Brazil’s PE market shifts from import to export as recession bites

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Brazil PE Apr164 years ago, Brazil’s polyethylene market flagged up the first warning signs that its GDP was hitting headwinds, as China’s stimulus programme begin to slow.  Today, sadly, the economy is in major recesssion, with the impeachment process against President Rousseff adding further pressure:

  • World Bank data shows GDP fell 3.7% last year: it forecasts “only” a 2.5% fall in 2016, but this looks optimistic
  • The impeachment process is intensely bitter, with Rousseff in New York today to denounce what she calls “a coup d’état without weapons” at the United Nations
  • Whatever happens, it is hard to see a quick return to normal, where all sides agree to work together
  • And all this is taking place just before Brazil becomes the first LatAm country to host the Olympics in August

I saw the problems at first hand last December, when giving a keynote presentation at the 20th Annual Meeting of Brazil’s chemical industry association.  The industry itself is run by people with plenty of energy and vision.  But they are let down by a weak and seemingly corrupt political leadership, that blocks progress.

Now, of course, Brazil’s problems are starting to impact the wider world.  As I noted last week, Brazil’s domestic car market is in crisis, with sales down 44% in Q1 versus 2013.  As a result, auto manufacturers are starting to ramp up their exports, which grew 24% versus 2015, and accounted for 1 in 6 of all cars made in Brazil.

Polyethylene (PE) is following the same pattern, as the chart shows:

  • Brazil used to be a net importer of PE, but Q1 saw net exports of 60kt versus net imports of 60kt in 2015
  • Imports from the Middle East, plus NE and SE Asia, virtually disappeared; even NAFTA imports fell 16%
  • Instead, Brazil’s own exports to Latin America jumped 49%, and rose 35% to China

This would be bad enough in terms of regional impact.  But, of course, there is a much bigger impact just around the corner.  This month has seen the start-up of 1.05 million tonnes of new PE capacity in Mexico from the Ethylene XX1 JV between Brazil’s Braskem and Mexico’s Idesa.  This volume will have attractive economics, being based on advantaged cost ethane from Pemex.

As ICIS news reported, sales will be focused on both the domestic Mexican market and internationally.  Inevitably, therefore, it will displace more exports from the US – just ahead of the vast expansions due to start up next year.  Its production will also boost downstream output from local convertors, adding to pressure in these markets.

It is hard to see how all these new volumes can be accommodated without a major price war taking place.  And whilst the war will start in Latin America, it must inevitably spread to other regions.  Those companies which have lost their sales to Brazil, are already fighting to gain market share elsewhere in order to maintain their volumes.

The only solution, as we discuss in ‘Demand – the New Direction for Profit’, is for producers to invest in new business development.  Areas such as water and food could potentially absorb major new volumes, if the effort was made to understand their currently unmet needs.

Common sense says this needs to be the top item on every CEO and business manager’s agenda.  There really is no “business as usual” option, given the tsunami of product that is about to appear.  And the the Losers in any price war will almost inevitably go bankrupt.

scenario-study-iec-horiz

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