APLA: Slow growth hits markets

15 November 2013 13:04 Source:ICIS Chemical Business

Growth rates in Latin America’s major economies are struggling, as consumer confidence, overseas export opportunities and capital investment are all showing negative developments

Latin America’s petrochemical industry is facing numerous challenges, from trade deficits to competition from US exports and slower domestic growth. The International Monetary Fund (IMF) recently lowered its 2013 forecast for growth in Latin America and the Caribbean to 2.75% from an earlier forecast of 3.5%, issued in April.


 Rising costs and taxes are seeing widespread protests

Copyright: Rex Features

Several factors have dragged down the larger economies of Latin America. The IMF blames problems with infrastructure and policy tightening in some countries. Meanwhile, China has slowed down, ending the commodity boom that had benefited so much of Latin America. The IMF warns that slower growth outside the region could slow Latin America’s growth by half a percentage point through its effect on commodity prices and exports.

Growth rates, though, are uneven throughout the region, with the largest economies lagging those of the smaller ones along the Pacific coast: Chile, Peru and the host country for this year’s APLA conference, Colombia.

Petrochemical demand is tied closely to economic growth. But even if demand for petrochemicals were rising rapidly, it would have to be met by foreign producers, particularly those from the US, whose capacity will rise as companies there take advantage of the nation’s shale-gas boom and expand capacity.

Latin America is a natural market for US exports because of its proximity and because it already has a chemical trade deficit. Moreover, feedstock constraints are preventing most local producers from increasing capacity.

Among the projects that do have access to feedstock, Mexico’s Ethylene XXI complex should be completed in 2015. Bolivia has started construction on an ammonia and urea plant. A liquids separation plant has recently started production and construction has started on a second one in the southern part of the country. Meanwhile, Tecnimont is conducting a conceptual engineering study for an integrated polyethylene (PE) project in the country.

Growth in Latin America’s largest economy, Brazil, is expected to stand at 2.5% in 2013 and 2014, down from 7.5% in 2010, according to the IMF. The economy has slowed, in part, because Brazil’s growth relied on public banks providing credit to both companies and consumers, says Pedro Tuesta, senior Latin America economist for 4cast, a financial analysis company. This could not be kept up indefinitely, he says. Meanwhile, consumers took on too much debt and became overstretched. Also, the slowdown in China has lowered demand for Brazilian commodities such as iron ore, Tuesta adds.

At the same time, business confidence in Brazil has fallen significantly. The Brazilian government is intervening too much, which is discouraging investments from flourishing, he explains. Brazil’s investment level in terms of GDP is about 10%, which Tuesta argues is exceptionally low. As a percentage of GDP, taxes make up 35-37%, Tuesta says. “That is huge for a developing country.”

Taxes make up part of what is referred to as the custo brasileiro − the additional costs that companies pay to do business in Brazil. The custo brasileiro also covers bureaucratic red tape, inadequate infrastructure and a ponderous tax system. But taxes would not seem so onerous if Brazil had much to show for them in terms of its ports, roads, airports and other infrastructure. The nation’s infrastructure is not meeting the needs of the country, and in a recent report, The Economist noted that Brazil would have to triple its annual infrastructure spending for the next 20 years to catch up with the levels of other big economies.

The public has taken note. Earlier this year, a proposed hike of bus fares in Sao Paulo set off huge protests in Brazil. Protestors were upset that Brazil was spending so much on stadiums for the upcoming World Cup and Olympics and yet public services continue to languish.

Tuesta warns that addressing the complaints of the protestors and the nation’s businesses would be painful. Meanwhile, the country will have to cope with slower growth while keeping inflation under control.

In October, Brazil’s central bank increased the nation’s Selic interest rate to 9.50% to control inflation. In a 12-month period ending in August, inflation reached 6.09%. Nonetheless, signs indicate that the government is at least aware of the problems and that conditions are improving.

This year’s expected growth rate − 2.5% − is higher than last year’s 0.9%. The IMF predicts that Brazil will repeat that performance in 2014 − better than 2012 but still below the government’s expectations, says Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center, a think tank that researches national and international topics.

Brazil, meanwhile, is embarking on a strategy of promoting more investment, especially in addressing problems in its infrastructure, Sotero says. “The government is absolutely aware of that. There are all sorts of plans to improve roads and railways and ports and airports.”

Regarding excessive bureaucracy, taxation and other contributors to the custo brasileiro, Brazil will inevitably have to resolve those problems, Sotero adds. “The problems have been accumulating,” he says. With the exception of agriculture, Brazil has fallen in all levels of global competitive rankings.

One big uncertainty is next year’s elections. All of the seats in the lower house and about half of those in the upper chamber are up for election. In addition, President Dilma Rousseff of the Partido dos Trabalhadores (PT) is up for re-election, and she will face Aecio Neves of the Partido da Social Democracia Brasileira (PSDB).

The two candidates will represent parties that have dominated Brazilian politics for two decades. But for the first time since then, voters will have a viable alternative, Sotero says.

Marina Silva of the Rede Sustentabilidade has thrown her support to Eduardo Campos of the Partido Socialista Brasileira (PSB). Campos, a talented politician and governor of Pernambuco, could force a run-off, believes Sotero.

Typically, government spending increases during such election years, and it is expected to happen again in 2014, he said. But a run-off could further increase government spending.

Looking ahead, the euphoria of the past decade has passed and the expectations that Brazil’s economy would take off at 5-7% annually have sputtered away, Tuesta says. Still, Brazil is a big market and companies will continue to invest in the country.

The Brazilian economy will ultimately recover, notes Bob Bauman, president of the US-based Polymer Consulting International.

But regardless of the pace of recovery, Brazil’s trade deficit in chemicals will continue. Brazil’s chemical trade deficit rose 21.8%, reaching $21.1bn, from January to August, the most recent data available, according to the country’s chemical industry association, Abiquim.

For process plastics, the trade deficit reached $1.65bn in the first eight months, up 13.3% year on year, according to Brazil’s plastics industry association, Abiplast.

The deficit could be reduced by the planned Complexo Petroquimico do Rio de Janeiro (Comperj) project. Under it, Petrobras will build two refineries and Braskem will develop several chemical units, including a world-scale ethane cracker.

Braskem is in talks with Petrobras about the pricing for the feedstock. If priced low enough, the ethane should help Braskem compete against low-cost imports from the US, which is enjoying a cost advantage against most of the world due to the advent of shale gas.

Latin America’s second largest economy, Mexico, unexpectedly slowed down this year because of a decline in government spending, construction activity and demand from the US, according to the IMF. The slowdown contrasted to the optimism that characterised the nation’s economy early in the year, a sentiment which helped send the exchange rate close to 12 pesos to the US dollar.

The IMF expects the Mexican economy to grow by 1.2%, down from its April estimate of 3.4%. The IMF’s estimate, though, does not take into account the storms that battered the country this summer, Tuesta says. Those storms could take a big hit on the economy, although reconstruction could boost growth.

Mexico is also exposed to the fortunes of the US, its main trading partner. This year’s impasse over the US budget and debt ceiling could further disrupt growth in Mexico. Longer term, though, the new administration of President Enrique Pena Nieto has introduced several reforms intended to boost the economy’s potential for growth, Tuesta says. The IMF itself said those reforms could increase growth to 3.5-4% in the medium term.

Those reforms are part of the so-called Pacto por Mexico, an agreement reached among Pena Nieto’s party, the Partido Revolucionario Institucional (PRI), and the other major parties, the Partido Accion Nacional (PAN) and the Partido de la Revolucion Democratica (PRD). The parties have targeted the country’s monopolistic telecommunications sector and its education system, Tuesta says.

Recently, Pena Nieto has proposed fiscal and energy reforms. Under the latter, Pena Nieto proposed changes to the Mexican constitution that would remove the laws that prohibit the state energy producer, Pemex, from establishing partnerships with other companies.

Although the PRD opposes the changes, Pena Nieto has support from his party and the PAN and most expect the changes to go through. Once the constitution is changed, the Mexican Congress would need to draft new rules that would define who can participate in the country’s energy sector and under what terms.

Mexico’s energy sector needs the reforms. Despite its substantial reserves, Mexico has a trade deficit in every class of hydrocarbons − including petrochemicals − except for crude oil. Outside capital and expertise could develop the country’s more technically challenging shale and deep-water energy resources, providing the country with feedstock for future chemical plants. Before Mexico can build the plants that will reduce its chemical trade deficit, it will need more feedstock.

After the cracker is built at the Ethylene XXI integrated polyethylene complex, the country will not have enough ethane for another one.

Argentina, the third largest economy, should grow by 3.5% this year, much higher than Mexico and Brazil, according to the IMF. That increase, though, is due to a strong harvest for the nation’s key agricultural sector, the IMF said. In 2014, growth should slow to 2.8%, which would make Argentina the only economy to slow down among Latin America’s largest, Brazil, Mexico, Colombia, Venezuela, Peru and Chile.

Several trends are weighing down on Argentina. Regulations make it more difficult for companies to do business in the country, says Jorge Buhler-Vidal, director of Polyolefins Consulting. This encourages companies to invest outside of Argentina. Plus, rising imports of LNG are draining money from the country, he says. “It is going to get progressively worse until oil and gas production picks up.”

Other obstacles stand as well. To keep scarce dollars from leaving Argentina, the government has adopted severe currency-exchange controls, which restrict how many US dollars can leave the country. As a result, it is difficult for international producers to send money out of the country as US dollars.

In another attempt to preserve dollars, the government has restricted imports. If the imports are needed for doing business, firms can still purchase them, but the process is not smooth, Buhler-Vidal says. Medium and small companies often lack the resources to do it.

These problems with currency-exchange controls and import barriers could also hold back Argentina’s attempts to develop its vast shale-energy reserves in the Vaca Muerta formation. Argentina needs the gas from these undeveloped reserves. Natural gas production has fallen steadily since reaching a peak of 51.6bn cubic metres (bcm) in 2006, according to the Argentine Energy Secretariat. By 2012, it was down by nearly 15% to 44.1bcm.

To meet rising demand, Argentina now imports gas. Imports reached 4.60bcm in 2012, up from 3.93bcm in 2011 and 1.69bcm in 2010. Those imports, however, are still not enough. Each winter, during especially cold days, Argentina cuts natural-gas supplies to petrochemical and other industrial consumers. That way, the country ensures supplies for homeowners.

The cutbacks have become so frequent, petrochemical producers now plan their maintenance around them. Without reliable supplies of feedstock, petrochemical companies cannot expand capacity and address the nation’s trade deficits in plastics and petrochemicals.

Argentina has attempted to address falling natural gas production by nationalising YPF and expropriating most of the stake owned by Spanish energy producer Repsol. Earlier this year, YPF signed various agreements with Chevron, ExxonMobil and Dow Chemical.

Those exploration deals are relatively small and will do little to address the country’s shortage of natural gas. Various sources said $35bn-40bn would be needed to develop Argentina’s shale reserves. Buhler-Vidal estimates that it will take several years before Argentina is once more self-sufficient in natural gas.

Venezuela is expected to grow by just 1.0% this year, the slowest rate among the seven largest economies of Latin America, according to the IMF. Inflation, energy shortages and currency exchange controls are all curtailing the nation’s economy. Those controls, as well as import-licence barriers, limit chemical imports.

The inability of Venezuelan chemical companies to source foreign currency, pay overseas suppliers and procure raw materials is forcing some to reduce output and shut down production lines, according to the country’s chemical industry association, Asoquim.

To guarantee plastics supplies to domestic companies, Pequiven, Venezuela’s state-owned chemical producer, announced plans to invest $4bn to raise capacity. However, previous expansion announcements have not been completed. It is unclear how Venezuela will obtain sufficient feedstock for the plants. Oil production is falling, and Venezuela imports natural gas, since it re-injects much of its domestic production into oil wells to boost output.

All Latin American producers considering capacity expansions have to consider the expected influx of exports from the US. The US is now one of the world’s lowest cost producers of ethylene due to the advent of shale gas, which has increased supplies of ethane. Latin America and much of the world predominantly use more expensive naphtha as a feedstock.

Because the US has such a cost advantage, producers have begun expanding ethylene and polyethylene capacity. Bauman says the expansions will bring US production well above what the domestic market can absorb. Companies will look to Latin America as a natural market. “Anybody south of the US is going to feel it,” he says. The US could displace higher cost Asian producers or even some Middle Eastern companies, he adds.

But Buhler-Vidal warns that US producers cannot safely assume that low prices alone will open up new Latin American markets for them. US companies will have to establish relationships with new customers. Plus, existing suppliers will not easily give up their business, he says. Nor will Latin American producers automatically shut down plants once more US material starts entering the market, he said. While those plants will not be globally competitive, they are still important sources for jobs. “Politically, it is not easy to just shut them down.”

By Al Greenwood