"Countries that are not fully committed to the sustainable agenda will realize that change will be necessary if companies want to sell products abroad, and pressures from the financial community will increase as customers demand a higher level of compliance.”

Rina Quijada

VP BUSINESS DEVELOPMENT – RESEARCH LATIN AMERICA, IHS MARKIT

August 17, 2021

What have been the main themes influencing Latin America’s petrochemical sector in 2021?

The main difference between 2021 and 2020 is a bit more clarity of where the trends are going, including the unexpected strength in global demand and increased margins by most companies. The rupture of the supply chain, which started early in 2020 and may continue through 2022, also generated the need to adjust sourcing and trade of products. Governmental support/incentives for economies such as the US and to some extent Brazil, has fueled the demand of finished goods. In the case of Brazil, for instance, light vehicle sales have gone up 38% year-on to June, which requires a lot of petrochemicals. The spread between basic petrochemicals and most of the derivatives is also very good, offering high margins. We have seen a lot of companies announcing record sales and revenue while production has not kept up with demand. There is a limited supply of key products to keep up with demand and this is keeping prices up.

If we look at global GDP, there has even been a significant improvement compared to pre-pandemic levels. Brazil is expected to report an increase of at least 3% in its GDP during 2021; the US is also expected to grow its GDP by 6% during 2021. Eventually, inflation and the increasing production costs will take its toll. However, we are currently in a window where the industry is moving forward.

Which products and markets have performed better during the pandemic, and how has this evolved?

The Covid-19 pandemic had an extraordinary impact on global demand for hygiene-related products as consumers became more conscious about hygiene and cleaning in homes and hospitals. On the other hand, disposable goods were also in high demand, hence, polyethylene (PE) and polypropylene (PP) products used for production of non-durable goods benefitted from people buying individually packaged products and increasing online buying. Increased demand came at the same time as supply chains were significantly disrupted by weather issues, unplanned plant shutdowns and limited supply of critical parts and products like microchips. Even markets which experienced lower demand in early 2020, such as polystyrene and PVC, have now rebounded thanks to housing and construction increased demand.

How are political factors, including a rise in populist politics, impacting Latin America’s appeal as an investment destination?

I think there are two factors to consider here – one, regional politics and two, the impact of global expectations for a much more sustainable business environment. I have been following Latam and the petrochemical industry for over 36 years, and I would say that the region has been plagued by social and political unrest. Furthermore, If we look at Latam in a global context, we can see investment opportunities to develop an industry that is much more in line with environmental sustainable goals. There is a significant sociopolitical change taking place globally for a much more diverse and equitable society.

In my opinion, there are windows of opportunity for investments because of the changing attitude towards renewable energy, sustainability, and commitment to net zero carbon emissions. Renewables such as wind, solar and new sources of hydrogen are attracting a lot of attention, adding many options for energy investors. Countries that are not fully committed to this agenda will realize that change will be necessary if companies want to sell products abroad, and pressures from the financial community will increase as customers demand a higher level of compliance. The energy transition train has already left the station. We believe Latin America will embrace it, perhaps not as quickly as Europe, USA or China, but change has already started.

Do you think M&A in the region could increase in the coming years?

Yes, I believe Latam will see increased activity in M&A in the coming years. Changes in the region will make it attractive to invest in certain countries and businesses. For example, the new gas laws in Brazil approved in April is a positive step. We know that Petrobras is selling several of its refineries, and also anticipate a significant change in Brazilian petrochemical industry in 2022/2023. Braskem, Odebrecht, Petrobras and Oxiteno are all expected to be part of this transformation. Today, I believe both buyers and sellers are more closely aligned and as a result we should see transactions ready to close: there is an appetite for M&A in a thriving market.

I also think we will see investments in the refining side. Perhaps adjusting refineries to produce more petrochemicals in the long term.

What potential do you see for Latin America to develop its domestic sources of feedstock?

This is a very complex question. If you had asked from 2015 to 2019 I would probably have given a different answer, but today investors want to also spend money on renewables. Five years ago there was a spending spree on fracking, but now carbon capture storage and renewables are in the front burner. A significant amount of oil and gas will still be needed through 2040, but perhaps the dollar amount dedicated to Latam will have to be shared among renewable energy and other investments such as Pre-Sal and  Vaca Muerta. Existing projects will go ahead, but we see increasing amounts of money flowing in the direction of renewables.

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