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Volume 87 Issue 2 | pp. 18-19
Issue Date: January 12, 2009

Cover Stories: World Chemical Outlook

Latin America

The region may avoid the worst of the petrochemical downturn, but growth will slow
Department: Business

THANKS TO HIGH commodity prices and economic policies that have hemmed in chronic regional problems like inflation, Latin American countries have enjoyed an unprecedented stretch of strong economic growth. Economists expect growth to slow with the global economic downturn, but not enough to push the region into recession as has happened in more developed areas.

That expectation is borne out in forecasts for economic expansion this year. The International Monetary Fund expects 3.1% growth in South America and Mexico in 2009. That's a decline from the 4.6% growth in 2008 but still a decent amount of expansion. IMF economists say the region is suffering from a commodity export slowdown and an increasingly difficult environment in which to borrow from foreign lenders.

IMF forecasts growth of 3.0% and 3.6% in Brazil and Argentina, respectively, down from 5.2% and 6.5% in 2008. For Mexico, the Latin American nation most commercially connected to the U.S., the fund predicts a less robust 0.9% rise in output, a slight decrease from last year.

Venezuela is suffering from its heavy dependence on petroleum exports. Oil prices have fallen to less than one-third of the record rates seen in July. Still, IMF predicts 2.0% growth for Venezuela in 2009, but that's sharply down from 6.0% in 2008.

But if the global downturn gets worse, IMF cautions, so will exports and financial conditions in Latin America. "Such a scenario will slow growth in the region even more," the fund said in a recent report. For the two biggest economies in the region, those of Mexico and Brazil, this means that chemical companies, which have held up well so far, will do much worse. And in South America, new projects and expansions will be more likely to slip.

Financial results from the first three quarters of 2008 reveal a chemical industry in Latin America that is still expanding. But they also show the beginnings of regional impact from the global economic crisis.

The state oil company of Mexico, Pemex, which has a monopoly on basic petrochemical production in that country, saw a modest net chemical production rise of 1.7% in the first three quarters. Ethylene production increased a healthy 5.8%. But output of some other products decreased. For example, vinyl chloride, used to make the housing-intensive product polyvinyl chloride, decreased 29.6% over the period.

Alpek, the chemical subsidiary of Mexican conglomerate Grupo Alfa, saw revenues increase by 28% to $3.8 billion and operating income climb 8% to $154 million for the first nine months of the year versus the same period in 2007. But those increases were driven mostly by a 19.5% rise in selling prices versus the year-ago period because of the second-quarter spike in oil costs.

Production volumes thus increased more modestly in major businesses such as Alpek's polyethylene terephthalate (PET) and terephthalic acid unit, up 8%, and its polypropylene and polystyrene business, up 4%.

The stormy economic weather began to impact Alpek in the third quarter, when its PET business saw a 3% tumble in volumes. In an October conference call with stock analysts, Alfa Chief Financial Officer Alejandro M. Elizondo said PET customers saw the sharp drop in oil prices and avoided buying resin because of their expectation that PET prices would fall in kind. He anticipates that demand for the resins—used in the recession-resistant beverage sector—will come back.

Distance makes Brazil a bit more insulated from the U.S. downturn, although companies there are bracing for a slowdown from high levels of growth.

The country's largest petrochemical maker, Braskem, saw a 1% decline in revenues during the first nine months of 2008 to $9.6 billion. Braskem's resins business saw a 9% increase in volumes for the first three quarters. Polyethylene and polypropylene volumes increased 4% and 11% for the period, respectively. Braskem showed some weakness in the third quarter with polyethylene volumes decreasing 15% and polypropylene dropping 5%.

Bernardo Gradin, Braskem's new chief executive officer, told analysts in November that he expects Brazilian demand for polymers to increase between 5% and 6% in 2009. "We think that the domestic demand in Brazil will still be positive in terms of growth next year, of course growing less than this year," he said.

Even without the economic downturn, excess capacity coming onstream in the Middle East and Asia would have spelled trouble for the chemical industry in coming years. But compounding that cyclical trough with a severe economic downturn will make matters worse, says Robert J. Bauman, president of the Spring, Texas-based consultancy Polymer Consulting International. "I believe the downturn will be the longest and deepest in the history of the petrochemical industry," he says.

The trough could last through 2015, Bauman says. But compared with North America, which depends on the export market for 10 to 15% of its sales, and Europe, which will be a natural home to materials made in the Middle East, Latin America should be in relatively good shape. However, he adds, "while domestic demand in Latin America may not decline as much as in the developed countries, the additional decline in resin and product exports will result in much lower operating rates and the need to idle capacity."

THE DOWNTURN is starting to hit Latin America already. Last month, Braskem said slowing demand for polyethylene was forcing it to idle ethylene lines at its two Brazilian steam crackers. The company thus reduced operating rates from 95% to 55%.

How the downturn will play out is still uncertain, says Vitor Mallmann, CEO of Quattor, which became Brazil's second largest petrochemical company in 2008 when some of the chemical assets of the conglomerate Unipar were merged with Petrobras. "The question now is how the crisis will affect demand," he says.

On the supply side, Mallmann anticipates the postponement of some new chemical plants on which construction might not have begun, such as those slated to open in 2011 or beyond. "We are facing an adjustment," he says.

The Latin American region itself is no stranger to petrochemical projects. Quattor may be part of a massive $8.5 billion plan to build a refinery and petrochemical complex in Rio de Janeiro in 2012. Mallmann, however, says his company is still working out issues such as feedstock pricing and the market situation when the plant is scheduled to come online.

Braskem has several projects in the region. It and Pequiven, the state chemical company of Venezuela, are planning a 1.3 million-metric-ton-per-year ethylene and derivatives complex for 2013.

Elsewhere, Braskem, Petrobras, and PetroPeru are studying an ethylene complex in Peru that could produce as much as 1.2 million tons per year of ethylene and polyethylene.

Many of these plans, having not advanced much beyond the discussion phase, are in the category of projects that could slip if the economic downturn gets much worse and hits Latin America harder than is now expected.

 
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