Image courtesy of Braskem Idesa

Election years rarely see a boost to economic and industrial growth anywhere, and last year Latin America held presidential polls in its two largest economies, Brazil and Mexico. In Brazil, real economic performance did not mirror inflated talk of a receding recession, with just 1% GDP growth in 2017 and an estimated 1.4% in 2018 (estimations by the International Monetary Fund (IMF) and Brazil’s Central Bank, respectively).

Meanwhile, in Mexico, López Obrador’s landslide victory sparked fears that the new government could introduce bumps on the country’s road to energy reform initiated by the preceding Peña Nieto administration. Adding to the political uncertainty, Mexico had to deal with the renegotiation of the free trade agreement with the United States and Canada, which finally resulted in the new USMCA agreement.

While Mexico’s economy has recorded positive growth since 2010, expansion levels have plateaued and are expected to be in the 2% to 2.2% range in 2018 and 2019. In comparison, the IMF expects the world’s economy to expand by 3.5% in 2019, according to estimates released in January 2019. This is down from a previous IMF projection of 3.7% growth; the negative effects of the China-U.S. trade tariff war, among other factors, explained the revision.

Looking at Latin America in particular, the overall feeling is that the region could actually perform better if governments were more willing to promote investment: “When you have a large consumer base of approximately 600 million people who are trying to improve their standard of living, you have the opportunity to create the products which they consume every day,” related Mark Eramo, vice-president for Oil Markets, Midstream, Downstream and Chemicals at market intelligence firm IHS Markit. “The problem is that capacity, in a significant amount of areas, is not being added, and therefore the region is still a major net importer.”

Eramo added that the region has natural resources available, and what is missing is the implementation of the right policies: “From an energy and chemicals perspective, the best prospects are in Mexico, Brazil and Argentina. It will come down to government decisions to put policies in place that support or attract foreign investment, as well as stimulate in-country investment,” he concluded.

Global Dynamics

By disrupting the previous trade scenario, the disputes over tariffs between the United States and China have also shaken the dynamics of global petrochemical product flows. Stefan Lepecki, CEO of Braskem Idesa, a large polyethylene producer based in Mexico, said that the United States is no longer a great exporter of polyethylene to China as used to be the case, and that, furthermore, the United States is bringing significant new capacity to the market: “All of this is creating new dynamics in trade flows, with an excess of polyethylene inventories here in the [Latin American] region, which is a challenge in the short term. Having said that, the long-term fundamentals are very positive, because global demand for plastics continues to be very strong,” Lepecki said.

The shale revolution in North America and the ongoing wave of investments in new petrochemical capacity is poised to compete with any potential new capacity in Latin America in the upcoming years. While development of Brazil’s pre-salt hydrocarbons and Argentina’s Vaca Muerta is already in motion, it will probably take a few years and substantial increase in demand in the region to have new, sizeable greenfield projects of petrochemical plants in Latin America.

“Latin America represents the shortest distance to market for North American exports,” highlighted Eramo of IHS Markit. “Trade flows have been and will continue to be sound as there is ample product in the north and a need in the south. There are, however, pockets of production within Latin America, which can compete within their domestic market.”

The most recent flagship investment in the region was indeed the US$5.2 billion plant by Braskem Idesa in Mexico. Inaugurated in 2016, the operation has been able to perform well despite the feedstock limitations in the country created by Pemex’ output decline: “Before Braskem Idesa, 70% of the polyethylene consumed in Mexico was imported from the US, and only 30% was produced locally. We managed to stabilize that, by replacing some imports and also doing some exports,” affirmed Lepecki of Braskem Idesa.

A Push for National Champions?

The trend toward the electrification of transport and the gradual phasing out of internal combustion engines has far-reaching implications for many industries. In mining, this is pushing long-term demand for copper and other metals, for example. Throughout the hydrocarbons value chain, we could see significant changes over the next couple of decades, especially in the downstream segment. Eramo of IHS Markit presented the following scenario: “There seems to a consensus that the rate of demand growth of refined products, such as gasoline and diesel, will decline as we progress through the 2020s. By 2030, the incremental growth of refined product demand will begin to flatten out and we will start seeing declines.”

As a result of this, refiners may start to redeploy their assets to base chemicals, and that will affect the volumes that the refinery industry can bring to the market each year, explained Eramo. “In my opinion, crude oil to chemical integration is going to happen, but there are only a few large players globally that will be able to compete in this arena from a capital standpoint.”

Those few large players in the world are companies that can benefit from the synergies created by vertical integration and economies of scale. Federico Veller, executive manager for chemicals at Argentina’s state-controlled YPF, the country’s largest energy company, anticipated that “the petrochemicals industry is the sector that will drive hydrocarbons consumption over the next years.”

“Large oil companies forecast flattened fuel demand, and this is why focus is increasingly placed on the petrochemicals business. Those companies that are vertically integrated, with feedstock production all the way to the downstream business, will be the most competitive ones,” concluded Veller.