VINACHEM

The downturn in global petrochemicals is set to last until mid-2025 as China’s capacities enter the market without strong demand, according to an analyst at credit rating agency Fitch.

Marcelo Pappiani, analyst at Fitch for petrochemicals and pharmaceuticals in Latin America, said China’s drive for self-sufficiency was likely to re-direct to Latin America imports formerly destined to the Asian largest economy, which is set to continue domestic prices.

The analyst said 2024 is set to be another “difficult” year for most petrochemicals producers, adding: “Our view is always a bit more pessimistic than that of companies.”

Mid-2025 is indeed the most far-out projection for a potential recovery in petrochemicals demand. Within Latin America, Brazil’s polymers major Braskem said earlier this year it expected some green shoots by the end of 2024, and the recovery in earnest by the start of 2025.

Activas, a large Brazilian distributor, also said the recovery would need to wait until 2025.

The view from Latin America’s largest economy is conditioned by a poor performance of its industrial sectors in 2023, which have failed to join the wider recovery propelled by a strong agricultural harvest and healthy services activity.

However, Fitch’s Pappiani said the downbeat sentiment in Brazil should also be considered within the wider malaise in global petrochemicals, as capacities in North America, the Middle East and China continue being added without the necessary demand to absorb them.

He specifically highlighted China’s capacities as the country aims to become self-sufficient and doing so in a state-planned manner.

Lower exports to China are likely to put further pressure on Latin American chemicals producers, who will need to continue fighting for market share in the face of abundant and affordable imports.

Brazil’s chemicals producers have repeatedly said imports into the country at “depredatory prices” are putting at risk the survival of domestic production in some value chains. Brazil’s chemicals trade deficit continued rising in the January-August period to a whopping $32bn.

The Fitch analyst said he does not expect a change for the better in Brazil’s chemicals trade deficit any time soon.

“China is becoming self-sufficient in producing PP [polypropylene] and PE [polyethylene], as well as other chemicals. Because in China they are not concerned about the economic viability of the enterprises. Companies can run into losses and the government doesn’t care. They care about people having jobs,” said Pappiani.

“They are very keen on becoming self-sufficient at whatever cost and what we consider economic irrationality may not be so for them.”

BRAZIL FERTILIZERS

Among Brazil’s three largest chemicals producers – Braskem, Unipar and Unigel – the latter is taking a hit from its exposure to fertilizers, putting the company’s finances against the ropes.

According to Pappiani, the company could be heading for bankruptcy within weeks if it fails to meet a debt interest payment in 10 days.

While Brazil’s agricultural prowess grows – the country has in a few decades become one of the world’s bread baskets – its production of fertilizers never took off and, as it can be seen with Unigel, is being reduced.

Prices for fertilizers’ main feedstock natural gas are around five times higher in Brazil than in the US, the main competitor in the Americas. Brazil’s chemicals keep lobbying for higher natural gas production out of the country’s large reserves, but its state-owned energy major Petrobras seems to be more focused on crude oil.

In June, Unigel and Petrobras had signed a “strategic partnership” to explore ways for the chemicals producer to obtain natural gas at more favourable prices; since then, nothing else was heard.

Nothing was heard either about the “working group” created by Abiquim and Petrobras in July to “face the critical situation” the Brazilian chemicals industry was in.

According to Fitch’s Pappiani, a potential deal between Unigel and Petrobras would have taken “12, 18, even 24 months” to be finalised: too long, in any case, considering Unigel’s pressing financial issues.

“[President] Lula has spoken of making of Brazil a champion fertilizers producer, and there has been recurrent talk of Petrobras entering the segment. Braskem also considered it in the past, but thought it was too volatile. It was Unigel who tried to engage in the sector, but as we can see it didn’t end up being what they expected,” he said.   – ICIS –