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H2 Outlook: Latin American PP sector to look for direction from Asian, US markets

The Latin American polypropylene market will continue to look toward Asian and US markets for direction for the remainder of 2019 amid weak global demand, according to market participants.

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In recent years, US and Asian markets have become important for Latin American buyers as the former is now the region's main source for propylene feedstock while the Asian product, which is impacted by oil and naphtha prices, ultimately ends up competing in Latin American markets.

Latin American market players had entered the year with a positive outlook amid political stability that brought waves of change. However, no changes have been seen to stimulate industrial sectors and demand in the H1 2019, sources said.

Latin American producers, who had to keep their prices down in the first quarter to retain their market share, did not fare well in the second quarter too due to limited demand and healthy imports. While they struggle to find the right equilibrium between pricing and market share, the situation is expected to intensify with continued price volatility and exchange rate fluctuations.

In Brazil, petrochemical giant Braskem revised its outlook from cautious to pessimistic, given local and global economic events. The company is bearish about the spreads due to higher supply coming from new refineries in Asia.+`

The Mexican market in the second half of the year will continue to be the main destination for US-origin PP, given the competitive advantages of the shared logistic capabilities between the two markets. Along the West Coast of South America, regional producers will continue the battle to retain customers and to be the preferred source over imports. Weak domestic demand in WCSA is expected to motivate regional producers to look for other opportunities in the export markets, including other Latin American and American markets.

PP markets may face higher supply, particularly in Brazil -- Latin America's leading economy. Demand hasn't picked up as expected and market players believe the remainder of the year will not bring many changes in the scenario.

The PP consumption, however, may increase seasonably through the year but it would still remain stable when compared to year-ago levels, sources believed.

Regarding pricing outlook, the region has been closely watching the international markets of the US, Asia and Europe. According to pricing data from S&P Global Platts from January 2018 to June 2019, Brazilian PP copolymer film and homo-polymer CFR prices and US Houston FAS are positively correlated, while Brazilian prices move in tandem with Northwest European prices.

"The US is definitely the main market in the PE segment, but PP has a different structure for South America. We import a lot from Asia but mostly from the Middle East," a Brazilian trader said.

On the other hand, West Coast South America PP copolymer film and homo-polymer CFR prices are more positively linked to US Houston FAS prices movements than to other regions.

Pricing scenario in the region could also be impacted by the US-China trade tension, which has already affected Asian demand of downstream goods, leading to cautious buying interest earlier in the year. As a result, Latin American region became a possible market for the remaining products, which could influence local prices.

Latin America is expected to see more offers from the US and China due to trade tensions between both the countries. Asian exports, however, come with longer transit times, which brings the question: what is more important for each costumer, price or availability? That is why some importers and distributors may still rely on local producers for hold-over supplies even at higher prices.

--Guilherme Baida, guilherme.baida@spglobal.com

--Charlie Uribe, Charlie.Uribe@spglobal.com

--Edited by Pankti Mehta, newsdesk@spglobal.com