Latin America PE, PP face pressure

Source: ECN

2018/12/13

Latin American polyethylene (PE) prices are headed down, under pressure from lower crude oil prices worldwide and long supply in the US Gulf, where production capacity has increased in 2018. Polypropylene is also weakening in most of Latin America but holding steady in Mexico.

Another important factor has been the impact of a strong US dollar in local currencies. This has been more noticeable in Argentina, where the local currency has had a strong devaluation in 2018. However, a strong dollar has affected many other Latin American nations as well.

In Mexico, the main problem has been the proliferation of offers from US PE producers. With all export channels for trade between the two countries firmly established by years of commerce under the North American Free Trade Agreement (NAFTA), Mexico has long been a preferred destination for US PE exports.

Mexico’s own PE production has increased in the last three years, since the Ethylene XXI complex came on line, and this year in particular, because Pemex is importing ethane to reactivate its own PE production.

The result has been oversupply of PE plastic resins in Mexico, causing prices to gradually decline.Pemex, the state-owned PE producer in Mexico, increased prices of all grades in November by 2.5% on low inventories, but has given 3% discounts in early December, effectively erasing the November increases. Another domestic producer indicated that prices could decline by about 3 cents/lb ($66/tonne) in December.

Latam PEPP

Competition from US imports remains strong with high inventories in the US Gulf, and a strong drive by US suppliers to increase sales volume.

Railroad congestion has eased in the country and weather concerns have dissipated. Deliveries are now normal and there are no logistics problems in the country.

Pemex production has grown to about 35,000 tonnes/month for PE with the new ethane provision from Vitol.

Ethane is first destined to ethylene oxide (EO) and ethylene glycols (EG) in Mexico, and the rest to PE plants.

The Morelos swing plant, currently used only for linear low density PE (LLDPE) production, stopped on 28 November for scheduled maintenance and will be down for 30 days, according to Pemex sources.

In the Cangrejera complex, (LDPE), production is up, with two out of three trains operating normally. This is the new reality for this plant.

High density PE (HDPE) production is normal at the Asahi and Mitsui plants, with all four trains in operation.

In Brazil, Braskem has been busy reducing PE prices in November and again in December to keep imports out of the country.

In Argentina, high inflation (48% in 2018) and high interest rates (more than 60%) have put a damper on demand for plastic resins, but prices have not declined by much. Dow has been less prone to lower prices than Braskem, taking advantage of its position as the sole domestic producer.

Both countries have high tariffs protecting their plastic resin producers, but Braskem, also a monopoly, has been more responsive to external price pressures.

Logistics play a big role in the availability of product for South America. Changes in the shipping industry have reduced the available ships in that route.

Most countries in the Pacific coast of South America have seen PE import prices come at increasingly low levels.

For the most part, countries such as Colombia, Ecuador, Peru and Chile have low or no import tariffs for PE.

This has increased pressure on regional producers, which are striving to keep market share.

There are initiatives by US producers to increase PE prices in January or February, but it is not clear what will change in 2019 to support those initiatives. The US-China trade war has changed product flows in the world, but trade volume has not changed by much, at least for PE. The decline of LDPE prices in Latin America is accelerating at the end of the year, even in protected markets such as Argentina and Brazil.

Latin America PP markets are weakening in December, with lower feedstock propylene prices and competitive offers from Asia and the Middle East. However, prices are holding in Mexico.

After a 10 cent/lb decline in November propylene contracts in the US Gulf, prices could still decline further in December, but not by as much. Lower prices in Asia are adding pressure to regional prices, with offers for late December and January arrival heard at competitive levels.

In Argentina, the decline in propylene prices has resulted in a $50/tonne price reduction for all grades of PP in December. Demand remains down. There is diminished activity in most of the PP segments and collecting payment from clients is now more difficult.

Prices are steadier in Argentina after the dollarisation of the pricing system for polymers, but demand remains negatively affected by the downturn in the economy.

Local players do not see a recovery in the short term, particularly because high interest rates are discouraging credit sales.

The local producer is seeking to export more, but there is a new tax on imports in addition to the removal of export incentives.

In Brazil, Braskem reduced PP prices for a second consecutive month in December. The reduction is Brazilian reais (R) 400/tonne, with PIS/COFINS taxes.

November prices for all grades of PP had already been reduced by R200/tonne. The mentioned taxes add about 10% to the price. Braskem export prices are also going down to meet competition in regional markets.

In Chile, PP prospects remain bearish for December, with competitive offers from Vietnam, the Middle East and India.

Domestic prices for December are in the range of $1,300-1,350/tonne and could go lower before the end of the month.

INCREASED OFFERS

In Peru, increased offers of material from Asia are encouraging buyers to expect lower prices ahead based on ample supply and lower feedstock prices.

Regional PP producers are lowering prices to compete with cheaper imports, and levels have dropped to about $1,350/tonne CFR (cost and freight) Peru main port. In Colombia, lower prices in Asia and Europe are producing lower offers. Regional producers are lowering prices, responding to lower offers of Asia-origin material offered by traders.

In Mexico, PP prospects for December are bearish with growing inventories in the US and a lower settlement of propylene contract prices in the US Gulf.

Crude oil prices are adding bearishness to the market, but prices in Mexico have shown some staying power. Producer Indelpro is still not lowering PP prices for December, citing low inventories.

But if propylene contracts in the US Gulf decline again this month, the current policy will be hard to maintain. Another important factor is seasonal. December is notoriously bad for sales because it has fewer workdays. Additionally, many buyers seek to end the year with low inventories. The downtrend is making buyers wait until they are sure prices have bottomed, contributing to lower demand.

Looking forward to January and February, PP import arrivals in Latin America are expected to be around $1,250/tonne or lower. Supply is expected to be normal for the region in the short term.

Demand is more problematic. In the logistics realm, players contend availability of ships in Latin America has declined, adding another bearish element to the situation.