Special Issue: Latin America polymer competition - blessing or curse?

24 August 2017 19:32 Source:ICIS Chemical Business

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Latin America set to receive a flood of US polyethylene imports, spurred by increased production of inexpensive shale gas



The upcoming polymer production increase in North America is expected to generate increased competition for market share in Latin America, where current market conditions are mixed. The new US production can have a profound impact on the region or it can be a non-starter in some countries. Are winners and losers likely to emerge out of this new reality?

In Latin America, we have identified three distinct scenarios for trade patterns:

  • Countries that have no industry to protect, and low or no import tariffs.
  • Countries that have local industry, but keep tariffs moderate.
  • Countries that have local polymer industry and high import tariffs.

In the first category, we find countries such as Chile, Ecuador, Peru and most Central American and Caribbean countries. Import tariffs are typically low or zero, and generally, they buy resins on price. They tend to get low prices, and logistics are an important factor in the purchases.

The second category lists countries like Mexico and Colombia. Chile could be included here too, but only in polypropylene (PP). Chile’s polyethylene (PE) production ceased in May 2014. These countries have a local industry to defend, but they keep import barriers low to ensure that domestic activity is competitive enough to coexist with imports. Polymer prices in these countries are usually competitive in the international market. In the third category, we have countries such as Argentina, Brazil and Venezuela. They have a well-established polymers industry and high import tariffs to protect it. Traditionally, these countries have some of the highest prices globally. Custom duties insulate them from foreign competition and their finished products are generally not competitive in international markets.

IMPACT BY LATE 2017/2018

The upcoming petrochemical production in North America, spurred by inexpensive shale gas, will hit Latin America markets at the end of 2017, but may reach full-force in 2018. The impact on the first two country categories is easier to predict.

Drastically increased supply in countries that embrace free trade will result in lower overall domestic prices. We already see this scenario at work in Mexico, where domestic production has increased after the entrance of Braskem Idesa. Mexico’s new production has taken market share from state-owned Pemex and from US imports. Pemex participation in the polymers market declined because of diminished ethane availability to feed its crackers. Braskem Idesa and sellers of US imports rushed to fill the void. The fight for market share became a price war and Mexico has today some of the most competitive PE prices in the world.

PE TRADE FLOWS

In the first five months of 2017, US exports to Mexico for all PE grades of $503m were down by 18% compared with the same period of 2016, according to American Chemistry Council (ACC) statistics.

Mexico is the top destination for US PE exports, accounting for about 24% of total US PE world exports year to date through May 2017. This compares to 18% of US PE exports having gone to Canada and 16% to China. Last year during the same period, 29% of total US exports of PE had gone to Mexico, 15% to Canada and 7% to China, according to the ACC.

Meanwhile, Mexico’s exports of PE resins have increased about 30%, a local source said, citing March statistics. In March, Mexico exported 46,000 tonnes of PE. Of that amount, about 33,000 tonnes have been HDPE and the rest LDPE. All these exports are from Braskem Idesa.

US polythene

These trends have continued. US PE inventories have grown about 1.5% in May over April and preliminary figures show potentially a 1.3% increase on inventories for June over May figures. Braskem Idesa is targeting exports to the US amounting to 10,000 tonnes/month and the company’s quest for a larger share of Mexico’s domestic PE market persists.

Pemex sources consulted said that despite their market share losses, the increased competition is good for Mexico, good for buyers and good for everyone. It has promoted business and invigorated the full supply chain.

Increased supply of US plastic resins in Colombia, Peru, Ecuador, Chile, Central America and the Caribbean could have a similar impact.

However, can we expect the same in Argentina, Brazil and Venezuela? Venezuela is increasingly isolated in terms of trade. For this reason, we will keep it out of this discussion.

HIGH TARIFF COUNTRIES

Let us take the other two countries as an example. In Brazil, there are 14% import tariffs and a number of small fees that add up to more than 20% to protect Braskem, the local producer. In addition, Brazil has a complex tax system.

The only Mercosur country that can compete tariff-free in Brazil is Argentina, but its exportable polymer volumes are not significant. Braskem exports PE and PP resins to Argentina to offset their exports.

Dow Chemical has the PE production monopoly in Argentina. With similar customs protection, the producer can keep prices at the import parity and, at times, slightly higher. Anyone who imports PE material must add about 23% to the CFR Argentina price and compare this value to the domestic price to determine whether the deal is viable. Only a few can import tariff-free, if the finished product is export-bound.

PE and PP prices in both Argentina and Brazil are some of the highest in the world. Transformers usually complain that they cannot compete with finished products from nearby countries. Will the new production in North America affect market conditions in these two countries? We do not see much of a chance this will happen.

A large distributor in Argentina said that US Gulf material will not have direct impact on the Argentine polymers market with the existing regulations, but it may displace Braskem product from other markets in Latin America. This, in turn, could drive Braskem to seek larger market share in Argentina.

Most large distributors in Argentina are already committed to taking material from Dow and/or Braskem and could not take US material from a third party without negative consequences, the distributor added. Whatever demand is left in the country would not be enough for another distribution channel. Another possibility would be increased imports from Dow into Argentina, particularly low density PE (LDPE) that is in short supply.

A corollary to all this would be that the use of regulations for the protection of domestic industries is easily defensible. But taken to the extreme, overprotective duties lead to abuse and loss of competitiveness for the entire downstream chain.

George martinGeorge Martin joined ICIS in 2004 as a senior editor on petrochemicals covering polyolefins in Latin America and other regional chemicals and plastics. He has served as deputy bureau chief and as an analyst before becoming editor-in-chief, Latin America in 2016. He has reported and analysed crude oil and petrochemical markets since 1994, focusing on Latin America. George also has experience in field construction and process plant piping. Contact George at george.martin@icis.com

 

By George Martin