INSIGHT OUTLOOK: LatAm petchems producers hope protectionism, freight costs could improve margins

MADRID (ICIS)–Latin American petrochemicals prices remain in the doldrums due to global oversupply, but domestic producers are hoping a sustained increase in freight costs and protectionist measures could start improving their dented market share.

Petrochemicals in the world’s quintessential ‘price taker’ region – Latin America remains a net importer and therefore is at the mercy of global price swings – have had some of the toughest years in memory: high levels of lower-priced imports have heavily reduced operating rates in the region.

In Brazil, producers’ operating rates stood in May at a record low of 58%, according to the country’s chemicals trade group Abiquim. The story repeats itself in most Latin American countries, perhaps with the only exception of Mexico.

There, the government increased import tariffs in several chemical products and the country’s North American status makes its petrochemicals industry less prone to the woes its southern neighbors have to deal with.

Still, Braskem Idesa, the largest polyethylene (PE) producer in Mexico, has not been able to avoid the competition from imports from Asia and the US in a much-oversupplied polymers market, with its sales and profit also hit by the situation.

Most economists believe Argentina’s GDP is going to fall around 4-5% this year, with a stronger rebound in 2025. However, most petrochemicals suffered heavy falls in demand this year of around 40%, according to some sources.

In Latin America as a whole, players in the PE and polypropylene (PP) markets, two of the most widely used polymers, expect little improvements in demand in coming months, under a global oversupply which is expected to remain or even widen as yet more capacities come on stream.

BRAZIL: THIRST FOR GAS
Petrochemicals producers in Latin America’s largest economy, Brazil, have been losing market share for the past two years as China’s dumping of its oversupplied chemicals to the rest of the world continues apace.

The chemicals trade group in the country Abiquim, in which polymers major Braskem has a commanding voice, grasped its opportunity when President Luiz Inacio Lula da Silva took office in January 2023.

Abiquim started then a lobbying campaign for higher import tariffs – the previous liberal-minded administration of Jair Bolsonaro had lowered them – to protect domestic producers’ market share, but also calls about high natural gas prices which, producers say, is making the industry uncompetitive in the global stage.

Lula’s cabinet, whose declared aim is to create more and better industrial jobs, has listened to Abiquim and in 2023 raised tariffs twice, and another increase is widely expected by September after a public consultation in which the industry – Abiquim as well as individual companies – requested increasing tariffs in more than 100 chemicals.

On the other hand, a coalition of a variety of trade groups who import most of the chemicals they use in their manufacturing processes – plastics converters, for example – have been lobbying on the opposite direction: for tariffs to stay unchanged or, in their best scenario, even lowered.

In natural gas, Brazil’s prices are admittedly much higher than the US’, the other large Americas’ chemicals market. According to Abiquim, they are five times higher, although that multiple varies according to the obvious gas price swings.

In June, Lula and several ministers went to gas-rich Bolivia to sign deals to increase imports of natural gas as well as fertilizers, taking with them several executives from manufacturing trade groups; Abiquim’s head, Andre Passos, was part of the entourage.

Only time will tell if, as Abiquim put it, the deals for natural gas end up representing a “historic step” for chemicals in Brazil, who supposedly could sharply lower their gas costs if more supply from Bolivia – and potentially from Argentina – went to Brazil.

Despite this progress, Brazil’s industrial sectors continue to import chemicals because they are simply not produced in the country, which imports nearly half of all the chemicals it uses in its factories: the country lacks special chemicals production which, in times of crisis, could help it weather global downturns.

As a consequence, the three main chemicals producers, mostly producing basic chemicals or polymers, have been hit hard by the global downturn.

Braskem and Unipar’s financial results continued suffering in the first quarter of 2024, while Unigel remains involved in a battle for its survival after its natural gas-based fertilizers division, combined with the downturn in the chemicals division as well as a high debt burden put its finances against the wall.

Unipar and Braskem are set to publish second-quarter financial results in coming weeks. Unigel has not released financials since Q1 2023, an option allowed by Brazil’s financial regulations for companies in financial distress.

The severe floods that affected Brazil’s southernmost state of Rio Grande do Sul in May are likely to hit the country GDP growth in 2024, although bodies such as the IMF expect a strong rebound in 2025 as reconstructions efforts gather pace.

While mostly out of the media spotlight by now, the floods were Brazil’s worst ever and its images will remain etched in Brazilians’ retinas for years. They left 182 dead, with 29 people still unaccounted for. Nearly 2.5 million people were affected at the peak of the crisis in the 11.5-million-strong state and its economy came to a standstill during May.

Brazil’s vast geography makes it prone to be victim of a variety of weather phenomena which are only set to increase in number and severity as climate change continues its course. Experts agree the country needs to step up its climate change adaptation measures.

IMF estimates (in %)	GDP growth 2024	GDP growth 2025	Difference with April forecast 2024	Difference with April forecast 2025
Brazil	2.1	2.4	-0.1	0.3
Mexico	2.2	1.6	-0.2	0.2
Latin America and the Caribbean	1.9	2.7	-0.1	0.2

SHEINBAUM INCOGNITA
In October, Mexico’s Claudia Sheinbaum will take over as president from Andres Manuel Lopez Obrador, who handpicked her for the role. Sheinbaum will be sworn in after 60% of her compatriots backed  her, with her Morena party achieving in parliament a supermajority of two thirds of seats.

The IMF also downgraded its GDP growth forecast for Mexico in 2024, as the presidential transition takes place and until Sheinbaum’s policies become clearer but upgraded them for 2025. Energy policies, greenhouse gas (GHG) emissions, and the burden of the overindebted crude oil state-owned major Pemex will be on the spotlight.

Mexican manufacturing is showing signs of a slowdown due to internal policy but also because of the US November election, where the export-intensive economy sends most of the goods it produces. The downturn in the US manufacturing sectors remains, with its Mexican peers taking the collateral damage.

Corporate Mexico was never too fond of Lopez Obrador’s left-leaning rhetoric, although the president did not really change much in the economic fundamentals.

In public, and for now at least, companies think Sheinbaum will be a better ally for the private sector, although many still fear what she may do with the supermajority backing her in parliament. One-party constitutional reforms are possible.

In an interview with ICIS, Sergio Plata, an executive at Braskem Idesa, said companies are liking the tune of Sheinbaum’s first steps as president-elect, and praised her visit to the petrochemicals hub of Veracruz after winning the election, in which she showed deep knowledge of the chemicals industry and its needs, he said.

Despite enjoying better operating rates than its Brazilian peers and certain protection from higher import tariffs, Mexican petrochemicals producers also continue to be hit by the global downturn in the sector.

Apart from the aforementioned Braskem Idesa, Mexico’s largest chemicals company Alpek and Orbia posted poor set of results for the second quarter.

ARGENTINA REVIVAL?
Many economists in Argentina and outside it have come to think the country has no solution as its economy became dysfunctional under a subsidy-dependent, corruption-prone, and closed to imports system where the large middle classes are now just a distant memory. According to official figures, around 60% of Argentinians live in poverty.

The country’s demise is studied in business schools as a case of a developed economy which downgrades to emerging economy status. In December, however, Javier Milei was sworn in as president under the promise of turning the country upside down and make it a liberal bastion, with a largely deregulated economy.

While his shock therapy has caused havoc, he is still backed by most Argentinians: the dislike for the previous failed administration and its mismanagement remains latent, and Milei had warned during the campaign the changes would be painful.

While the economy may rebound strongly in 2025, petrochemicals are not expected to benefit much from it, as the recovery is expected to be led by export-intensive and foreign reserves-generating sectors such as crude oil, agriculture, or mining.

The petrochemicals-intensive manufacturing and construction sectors have been hit the hardest by the recession. Inflation has started to slowly fall, but it remains at an annual rate of 271%.

Petrochemical sources in the country are already bracing for more hardship in 2025, with demand expected to fall again. Indeed, it will take many quarters for consumers to have the means and the confidence to buy higher-priced and petrochemicals-intensive durable goods.

“Everyone is wondering for how long people can take the shock therapy. If the changes implemented by Milei bear fruit, Argentina could be a completely different, and perhaps better country,” said in July a source at a distributor in the country.

“But will he achieve what he is proposing? I am not that certain.”

MADURO DRAGS ON
Venezuela may also end up being studied in business schools’ textbooks, having gone in just three decades from powerful oil exporter to poor nation, plagued by insecurity, with a third of its population gone abroad since 2015, and with a president who is a dictator in all but name.

The country’s demise started in the 1990s and worsened after the socialist PSUV party took over in 2001, first under Hugo Chavez and later under Nicolas Maduro.

On 28 July, the country held an election with hopes it could be free, unlike the 2018 election which gave the PSUV got more than 95% of seats in parliament and which ultimately made Venezuela a pariah country.

Several analysts and even opposition figures in Venezuela hinted that, if Maduro lost the election, he could be given the option to leave for exile in some of the few allies he has – Cuba and Russia recurrently mentioned – allowing Venezuela to start afresh.

Opinion polls consistently showed Maduro was on course for a defeat. Turnout on 28 July was high, and long queues of Venezuelans at the polling stations drew a picture of thirst for change.

However, when the official results came in, most Venezuelans realized the election had just been yet another farce. The government said Maduro had renewed its mandate with 51.2% of the votes, with the main opposition candidate at 44%.

Few countries have recognized Venezuela’s result yet, apart from some of Maduro’s allies, some of them global pariahs themselves. Even China, tired of lending Venezuela large sums which it fears it will never get back, has not been unfriendly to opposition leaders.

The US, the EU, and traditional allies in Latin America such as Colombia’s Gustavo Petro, Brazil’s Lula, or Chile’s Gabriel Boric had also said a recount should take place again with full transparency; the very demand coming from the opposition since the official results were announced.

The coming days and weeks are crucial. However, after years of demise, Maduro’s exile, if it happens, would only represent for most Venezuelans a small glimmer of a very distant light at the end of a very dark tunnel.

Front page picture: Brazilian President Lula (right) meets chemicals industry representatives in Brasilia in May, including Abiquim’s director general Andre Passos (right, behind Lula)
Picture source: Abiquim

Insight by Jonathan Lopez