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The global petrochemical industry has always been cyclical.
After experiencing an extended upcycle from 2015-2018, the industry
was affected by lower economic growth in countries such as China,
decreasing demand for many petrochemicals and beginning a reduction
in margins in 2019. While demand was declining, significant
additional production capacitywas expected to enter the market in
the 2019-2022 time frame. The combined effect of lower demand and
higher supply was expected to reduce margins in from 2019 to 2021 -
and that was before the impacts of COVID-19 and lower crude oil
prices were realized.
To understand recent market developments and the impact in Latin
America, let's consider ethylene, the building block of the
petrochemical industry. Latin America has an installed capacity to
produce approximately 7.5 million metric tons of ethylene per year
at facilities throughout the region (see Figure 1).
Brazil, Mexico, and Argentina account for the largest production
capacity in the region, while Colombia's production capacity is
approximately 100,000 tons per year. Venezuela has two
ethane/propane crackers on the West Coast, but the lack of
feedstock availability has reduced production capacity to
negligible volumes in recent years. It's worth noting that
nameplate capacity does not translate into production when
feedstock availability is limited.
Of the feedstock slate at crackers in the region, naphtha is the
preferred feed with 46% of the total (see Figure 2).
In recent years, however, ethylene production in the region has
been limited by feedstock availability. Hence, imports of ethylene
derivatives and in some cases, ethane and propane shipments have
increased significantly as well. Today, almost 12% of the ethane
consumed at the Braskem/Idesa cracker in Mexico is imported from
the US Gulf Coast.
We believe the impact of lower crude oil prices will affect
production cost and competitiveness of the petrochemical industry
in Latin America. On the demand side of the equation, the negative
impact of COVID-19, primarily on durable goods, will be
unprecedented. As a result, production of many end-use products
derived from petrochemicals will be dramatically lower, affecting
operating rates at the crackers.
Lower crude oil prices will result in lower naphtha prices,
which will then translate into increased cost-competitiveness for
naphtha crackers. This trend primarily affects crackers in Brazil,
where naphtha accounts for 73% of total feed. While ethane crackers
in the Americas (including the USA, Mexico, and Argentina) are
expected to lose some of their cost advantage in the 2020-2021
period, we anticipate this change in production cost among crackers
in the region will be short-lived - ended by a return to higher
crude oil prices and a higher naphtha price by end of 2021.
Figure 3 illustrates ethylene production costs for several units
in the region under different crude oil scenarios. The blue line
represents production costs across different ethylene production
facilities in the region during first half of 2020. Production
costs at these units are evaluated under a low West Texas
Intermediate (WTI) crude oil scenario of US$ 32/bbl in 2020. This
graph was produced using the IHS Markit Cost Curve Margin Analysis
(CCMA) model.
We believe producers in Brazil that crack naphtha will be the
lowest-cost producers in the region for a short period. Ethane
crackers in Argentina and Mexico will move higher along the cost
curve to reach less-competitive cost positions. This situation is
expected to change in 2021 as naphtha prices increase upon the
return of higher crude oil prices.
These changes in production costs have a significant impact on
local markets, trade opportunities, and production rates. For a
producer with a flexible feed position, having access to this
information is very useful to develop strategies and help mitigate
the downturn. Producers can even increase production to make
better-than-expected margins and earnings during these unexpected
and short-lived windows of opportunity.
Despite a competitive position for Brazilian naphtha crackers in
early 2020, the COVID-19 lockdown created a significant downturn in
domestic demand - virtually eliminating the possibility of
Brazilian crackers running at high rates during this temporary
competitive position. However, the rapid recovery and increase in
domestic demand in China opened the door for exports, as production
costs at Brazilian crackers were competitive with other producers
around the globe. Looking ahead, as delivered cost to other
regional markets becomes too high for ethane cracker producers,
there may be opportunity to expand sales to regions not previously
considered. In this way, we could see Brazilian product entering
markets in Europe and Asia.
Of course, very little ethylene is sold as monomer. More often
it is sold as a derivative such as polyethylene, ethylene glycol,
or polystyrene, typically in domestic markets that yield a better
netback. For example, for polyethylene plants consuming ethylene
from naphtha feedstock steam crackers, a much more favorable
competitive position will develop under the current crude oil price
scenario. However, demand for these derivatives must exist in order
to run units at relatively healthy rates.
Prior to COVID-19 and current lower crude oil prices, we
anticipated a downturn in margins for most chemical chains, which
should have extended for some years to come. However, unexpected
change in global demand for most products has reshaped the
immediate future. In dynamic markets, access to information
pertaining to changing production costs and margins is essential to
creating insight into a product chain and developing strategies for
the coming years.
Fundamental changes in production costs, feedstock availability,
and global trade will challenge "business as usual" in Latin
America. Hence, a clear understanding of how crude oil prices
affect the selection of a competitive feedstock slate for producers
in the region can prove valuable in these uncertain times.
Posted 07 September 2020 by Rina Quijada, Ph.D., Vice President Latin American Business Development, IHS Markit