OUTLOOK ’19: LatAm PE oversupply to continue

HOUSTON (ICIS)–Polyethylene (PE) markets in Latin America will continue to experience high supply in 2019, even when production capacity has not increased in the area and will not increase in the short term.

The proliferation of ethylene and PE projects in the US Gulf has removed incentives to increase PE capacity in Latin America, and has virtually killed many existing projects because the economics do not support such an investment.

Take, for instance, the Brazilian Comperj project: It started many years ago as a naphtha-based project. US shale gas produced cheap sources of ethane and the promise of competitive ethylene costs. Comperj was then redesigned to be a gas-based project, which, in the end, never came off the ground.

The same happened to projects in Venezuela, where local economic problems made circumstances even more challenging. All of these Latin American projects have one thing in common: They could no longer compete with US shale gas costs.

The Ethylene XXI project in Mexico, on line since April 2016, had one main advantage: The final investment decision (FID) came before the new projects in the US materialised, and by virtue of being there first, the project gained its space in the market.

However, the new production in Mexico, coupled with new US production, has produced oversupply in the local market and prices have eroded throughout 2018 and will continue to be under pressure in 2019, when new US plants will still be coming on line.

There will not be new production in Latin America for a few more years. The only country that is getting a better chance of increasing ethylene supply is Argentina, where Dow Chemical and state-owned YPF have joined forces to generate gas in the Vaca Muerta play to make possible the eventual construction of a new cracker and perhaps expansion of the existing PE plants.

Even with availability of raw materials, Latin America has another problem: lack of a large consumer market. With the exception of Brazil and Mexico, most other countries would need additional demand to justify investment in new plants. The oversupply in the US is filling the needs of net buyer countries in the region such as Chile, Peru, Ecuador, Paraguay, Bolivia and Uruguay.

With the overflow of US products, Latin America PE markets are balanced. Prices have fallen in most countries, and the decline is happening even in markets that are protected by high tariffs, as is the case of Brazil and Argentina. The price decline is more evident in countries that have no domestic production, and as such, no import tariffs.

What can change between now and the first months of 2019? Supply is expected to increase in the US Gulf and demand in Latin America will only increase with economic or demographic gains, very slowly. There are a few increase initiatives talked in the PE market for 2019, but they appear to be based on producers’ desire to improve margins more than on market fundamentals.

Latin America’s demand is still uncertain because the two largest markets, Brazil and Mexico, have new governments and their agendas are still undefined. Argentina’s demand has declined sharply, with currency devaluations and inflation of nearly 50% per year. Credit has declined with high interest rates, further depressing demand.

There is uncertainty in crude oil markets, and the global economies are showing vulnerabilities and a potential for increased conflicts worldwide. The US-China trade war is contributing to short-term uncertainty, and after the 2008 financial crisis, the world appears overdue for the next downturn.

Product from Asia and the Middle East is also showing up in the American continent, compounding the oversupply. The hurricane season is over in North America, suggesting that at least that frequent problem will not play a part in early 2019.

Polyethylene prices are headed down in Latin America. The graph shows LDPE prices falling in the region, with more to come in 2019.

Focus article by George Martin

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