/UIG/Rex Shutterstock

“It is going to be more difficult to build new projects based on local feedstock”

EDMUNDO PUENTES RUIZ

General manager, OXIQUIM; Vice president, APLA

The US has maintained its cost advantage against many Latin American producers, despite the decline in oil prices, the head of a Chilean distributor said on 24 July.

Outside of Mexico and Argentina, nearly all Latin American crackers rely on oil-based naphtha as a feedstock. The US, meanwhile, relies mostly on natural gas liquids (NGLs), giving it a cost advantage against much of Latin America and the rest of the world.

Naphtha-based producers received some cost relief from the recent drop in oil prices.

However, prices for US NGLs have also fallen, especially for propane and butane. The US has maintained its cost advantage.

“It is certainly a challenge,” said Edmundo Puentes Ruiz, general manager of Chilean distributor OXIQUIM. Puentes is also the vice-president of the Latin American Petrochemical Association (APLA).

He made his comments in an interview with ICIS. “It is going to be more difficult to build new projects based on local feedstock,” Puentes said.

The competitive advantage of the US over Latin American producers will discourage investment in the region, he said.

“We are going to face a market with fewer advantages, with a more difficult environment for our region.”

In particular, Chile has felt the effects of the cost advantage of the US.

Methanex once operated four methanol units in Punta Arenas, in the southern part of Chile. Chile has very limited feedstock for petrochemical plants. As a result, Methanex’s methanol plants relied on natural gas from Argentina.

Over the years, however, Argentina lost its surplus of natural gas and became a net importer. As a result, the country cut gas exports to Chile, causing Methanex to shut down some of the units.

SHALE GAS REVOLUTION

Meanwhile, the advent of shale gas caused US prices for natural gas to fall sharply. As a result, Methanex decided to move two of its four methanol units from Chile to Geismar, Louisiana, in the US.

The first unit began production early this year. The second one could start operations next year.

Currently, Argentina is exporting some methane to Chile, so it can produce methanol and send it back to Argentina, Puentes said.

“The expectation is that we will have some availability to maintain at least one or maybe two of the production lines that Methanex has in Punta Arenas,” he said.

In all, Latin America will continue to have a petrochemical deficit, Puentes said.

This should be partially offset by the start-up of the Ethylene XXI project in Mexico later this year.

The project is being developed by a joint venture set up by Braskem and Grupo Idesa. Critically, the project’s ethane will be supplied through a 20-year long-term contract with Pemex, based on Mont Belvieu reference prices.

Mont Belvieu is in Texas, and is the US hub for natural gas liquids (NGLs). Because Ethylene XXI’s ethane will be referenced on Mont Belvieu prices, the Mexican project will also benefit from the US feedstock advantage.

Ethylene XXI will have a 1.05m tonne/year ethane cracker, two high density polyethylene (HDPE) units of 400,000 tonnes/year and 350,000 tonnes/year, and a 300,000 tonne/year low density PE (LDPE) unit.

ETHYLENE XXI PE DISTRIBUTION

Mexico is likely to consume most of the PE produced by Ethylene XXI. However, some could still be available to outside markets. As such, the project should be a benefit for the region, since it will provide Latin America with another source of PE, Puentes said.

Ethylene XXI, however, will not end Latin America’s PE deficit. In fact, even Mexico’s is likely to persist.

“I think that our region will have to face the reality that we have to sustain economic growth,” Puentes said. It will need to promote competitiveness and innovation, he added. “We will have to invest in projects to reduce the cost of energy and get feedstock.”

Companies are already responding to the US cost advantage by considering projects that would use their own low-cost feedstock.

Brazil-based Braskem plans to double the capacity of its gas cracker at Duque de Caxias in Rio de Janeiro state. The project will raise the cracker’s capacity to more than 1m tonnes/year of ethylene.

Bolivia’s state energy company YPFB may build an integrated PE complex that will rely on ethane as a feedstock.

YPFB may also carry out a study to explore the possibility of building a petrochemical plant on Peru’s southern coast.

Braskem and state-run Petroperu have been carrying out studies into the technical and economic viability of a 1.2m tonne/year ethylene/PE plant that would use the ethane content of natural gas from the Camisea gas fields in northern Peru.

SUSTAINABILITY VERSUS GROWTH

The chemical industry is weighing increasing demands for sustainability against incurring additional costs at a time of slower growth, said Puentes, adding that increasingly, customers are becoming more sensitive about sustainability – a permanent trend that will continue.

Companies, however, are trying to satisfy customer demand for sustainability at a time of slower economic growth. The International Monetary Fund (IMF) expects the economy of Latin America and the Caribbean to grow by just 0.5% in 2015.

Brazil, the region’s largest economy, is expected to fall into a deep recession this year, with GDP shrinking by 2%.

“It makes it more difficult for leading companies in the market to go ahead and develop more sustainable operations,” Puentes said. In times of slow growth, the tendency is to focus on costs.

Outside forces, however, may counter that tendency. Governments are responding to pressure and adopting stricter regulations, Puentes said. “Society is demanding safer and better behaviour from companies. The government is reflecting that.”

These trends do not have to represent costs to the chemical industry. They can also represent opportunities, Puentes said.

Consumer demand for safer and more environmentally friendly products can increase demand for new materials, he said.

“I think the chemical industry should benefit from sustainability,” Puentes said. “It should be a driver for innovation.”

For its part, the chemical industry is responding to demand from consumers. Chile’s chemistry trade group, Asiquim, has worked hard to introduce a responsible-care programme, Puentes said. Chile’s chemical industry is now trying to expand this programme to other sectors.

OXIQUIM is no exception to this trend. “We are investing in logistics capability, which is very important, especially in our country, which is far from a lot of raw-material sources,” Puentes said. Investments include tank farms and warehousing as well as storage capacity.

Other improvements will target safer handling of products and offering even more technical assistance to customers, he said.