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After 25% growth in 2010, Argentina's petrochemical market faces several challenges
A lack of feedstock access is plaguing the Argentine petrochemicals industry with the prioritisation of residential winter fuel demands leading to severe restrictions in gas allocations to downstream industries and plant shutdowns and undermining hopes of product diversification and expansion, according to Business Monitor International. The government has been restricting gas deliveries to factories and power plants so homes get sufficient supplies, as deficit is at 25 mn cu m/d, or 20% of average demand. In the winter of 2010, there were cuts of around 30% of supply of normal gas use by industrial clients, including petrochemicals industries, despite ordering more LNG cargoes as a stopgap measure. In a further move to secure gas supply, Argentina is currently exporting about 40% less to Uruguay and Chile than it did in 2009. In July 2010, producers in the petrochemicals sector, such as TGS, The Dow Chemical Company, PBB Polisur, Solvay Indupa and Profertil, were operating plants at 30-40% capacity on inadequate natural gas supplies, as the country was gripped by a severe cold spell. The cold weather drove up residential gas demand by 60-67 mln cu m/d. A lack of ethane supply from Compania Mega led to a reduction in feedstock for Dow Chemical's 700,000 tpa ethylene plants and 600,000 tpa HDPE, LDPE and LLDPE facilities in Bahia Blanca. Dow was forced to idle its ethylene facilities and import ethylene for PE production. Mega, a venture of Dow Chemical (28%), Spain's Repsol (38%) and Brazil's state-owned Petrobras (34%), gets gas supplies from Repsol YPF's Loma La Lata field in Neuquen. The company has the capacity to produce 540,000 tpa of ethane, 365,000 tpa of propane, 235,000 tpa of butane and 220,000 tpa of natural gasoline at Bahia Blanca. Argentina's petrochemicals market experienced a strong upturn of at least 25% in 2010 with main consumers experiencing strong growth. However, GDP growth is set to decline from over 4% in 2010 to just 1.8% in 2011, dragging down the recovery in the market. BMI cautions that the consumer-led growth in plastics consumption is very short term and is likely to decline to much-reduced levels when tax breaks and subsidies are removed. With the domestic market headed for slowdown in 2011, petrochemicals output is going to be more reliant on exports and therefore sensitive to exchange rate fluctuations. Over the longer term, BMI continues to see steady depreciation, owing to the current economic model of export promotion and fiscal expansion. The Argentine peso is set to decline from an estimated average of ARS3.90/US$ in 2010 to ARS4.50/US$ in 2011. However, signs that the government may shift away from this model could lead us to adopt a more bullish long-term stance. Argentine PP producers Petroquimica Cuyo and Petroken have proved to be more competitive on the domestic market; although Brazilian PP has duty-free entry its prices are higher than Argentine prices, while imports from the US and Asia have a 15% import tariff which prices them out of the market. Solvay Indupa's PVC facilities will be less affected by the domestic slowdown in 2011 as PVC exports will benefit from growth in Brazil and the growth in the country's construction sector.
A favorable economic climate and a rising middle class, fostered by government policies to reduce poverty, have increased disposable incomes, food and beverage consumption and thereby, plastic packaging uptake. Argentina's economy was reasonably insulated from the economic downturn, lending some stability to its gross domestic product (GDP) growth rate, which is expected to grow at 6% in the next few years and stabilize at 3.5% by 2017. Analysis from Frost & Sullivan finds that the market earned revenues of US$1.25 bln in 2010 and estimates this to reach US$1.91 bln in 2017. Growth in GDP rates directly influence commodity plastics consumption, where for every GDP point, the PP segment grows by 1.2% and PE by 1%. The demand for food and beverages is growing at 4% and is expected to mirror the growth rates of the GDP. The requirement for food, and hence plastic food packaging, is non-cyclical and 'income inelastic.' Consequent to the economic stability, supermarkets are thriving in Argentina and retailers hold a lot of sway over the type of packaging used in the food and beverage industry. Food retailers require packaging that extends shelf life, as it allows them to better manage their logistics and therefore, several plastics manufacturers are investing in R&D to improve this quality. Moreover, the lightness of plastics does not add extra weight to the product and hence, makes it easier for distributors to carry plastic packaging than glass, board, paper, or metal. Retailers are pressuring food and beverage manufacturers to use plastic packaging as they are shatterproof and have lesser volume, making them easier to stock. Plastic packaging has widened the gap with other materials through further improvements in polymer performance properties and processing technology. Their faster filling rates and the ability to hold foodstuffs that are still hot have given plastic packaging yet another competitive edge over other materials. However, plastics packaging manufacturers have to strategize to counteract the high prices of feedstock, as they reduce margins. Resins constitute 50 to 70% of the total converted cost of plastic packaging and the frequent fluctuations in their prices have compelled resin producers to increase prices. Food and beverage manufacturers are unwilling to pay more for the packaging, as they know that it is a buyer's market due to the fierce competition among converters. Packaging manufacturers can take heart from the shale gas discoveries in Argentina, as it could enhance polymers production capacities, which are currently low due to domestic gas scarcity, especially in winter. Additionally, manufacturers are realizing the importance of developing biodegradable plastics to counter the depletion of oil and gas resources, especially at a time when customers are becoming increasingly environment conscious. Thus, alternative raw materials as well as recycling (only in PET products) can offset rising resin prices, international oil prices, and domestic gas scarcity.
As per a report by IHS Chemical Week, Argentina has experienced high economic growth averaging around a 9% GDP increase in 2010 and 2011. The chemical sector is an integral part of Argentina's economy, with above average growth rates in comparison to other sectors, at 10.5% average annual growth from 2007 to 2011, making it the most dynamic sector in the country's economy. As per Argentina's Chamber of the Chemical and Petrochemical industries (CIQyP) forecast, the chemical industry in Argentina has the opportunity to grow 100% over the next 10 years under ideal growth scenarios. In general, all chemical producers have good growth potential in the local market as the economy is growing at 8% per year and the demand for chemicals is increasing. The petrochemical sector growth is limited posed by the scarcity of raw materials, in particular natural gas. While the private players have built solid foundations and display impressive innovation and growth, in line with the rising GDP, a question mark hangs over the government's efforts to provide a competitive business environment. The country's potential to increase raw material supply through investment in the oil and gas industry and the development of unconventional gas reserves is promising in the long term, and private companies' proven track record for overcoming difficult economic situations virtually guarantees the continued growth of the Argentinean chemical industry. The total annual production of the chemical and petrochemical industry of Argentina is estimated at 8 mln Mt in 2010, with 40% of this made up from products of basic chemistry, 30% semi products and components, and 30% readymade materials and finished products, (according to Instituto Petroquimico Argentino). From years 2006 to 2011, domestic consumption of chemical products grew by 22%, and the export and import of chemical products, including basic products and semi- manufactured products, has increased 25% and 23% respectively. Argentina has seen a dramatic reduction of gas reserves in over the last 30 years, which is now threatening the country's once thriving petrochemical industry. Petroquimica Cuyo's General Manager, Jorge R. Sampietro, states: "Over recent years, Argentina's natural gas supply during the winter season has been insufficient to meet growing total demand. Therefore, government authorities have decided to divert the scarce resources to the residential sector, rather than to basic industries in order to satisfy domestic use. This decision has had a severe impact on the petrochemical sector and has led to domestic demand for petrochemicals far outweighing the diminished local production levels." The domestic demand for polypropylene is currently around 350,000 M tpa, whilst the combined local producers output reaches only 280,000 M tpa. Petroquimica Cuyo is the oldest polypropylene producer of Argentina and the second largest producer in terms of installed capacity. The main source of basic feedstock (propylene) for its 130,000 M tpa capacity is the YPF Luj�n de Cuyo refinery that is located next to the company's industrial plant in the province of Mendoza. The company's strategic location next to its main supplier, YPF, is ideal for operations when YPF's production levels are maximized, Jorge R. Sampietro, explains the difficulties Petroquimica Cuyo is facing under the current scenario: "The inland location of our plant site constitutes a very difficult problem to overcome, because it limits our ability to find new sources of raw materials due to high transportation costs and logistical complexities involved. Therefore, our challenge today is to improve our performance on a continuous basis through the reduction of production costs, the development of new polypropylene grades to meet the evergrowing plastics transformers demand and to improve our technical and commercial service to our customers." Petrobras, an integrated energy company, and the second largest oil producer in Argentina after YPF, is also the leading player in the styrene business in Argentina. The industrial complex located in San Lorenzo, province of Santa Fe, extends over and area of 150 hectares with a pier on the Parana River suitable for handling liquid cargo and has an installed capacity of 160,000 Mt of styrene and 58,000 Mt of elastomers (rubber SBR and NBR). The other facility located in Z�rate produces general purpose and high impact polystyrenes as well as bioriented polysterene in the only unit of its kind in Latin America. Argentina has historically been an oil exporter, but in recent years the country has had to turn to imports to meet the rising internal demand and depleting reserves. IPA estimates that for 2011 the petrochemical industry had a trade deficit of US$2.1 bln. President Ms. Fern�ndez has publically blamed Repsol for the country's current situation, accusing it of having drained YPF of financing since acquiring a controlling stake in the 1990s and not investing enough in Argentina to secure the country's long term energy position. Despite the varying opinions on who is to blame, it is clear that this lack of investment has impacted not only the oil and gas sector in Argentina, but also the downstream activities which make up the country's petrochemical market. On a promising note, Argentina has some of the world's largest reserves of shale oil and gas. In November 2011, YPF announced a major find of one billion barrels of shale oil, ranking Argentina number three in the world in terms of recoverable shale resources, behind China and the US, according to BBC News and US Energy Information Administration.
(Source Courtsey www.gbreports.com)
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