INSIGHT: Argentina’s chemicals, manufacturing could be collateral victims of liberalization push
Jonathan Lopez
24-Jan-2025
SAO PAULO (ICIS)–Argentina’s cabinet drive to shift the economy from staunch protectionism into liberal bastion is increasing fears among chemicals and wider manufacturing players that the country’s beleaguered industrial fabric is yet to suffer further losses in output in coming years.
As production costs in Argentina remain higher than in key manufacturing hubs such as China and the US, industrialists fear the country’s battle against inflation – the number one priority of Javier Milei’s administration – is to increase liberalizing measures that could hurt domestic industrial producers.
This week, Argentina’s largest industrial trade group, the UIA, called on the government to make use of antidumping duties (ADDs) to protect the country’s manufacturers against unfair competition.
The call for an increased use of ADDs comes as the cabinet lowers import taxes, so cheaper production from abroad can make its way to Argentina and, ultimately, lower prices for consumers: winning the battle against inflation will mark Milei’s term, and he is decided to win that battle, at any cost.
Consumers may end up being winners in the equation, rightly so after the country’s crisis pushed more than 50% of Argentinians into poverty, according to official figures. But where there are winners, there are losers and, increasingly, chemicals and manufacturing players fear they will on that side of the equation.
CHEAP IMPORTS, POTENTIAL PLANT
SHUTDOWNS
Macroeconomically,
Argentina has turned a corner, and consumers
are starting to buy into the recovery
narrative.
This week, the country’s statistics office Indec said output rose in November, both year on year and month on month, although the petrochemicals-intensive manufacturing and construction continued contracting.
Moreover, two much-followed indicators compiled by Buenos Aires’ University Torcuato Luca di Tena showed positive trends: consumer confidence is up and, most importantly, its so-called Leading Indicator compiling ten different economic data sources, was showing the economy had entered an “expansionary phase” in the last quarter of 2024.
The annual rate of inflation has more than halved in the past twelve months, standing at nearly 118% in December but down from its peak at nearly 300% in mid-2024.
The state posted fiscal surpluses in some months of 2024, something unheard of in Argentina for decades, and squeezed consumers are holding off showing their pain in the streets, a well-established tradition in the country. So far, the majority still buys Milei’s disruptive narrative, aware the previous corruption-prone, protectionist system was unsustainable.
The overall upbeat mood has made some in the chemicals industry hopeful that sooner rather than later they will also ride the recovery wave.
Others, however, are turning increasingly pessimistic about a liberalized economy in which smaller chemicals players will have it very difficult to survive the current global oversupply.
In an interview with ICIS this week, Manuel Diaz, the director general at Buenos Aires-headquartered trade group the Latin American Petrochemical and Chemical Association (APLA) and an Argentinian national himself, said the country’s progress in bringing down both inflation and the fiscal deficit has been remarkable.
He conceded, however, many chemical companies in the country are now analyzing their outlook as the new liberalizing policies are to force them to adapt to global competition, which was not a factor in the previous protectionist system.
There have already been some plant closures. At the end of 2024, US chemicals major Dow, who is the sole producer of polyethylene (PE) in Argentina, shut its polyols plant in San Lorenzo, citing global competitiveness issues.
Local producer Rio Tercero’s shut its toluene di-isocyanate (TDI) plant in Cordoba arguing the same.
APLA’s Diaz said there could be other plant closures in coming quarters, but they would affect small facilities which are uncompetitive in the global market, but he remained confident about larger facilities, which should weather the storm and come out on the other side still functioning and profitable.
“Overall economic expectations are turning positive. In chemicals, the plant closures we have seen in Argentina is something we can also see in other markets, such as Europe. But in Argentina’s case, I think more plant closures will be contained to small facilities whose global competitiveness is difficult with higher production costs,” said Diaz.
“In general, companies will try to accommodate a new reality, and I am confident many will be able to do that. Moreover, let’s look ahead: with crude and gas output from the Vaca Muerta fields expected to increase, there is a big potential for chemicals. Also for some fertilizers such as urea.”
Diaz’s optimistic assessment is not shared by all other chemicals and wider manufacturing players.
In its call this week for a larger use of ADDs to protect domestic production, industrial trade group UIA highlighted how small- and medium-sized enterprises (SMEs) would need extra protection from global markets if they are to keep their activity.
Some of those SMEs would be the small chemicals plants Diaz was referring to.
According to the UIA, Argentina currently has 94 ADDs in place, 50 of which are directed at products from China. Globally, Argentina occupies the sixth place in terms of ADDs in place, with 5.6% of the total.
The country is behind the US (21.5% of the total), India (14.3%), Brazil (7.1%), Turkey (5.9%), and China (5.7%). Meanwhile, a third of total ADDs in the world are directed at China, according to the UIA figures.
The 94 ADDs in place in Argentina are still a reminiscence of the previous protectionist system: Milei’s intended plans to turn the economy around will be a years-long process. If the President succeeds, it would amount to a “regime change” economically, said metaphorically an economist at Buenos Aires-headquartered Fundacion Capital in an interview with ICIS last year.
While the UIA praised changes passed this week by the cabinet simplifying the ADDs application procedures for companies, it also said that without them many companies may go out of business in the current global oversupplied markets for industrial goods.
“These tools are essential to combat unfair competition. The impact of these measures is crucial for local SMEs, which face significant challenges, including one of the highest tax burdens in the world, high logistics costs, and difficulties in accessing competitive financing,” said the UIA.
“In contrast, products imported from certain countries reach the local market with falsified prices, subsidized at their origin, and with lower labor costs. This situation generates unfair competition that threatens the sustainability of the national industry.
“In developed economies such as the US and the EU, these tools have proven effective in protecting local investment and employment.”
BUCKING THE TREND
The
2020s will be remembered by chemicals players
as a time of global oversupply which plunged
the industry into a years-long downturn. And
China will be at the center of those memories,
as the country turned from chemicals importer
to net exporter – and doing so with distorted
trade practices which helped it dampen its
excess product abroad.
For a couple of years now, Latin America has been at the centre of this global oversupply. The region’s chemicals production can only cover around 50% of its demand, so Latin America’s trade deficit in chemicals makes the region a ‘price taker’ at the mercy of global markets.
A prime target, therefore, for Chinese state-controlled, heavily subsidized chemicals producers.
The region’s two largest economies, Brazil and Mexico, are large users of ADDs to protect their domestic industries. As observed in the UIA data on ADDs, Brazil is the third country globally with most ADDs in place (7.1%) but Mexico also featured high on the list, in ninth place with 3.8% of the total.
The EU and Canada were in seventh and eighth place, with 5.5% and 4.9% of the total, respectively.
Amid a rise in protectionism best reflected by the return of Donald Trump to the US presidency, Argentina is bucking the trend aiming to be the champion of liberal policies. The country tried something similar in the 1990s under Carlos Menem’s presidency, an experiment which did not end up well.
The current push for liberalization has so far come with a key factor which did not happen in the 1990s: public sector spending is sharply down as Milei aims to trim down the size of state. That was a key factor in 2024 to dampen demand.
It remains to be seen whether a more liberalized economy set to be based in services will leave any room for some industry to thrive in Argentina. Chemicals-wise, the country has the advantage of feedstock, but the full benefits of Vaca Muerta will take some years to bear fruit.
In the interregnum, many chemical sources fear they may go out of business permanently.
Sources who deal with cabinet officials have said to ICIS that when the officials are pushed on how local manufacturing production may suffer under liberalization measures, their response is always the same: in a free market, those who cannot compete should not be in the market.
This week, Milei said he would withdraw Argentina from the free trade bloc Mercosur with Bolivia, Brazil, Paraguay, and Urugay if that was a necessary condition to sign a free trade deal with the US. Milei is Latin America’s most staunch supporter of President Trump, although economically their agendas diverge greatly.
Milei has in the past referred to Mercosur’s trading rules as having “become a prison” which dwarfs competition.
This week, asked in an interview with Bloomberg if he would be willing to leave the bloc, he said: “If that was the extreme condition [to sign other trade deals], yes. There are, however, mechanisms by which it can be done being within Mercosur. So, we say it can be achieved without having to abandon what we have in terms of Mercosur.”
Mercosur and the 27-country EU signed in December a free trade agreement after more than 20 years in the making which would create a 700-million consumer free trade area. The deal, however, still has to be fully ratified after it sparked protests among some economic sectors, mostly in the EU, such as farmers.
The cabinet officials’ reasoning about uncompetitive companies going bust in a true free market leaves chemicals sources perplexed and disappointed, but after one year of Milei firmly installed in the Casa Rosada presidential palace, players are starting to assume they may need to change their business model – less production and more trading and/or distribution, for example – if their companies are to survive.
“In the next few years, Argentina’s economy will do very well, but not everyone will do well. Exports-wise, oil and gas, mining, or agriculture will boom. Those with stable jobs will be fine, merchants will be fine, importers will be fine, but clearly industrialists will not be fine,” said a chemicals source in Buenos Aires this week.
“Industrialists will suffer because the Argentine government has not yet lowered any of the production costs, be it taxes or costs of the corporatist inefficiency that exists in Argentina, and that makes it difficult for them to compete against imported products that are so cheap.
“In other words, I think that industry will suffer in coming years and destroy employment. But employment is not part of the conversation today: it’s all about inflation. Until employment is not part of public opinion’s concerns, the government believes it can ride the wave and win the next election. But, along the way, I fear industrial fabric is set to be lost.”
Insight by Jonathan Lopez
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