OUTLOOK ’18: US PE oversupply could have mixed impact in Latin America

HOUSTON (ICIS)–New polyethylene (PE) production coming online in the US Gulf in the first quarter of 2018 could bring oversupply of product in Latin America, but the impact on each country will be different, considering that the regional economies are on different stages of development and have different import tariffs.

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The impact on Mexico will be immediate because this country is already the largest trading partner for the US in PE, and there is an infrastructure in place for such trade. Domestic production has increased in Mexico since the coming online of Braskem Idesa in early 2016, adding more than 1m tonnes/year of PE to the market.

However, the production of Mexico’s Pemex has declined since Braskem Idesa started, because Pemex does not have enough ethane left for its own crackers after satisfying its supply contract with Braskem Idesa. This may be a temporary obstacle since Pemex is considering the possibility of importing ethane from the US Gulf in 2018. Although Mexico represents a good netback for US PE producers, the available market has shrunk considerably after the start of Braskem Idesa.

The North America Free Trade Agreement (NAFTA) could throw a curve to the polymers situation in Mexico if negotiations fail to produce agreement. The fear is that lack of agreement could end in termination of the deal. If that happens, Mexico will have to look for viable suppliers of feedstock and resins and the cost structure will change. On the other side, termination of the agreement would be harmful to the US petrochemical business because the US has a trade surplus with Mexico in this sector.

Many importing countries in Latin America such as Colombia, Ecuador, Peru and Chile will welcome the new production from the US Gulf, if it arrives at competitive prices. Those countries receive material also from the Middle East and Asia, and sporadically from Europe. Prices will determine what volumes win entry.

Meanwhile, there are countries such as Brazil, Argentina and Venezuela that have domestic production but have room for some imported volumes. These countries are protected by high import tariffs – of 14% or more – that make imports noncompetitive. US material may not have much entry to these countries unless import tariffs are reduced or eliminated – an unlikely proposition.

In the case of Venezuela, the chances get even smaller considering the dire situation of that country and their conflicting relationship with the US. Production in Venezuela has gradually declined for a number of undisclosed reasons that vary from feedstock shortages to lack of spare parts for plant equipment. For as long as crude oil prices remain below $60/bbl, it is unlikely that Venezuela can revert its polymer production decline.

The implied message is that with such an abundance of material aimed at the region, pricing will play a big role on PE purchase decisions. The US domestic market will face this oversupply situation first, because the domestic market is the most important prize for the new volumes.

Latin America buyers expect lower PE prices in 2018. They will likely embrace suppliers primarily with low costs in mind, in addition to other considerations. The region has had few alternatives for quite a long time. New US PE supply in 2018 has the potential to change that. However, expectations of a drastic PE price decline as early as January 2018 could be unrealistic.

Producers of Latin America PE include Braskem Idesa and Pemex in Mexico, Dow Chemical in Argentina, Braskem in Brazil, Ecopetrol in Colombia, as well as Pequiven in Venezuela.