INSIGHT: Trade war adds pressure on weakening Latin America PET

Author: Luly Stephens


HOUSTON (ICIS)--Tensions caused by the US-China tariffs war are affecting the Latin American polyethylene terephthalate (PET) markets by driving prices down at a time when the seasonal lull has already taken a toll.

Market fundamentals have been very slow across the Latin American region, with reduced spot buying interest and declining prices in several countries, particularly in those where imports are more frequently traded.

Diminished resin trade between the US and China is resulting in more availability of Chinese product at lower prices, particularly in non-producing countries in South America.

Additionally, prolonged tariffs issues could potentially lead to fewer cargoes between Asia and the US and consequently extra free cargo space, reducing freight costs for material shipped from Asia to Latin America earlier in the first quarter.

PET prices in Latin America are under pressure not only because of cheap imports, but also because of declining feedstock prices, oversupply and depressed economic conditions in the region.

The following graph shows how Asian PET prices have been trending down on the back of soft demand and declining feedstock prices. The situation has been exacerbated by expectations of further declines in feedstock paraxylene (PX) costs as additional capacity is coming online in China this year.

In Mexico, despite previous promising GDP projections of 2.5%, the country may be looking at a year of slower growth compared with last year, which is already noticed in slower-than-anticipated activity in the plastics segment.

Domestic demand for PET is weak, especially for the time of the year. Some sources believe that sales are actually lower than last month. Mexican PET product continues to enter the US as a means to compensate for sluggish domestic demand. Prices eroded in May as a result of the atypical lull, falling by 2 cents/lb ($44/tonne).

In Colombia, prices for bottle chips eroded due to diminished demand and influence from declining Chinese resin prices. Buyers see availability of Asian as well as Brazilian PET at competitive numbers.

Further price decreases are expected as Chinese offers for product delivered next month are at least $50/tonne below current prices for mid-May product.

No imports from Mexico emerged as the country appears to be exporting material mainly to the US.

Buying interest in countries along the Pacific coast of South America that have no domestic production of PET resin is slightly better than in the rest of South and Central America. Asian product for early June delivery is being offered at lower levels than in previous weeks.

Industry sources believe that prices of Asian offers will likely continue to decline.

The Argentina and Brazil resin markets are protected from the effect of cheaply priced imports due to the antidumping measures that have been in place.

In Argentina, resin sales remain low in line with the seasonal lull expected in the second quarter and a depressed economy in the country. Despite the downturn, PET resin prices for May are unchanged from April levels.

In Brazil, some market participants describe demand as sluggish, but acceptable citing similar levels as those seen in 2018 during the same time of the year. Others describe demand as somewhat worse due to the seasonal slowdown caused by the approach of winter.

May resin prices remain flat from April, although some participants are observing downward pressure due to the local economy and Asian PET price downtrend. The US-China tariffs war has created more uncertainties in the Brazilian resin market, pushing domestic resin prices in the local currency slightly up, but still unchanged in US dollars.

Market speculation suggests that oil prices could rise due to tensions created by the tariffs war, which would trigger hikes down the petrochemical chain all the way to resins.

The new expected 2019 GDP growth is projected at 1.45%, down from the previous 2.4% projection.

Issues in the polyvinyl chloride (PVC) sector could affect the PET market in Brazil.

Shortage of feedstock for PVC production has led the country's plastics association Abiplast to present a request to the Ministry of Economy to cease antidumping duties on PVC and PET, arguing that the country has alienated itself from the international market due to the heavy import duties currently imposed.

As a result, there is no close business relationship with any other large resin players in the world, and therefore, it will not be easy to receive feedstock supplies via imports, if needed.

Industry sources expect a response from the local government this week.

Prices for virgin PET resin in Latin America are at $1,400-1,750/tonne DEL (delivered).

Given the prolonged slowdown in the PET market, no quick recovery is foreseen any time soon.

With most local economies in Latin America struggling amid inflation and political issues that lead to uncertainties and instability coupled with tensions caused by the US-China tariffs war, resin prices are likely to decline further.

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PET resins can be broadly classified into bottle, fibre or film grade, named according to the downstream applications. Bottle grade resin is the most commonly traded form of PET resin and it is used in bottle and container packaging through blow molding and thermoforming. Fibre grade resin goes into making polyester fibre, while film grade resin is used in electrical and flexible packaging applications.

PET can be compounded with glass fibre for the production of engineering plastics.

DAK Americas, Indorama, Nan Ya Plastics Corporation and Far Eastern New Century (FENC) are PET producers in the Americas.