As new polymer capacity comes on-line in the US, Canada and Mexico, producers are hoping that export markets will be strong. Unfortunately, the math doesn’t bode well for exports to Latin America. China, India and Africa may be better market targets for what promises to be a 4-6 million ton-per-year surplus of North American polyethylene.1
The traditional export market for US polyethylene (PE) has been Latin America and early capacity announcements were based on meeting its polymer shortfall. However, as seen in Figure 1, Latin American GDP growth since the middle of 2014 has been very disappointing, primarily due to poor world economic growth, political issues in Latin America and the commodities market bust (Latin America has a large dependence on minerals production). Polymer producers around the world looking for export markets will need to do more to lock in and grow export market share.
Weak economic growth has impacted PE markets in Latin America. Figure 2 shows the growing trade deficit in PE experienced by Latin America over the past decade, widening 17% per year between 2005 and 2014. However, the deficit shrank by 7% in 2015—a warning to producers counting on this to be a robust export market. This decline was the first since the 2009 recession. And, unfortunately, economic forecasting firm Oxford Economics does not foresee positive GDP growth for Brazil, Latin America’s leading economy, until 2018, albeit relatively weak growth in that year.
North American (includes Mexico) polymer producers have been aggressively selling into Latin America to boost market share and create a stable outlet for PE resins, with good success—they have gained PE import share over the past decade, taking volume primarily away from Europe, Asia and the Middle East, as seen in Figure 3.
However, some of this share has been bought with lower prices. Recent data based on reported import volumes and values indicate that North American sourced PE has come into Latin America at lower prices than from other regions, including the Middle East (see Figure 4), the lowest cost producer in the world. North American plants located on the US Gulf Coast have a superior logistics advantage over all other regions in serving Latin America.
Still strong long-term fundamentals
Most PE imports to Latin America are in high density polyethylene (HDPE), as shown in Figure 5. While a large part of this goes into food packaging, a high growth area is in pipe, as water infrastructure and agricultural irrigation uses continue to grow (see past blog on water). New uses that have potential for growth in Latin America include PE netting, for instance. Nets can be applied to protect crops from hail, wind, insects and birds. Other applications include fruit ripening sacks as well as bags and film for aseptic food packaging (see past blog on food).
From a trade perspective, Latin American (excluding Mexico) imports for bags and sacks made of PE grew 25% between 2014 and 2015; pipe and tube imports grew 27% in the same period. However, these two were among the few high growth areas for converted PE. As a matter of fact, agriculture was one of the very few sectors exhibiting output growth in Latin American between 2014 and 2015 (at less than 3 percent).2
In essence, HDPE in Latin America is aligned with megatrend growth related to water and agricultural development for meeting the world’s growing thirst and appetite.
However, the total Latin American (excluding Mexico) import market is still rather small, with a 2 million metric tons per year (MMtpy) deficit in 2015. By 2020, North America will have 7.1 MMtpy more PE capacity than in 2015.3 Some will cover Mexico’s 1.5 MMtpy trade deficit and some will cover growing North American demand (see past blog on North America). However, a large part, about 4 to 6 MMtpy, will need to be exported. If North America gains a 100% share of the Latin American import market (from its current 66% share), it will only sell another 1.5 million metric tons of PE, unless significant market growth occurs. This will still leave another 3-4 MMtpy for other destinations.
Finding a home for PE
As seen in Figure 6, China (12 MMtpy of net imports in 2015), India (1.9 MMtpy) and Africa (1.6 MMtpy) are good targets for the remaining product. The main competing exporting region for these markets is the Middle East, which is also expanding in PE. If all the remaining North American PE went to China, that would account for almost one-third of China’s current PE trade deficit (see past blog on China prospects).
In addition, the North American surplus is likely to increase if so far unconfirmed expansions happen after 2020. It is imperative that producers develop strong customer connections to maintain and grow trade share.
What should plastic producers do?
Producers from the Middle East to North America vying for increasingly scarce export markets should:
Look to growing end-use consumption areas (aligned to megatrends) and gear application development toward those areas. New tools, such as data mining media, can help find new growth applications.
Maximize supply chain efficiency as cost curves may be flat, depending on oil prices, and every bit of cost competitiveness would be needed (see past blog on oil price impacts).
Invest in “forethought,” harnessing internal and external expertise as well as utilizing scenario planning and other methods of understanding future market conditions.
Strengthen customer “stickiness” in destination markets, demonstrating that you are supporting them over the long term. Offer dedicated technical support, service and application development.
Figure 1: Accenture Research analysis of Oxford Economics data as of May 12, 2016.
Figures 2-6: Accenture Research analysis of IHS Global Trade Information Atlas data; includes inter-LA trade.
1Based on Nexant data and Accenture Research analysis of capacity expansions and expected growth.
2Based on an Accenture Research analysis of the real gross output of 109 different sectors and/or subsectors covered by Oxford Economics for Latin America.
3Based on Accenture Research analysis of Nexant data from December 2015.