Latin American petrochem growth to slow, but will elude the worst of the downturn

Latin American region may avoid the worst of the petrochemical downturn, but growth will slow. Since 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. The International Monetary Fund (IMF) expects 3.1% growth in South America and Mexico in 2009, - a decline from the 4.6% growth in 2008, mainly due to commodity export slowdown and an increasingly difficult environment in which to borrow from foreign lenders. IMF forecasts growth of 3% in Brazil and 3.6% in Argentina 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. IMF predicts 2.0% growth for Venezuela in 2009, but that's sharply down from 6% in 2008- mainly because Venezuela's heavy dependence on petroleum exports. Oil prices have fallen to less than one-third of the record rates seen in July. Venezuela failed to diversify its oil-dependent economy and is facing a sharp slowdown from the global oil bust while experiencing Latin America's highest inflation rate, 30%. Most Latin American countries are better prepared for the downturn as they have saved money, found new export markets and kept inflation low during the good years. Peru, Chile, Panama and Brazil seem best positioned to ride out the economic storm. Argentina is suffering from plummeting soybean prices, double-digit inflation and a scarcity of foreign investment. Mexico and the Central American countries are facing an especially bleak 2009 because their economies are tied so directly to the U.S., whose economy is expected to contract in 2009. Latin America is expected to grow by only 1.9% in 2009, according to the Economic Commission on Latin America and the Caribbean, as compared to 4.6% in 2008 and 5.8% in 2007, as the region faces a decline in economic drivers of export growth, remittances, commodity prices and foreign investment. 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. Alpek, the chemical subsidiary of Mexican conglomerate Grupo Alfa, saw revenues increase by 28% to US$3.8 bln and operating income climb 8% to US$154 mln for the first 9 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%. 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 bln. 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%. The downturn is starting to hit Latin America, 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%.