Latin America Petrochemicals Overview - Q213
2013: A Better Year For Sales
The Latin American petrochemicals market appeared to have stabilised by the end of 2012 with capacity utilisation in Brazil returning to over 80% largely due to a decline in the value of the real against the US dollar. The stagnation in the Brazilian market in 2012 is likely to be replaced by growth in 2013, which should be good news for exporters to Brazil. Although demand has been flat, it has largely been at the expense of Brazilian producers due to low levels of domestic competitiveness caused by rising raw material, labour and energy costs - and the strength of the real, which led to a massive rise in its trade deficit for processed plastics.
The weakness of regional currencies against the real will help raise sales in the Brazilian market, offsetting a poor domestic performance. However, it will be US producers that will be best placed to capitalise on a recovery in Brazilian consumption. Meanwhile, Mexico's petrochemicals industry is vulnerable to exposure to the US market and could contract if the US economy does not bounce back.
Latin America: Leading Emerging Market Consumption Growth
Over the medium-term, US petrochemicals producers will find a strong export market in Latin America. Polyethylene (PE) imports into the region are set to grow over the next five years to over 3.5mn tonnes by 2017, of which a third will be destined for the Brazilian market. South American PE imports are projected to rise 6-7% per annum over the five-year forecast period, assisted by 9% growth in Brazil.
Latin America's strength in polypropylene (PP), due to its utilisation of heavy feedstock, will be challenged by Chinese PP finished goods; in 2011, competitively priced PP goods imports from China rose by nearly a quarter on the Brazilian market. PP use is being spurred by growth in the region's automotive and appliance markets and BMI believes that the region will retain a net PP deficit over the 2013-2017 period, reaching over 500,000 tonnes. Planned PP projects will be insufficient to stem the tide and further growth in production will not be possible without propylene expansion.
In polystyrene (PS) segment, the South American styrene market is estimated at over 800,000 tonnes per annum (tpa) with PS accounting for two-thirds of the region's end use, compared to 40% worldwide. PS consumption is set to rise from an estimated 1.3mn tonnes in 2012 to 1.6mn tonnes by 2017. Growth in PS should allow the region's producers, with combined capacity of 1.1mn tpa, to maintain high operating rates. As such, the region should continue to be a net importer of styrene, with demand growth set to average 4% through to 2017; net styrene imports in 2011 and 2012 were estimated at 300,000-350,000 tonnes. The main growth areas for styrene consumption will be Venezuela, Colombia and north-east Brazil, while Argentina will remain self-sufficient.
South America's complete reliance on imports of purified terephthalic acid (PTA) will be ended by commercial production at Petroquímica Suape's new 60,000tpa PTA plant in Ipojuca, Brazil, which will help feed a new 400,000tpa polyethylene terephthalate (PET) plant from 2013. This will help roll back South America's under-supply of PET, but the region will remain a net importer and PET output is likely to be destined for regional markets.
|US Consolidates Ethylene Production|
|Ethylene Production By Country (%)|
No Prospect Of A South American Shale Boom
Over the long-term, producers in Mexico and Argentina are looking to exploit shale gas deposits, which are likely to be plentiful. This would mirror developments in the US, sparking increased competition based on cheap feedstock. In contrast, Brazil is struggling to prove any commercially viable shale gas reserves, putting it at a disadvantage. However, Argentina's exploitation of shale gas resources will be undermined by its decision to nationalise YPF and revoke some concessions, which will undermine investor confidence for years to come. In Colombia, the liberalisation of the oil sector and the cooling of armed conflict have stimulated the interest of Western majors, who have been drawn to the country's vast deposits of unconventionals, shale oil and gas, oil sands and coal bed methane. These promise to boost potential feedstock availability to the petrochemicals sector. As such, Brazil is unlikely to face any challenge from shale-based based petrochemicals in South America, although the planned rate of US expansion will pose a major challenge to the region's petrochemicals production over the next five years.
|Brazil Dominates Latin America Polymer Capacity|
|Chemicals Capacities By Country (%)|
US Shale Deals A Blow To LatAm
Nevertheless, the Latin American petrochemicals industry's reliance on naphtha is a fundamental weakness that could seriously disrupt industry expansion. Initiatives undertaken by Petrobras to increase local naphtha production, as well as a move towards projects based on increased gas production, are likely to benefit the industry. Brazilian petrochemicals firms are trying to ensure domestic petrochemicals prices are aligned with international prices, so as to increase margins and pass on higher prices for raw materials such as naphtha.
Oil and gas discoveries have set the Latin American petrochemicals market on a path towards strong growth and development. However, uncertainty remains and margins will come under pressure from increased global capacity as new plants start up in the Middle East and Asia. At the same time, projects are being delayed due to feedstock supply problems and the downturn in the market. The prospect of cheap shale gas in the US, which will boost the country's ethane supply, has dealt a major blow to plans for naphtha-based crackers in Latin America. A number of petrochemicals majors are planning cracker projects in the US, which could undermine the viability of naphtha-based projects that have been announced in Bolivia, Brazil, Colombia, Peru and Venezuela.
ExxonMobil Chemical, Dow Chemical, Shell, Chevron Phillips Chemical and Formosa Plastics are among the companies that are setting up new naphtha cracking projects in the US to exploit shale gas reserves. This has transformed the industry, with shale gas promising to make the US one of the world's most competitive producers of ethylene. Before the 2008 financial crisis, the consensus was that the US petrochemicals market would become steadily more import reliant - with Latin America playing a significant supply role. US cracker capacity had been expected to decline as the structure of the global petrochemicals market changed. Now it is looking to export petrochemicals to Latin America in the long-term.
Brazil Weakening, But Only Mexico Gaining
While the depreciation of the real has created more opportunities for the Brazilian petrochemicals industry in an over-supplied regional market, it still needs to make structural changes to become more competitive, notably in relation to the cost of electricity. The lack of competitiveness is hindering plans for the Comperj refining and petrochemicals complex, with Brazil's Petrobras unable to attract investment partners. While construction of the first oil refinery at Comperj is well underway, there are doubts that the petrochemicals plants will come onstream. The petrochemicals plants are now unlikely to come onstream until 2017, even if construction proceeds.
The costs of operation are a major concern with regard to Comperj's competitiveness and even if these costs are contained, Braskem is mindful of over-supply in the South American market that would put pressure on its margins. These factors also appear to have informed its decision to retreat from ambitious development plans in Venezuela, another country where the business environment has deteriorated, albeit for political reasons.
Instead of increasing domestic capacities, Brazilian petrochemicals producer Braskem is looking to the US and Mexico to make investment, including Mexico's Ethylene XXI facility, which will have 1mn tpa of PE capacity when completed. Reports in 2012 suggested that Braskem had effectively opted out of Comperj in favour of developing its business in the NAFTA markets. Braskem aims to be one of the world's top five petrochemicals companies by 2020, and is seeking to achieve this by leveraging hydrocarbons resources outside Brazil to capitalise on downstream production, as well as acquiring PE and PP assets in the US. As such, other producers in Latin America can be comfortable in the knowledge that Brazil will remain a net chemicals importer for the foreseeable future, although low-cost Asian producers will pose a significant challenge.
In Venezuela, Braskem is scaling back its projects, while the state-owned petrochemicals company Pequiven is reducing the size of the Propilsur PP plant by 150,000tpa (to 300,000tpa) and opening it in 2013 rather than 2011. Meanwhile, the 1.3mn tpa ethylene cracker and 1.1mn tpa PE complex, proposed as part of the companies' Polimerica JV, have been indefinitely postponed, ostensibly due to market conditions.
In Peru, the situation is more promising with potential gas extraction providing substantial ethane feedstock to justify the creation of a world-scale cracker and associated plants. The second phase of the Southern Andean gas pipeline aims to provide feedstock for a Braskem- and Petroperú-owned petrochemicals plant being constructed in the southern Pacific coastal region. The Peruvian government wants the new petrochemicals complex planned for the south of the country to be operating by the end of 2015. A world-scale cracker would require at least 1bn cubic metres (bcm) of ethane feedstock and BMI believes that output needs to be ramped up to meet current domestic requirements in addition to the feedstock needs of a petrochemicals complex. Attention has also focused on the development of the fertiliser sector. Proposed projects could provide 2.41mn tpa of ammonia capacity, but BMI does not believe any of these projects will be completed before 2015. Nitratos del Peru plans to produce around 710,000tpa of ammonia and 350,000tpa of industrial-grade ammonium nitrate.
Argentina's petrochemicals industry will remain small over the medium term, with little possibility of investment in new capacity due to declining oil and gas output. Argentina's petrochemicals capacity remains small, with olefins nameplate capacity of 835,000tpa of ethylene, 355,000tpa of propylene and polyolefins capacity of just over 1.51mn tpa. The industry has come up against constraints, as feedstock has been diverted for heating during winter months. Despite the relatively favourable licensing regime, high taxes on crude oil and oil product exports have curbed foreign companies' enthusiasm for oil exploration in Argentina, inhibiting growth in downstream capacity. Nevertheless, there are plans in the pipeline, including the construction of ammonia and urea complexes in Tierra del Fuego.
In Colombia, Ecopetrol has mooted a number of petrochemicals expansion projects in recent years, but without any commitment. The most significant expansion has been at Propilco's two PP plants, which had combined capacities of 500,000tpa in 2012, up 45,000tpa since 2009. Ecopetrol indicated at end-2011 that it was looking to build a new cracker with associated PE and PP facilities near Cartagena, which would also supply propylene to Propilco. Aromatics and PET have also been suggested for the site. The project would cost an estimated US$4bn and a tentative start-up date has been proposed for 2017. However, further details have not emerged and previous announcements have not developed into a coherent plan. As such, Colombia will not register any rise in petrochemicals capacity over the foreseeable future and growth in its market will be served largely by imports.