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H1 Outlook: Latin American polyethylene markets face record-low prices, uncertainty in 2019

Houston — The last two years have each been a tale of the fourth quarter for the Latin American polyethylene market, with the driving factors -- beneficial or otherwise -- originating from its North American counterpart and leaving more questions than answers.

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After Hurricane Harvey in the summer of 2017 greatly reduced PE trade between the regions and propped up pricing, 2018 began with a muddy outlook for Latin American PE importers waiting on a flood of cheap PE pellets to hit their shores as part of the first wave of North American capacity expansions.

This year, however, has already begun on the opposite end of the spectrum, and it is again because of a Q4 shift in fundamentals. A simmering trade war has seen China take aim at the US plastics industries, and the fallout has shifted PE tradeflows and depressed global pricing as the US looks for relief valves for its recent surge in resin production.

As a result, buyers from Mexico to South America spent the final few months of 2018 enjoying record-low PE pricing, and they entered January with ideas of more of the same.

PROCEEDING WITH CAUTION

That positive outlook is somewhat balanced by uncertainty tied to new governments in key markets -- a dynamic not unique to Latin America but seemingly omnipresent in recent years -- leading to what can be best described as cautious optimism.

"The markets feel good for now but they're still nervous, and with good reason," a South American trader said. "They've seen the promises that politicians will revive industries and fix economies, but they've also seen the corruption take hold and leave them worse off than before.

"So, the cheap resins are nice and a positive for the fabricator and the consumer and so on, but it won't matter if the governments don't learn from mistakes. We need investment. We need competitive and reliable feedstocks, and to not be dependent on the government to supply the petrochemical industries."

To that end, both Braskem Idesa in Mexico and Braskem in Brazil are in the exploratory stages of seeking avenues for diversifying their feedstock options, company sources have said, adding that the US' shale revolution has led to a rethinking of investment and feed flexibility going forward. There has even been renewed market talk of similar shale play in Argentina's Vaca Muerte, with optimism that any petrochemical expansions that result would lead to a greater sense of self sufficiency for the region, sources have said.

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For the time being, the overwhelming sentiment from Latin America is one of no resolution in sight for the US-China trade war, with decision-makers starting to plan for the long haul. Regional producers such as Braskem in Brazil and Pemex in Mexico have had to fall in line with the falling PE import prices tied to US-origin resins, which are subject to a 25% tariff in China -- the intended export target for the recent first wave of US capacity expansions.

US-CHINA RESOLUTION COULD BE DISRUPTION

Buyers in these same key Latin American markets have become well aware of the current situation and are keen on waiting out a price floor, taking a hand-to-mouth approach to inventories in the interim. That has applied yet another pressure point to PE prices in the region, with the resulting weak demand from converters leading to elevated stocks for producers and distributors alike, in turn hurting import demand further.

That cycle, it seems, can only be broken with a return to normal global tradeflows, sources have said.

"The key is China," a US-based trader said. "If they open back up to the US today, we could see global PE pricing spike by up to 5 cents/lb ($100/mt) by tomorrow or within just a few days."

Latin American PE producers have also began wondering "what if" regarding trade involving the US, although most readily admit any trade tensions between the regions would ultimately hurt the US more. A reworked trade agreement between the US and Mexico went a long way toward at least temporarily assuaging those fears for at least one regional producer.

"We are happy for the free trade agreement between Mexico and the US," a Mexican PE producer source said. "Trade wars are not good for anyone, country or consumers. We think its a bad move for US and China.

"If tariffs between Mexico and US were imposed on PE, our view is that the US producers are the ones most negatively affected, and the consumers as well. For us, it could be neutral or even positive, considering that Mexico imports large volumes of PE from US. The two Mexican producers could benefit from that, although we are a supporter of the current NAFTA free trade agreement and we think that no tariffs should be imposed, an outlook shared by our chemical and plastics associations."

--Phillipe Craig, phillipe.craig@spglobal.com

--Edited by Jennifer Pedrick, jennifer.pedrick@spglobal.com