Mexico’s Polyethylene Market: The battle that’s brewing…

Mexico is one of the largest Latin American markets for polyethylene. In 2015, Mexico’s apparent demand (production + imports – exports) crossed the 2 million metric tons barrier. In spite of its sizable market, per capita polyethylene consumption in the country is still comparatively low. At 17 kg per person, its per capita demand for polyethylene is about half of the level in Europe and North America.

About 40% of the polyethylene consumed in the country is high density polyethylene (HDPE), followed by linear low density polyethylene (LLDPE) with 38% share of demand. Ever since 2006, when Pemex started domestic production of LLDPE, low density polyethylene (LDPE) has been losing market share in the country. From a volume standpoint, between 2005 and 2015 LLDPE demand doubled, whereas LDPE decreased by 30%. During the same period, HDPE demand increased by 20%.

Imports play a key part in the Mexican polyethylene market. Ninety percent of the HDPE consumed in the country is imported, whereas seventy percent of LLDPE and fifty percent of LDPE are imported.

Imports Share of Demand

In 2015 alone, Mexico imported 800 thousand tons (KT) of HDPE, 580 KT of LLDPE, 180 KT LDPE and 43 KT ethylene-vinyl acetate (EVA) copolymers. To put this in perspective, this volume is the equivalent of two world scale HDPE plants, one world scale LLDPE plant and one of LDPE. Due to proximity, lack of logistical barriers and free trade agreements, most Mexican polyethylene imports originate in the United States. As much as 90% of HDPE imports, 90 to 95% EVA copolymers imports and 70 to 80% of the low and linear low density polyethylene imports into Mexico were sourced from the United States. In spite of it being the main supplier of polyethylene to Mexico, the United States has been decreasing its import market share. As recently as 2008, U.S. imports represented 88% of the total PE imports into the country; by 2015 the share had decreased to 81%.

Mexico's Polyethylene Imports

Last week, we covered the startup of Braskem Idesa’s Etileno XXI plant, the first polyethylene plant to start in North America in over 10 years. This event is expected to drastically change the market dynamics in the country. Material from this plant, which includes 300 thousand tons of LDPE and EVA copolymers and 750 thousand tons of HDPE, will begin to hit the market this month. United States suppliers stand to lose the most from this increased domestic source of material in Mexico.

Mexico's Reported Imports

During 2016, we expect Braskem Idesa to add as much as 400 thousand tons of HDPE and 160 thousand tons of LDPE supply to the Mexican market; this is equivalent to about 50% of the HDPE imports and 70% of the LDPE imports to the country in 2015.  Thereafter, the new domestic production in the country will equal to as much as 85% of the 2015 HDPE imports and 123% of 2015 LDPE imports. This would definitively result in a lot of displacements and supply reshuffling in the Mexican market.

It is unlikely that all of that material will be introduced suddenly; such a move would have negative impact in prices and profitability for polyethylene suppliers in Mexico. There are a number of possible scenarios that may start developing from this point forward.

Possible scenarios

Initial focus on export markets by Braskem Idesa: the company has made public its plans to export a significant amount of its production outside of Mexico. This will likely continue for some years, as Braskem Idesa gradually increases its share of the domestic market.

Domestic market expansion: the addition of domestic capacity typically boosts domestic demand growth. For example, LLDPE demand in Mexico jumped by 30% in 2006, after the introduction of domestic production by Pemex. Double digit growth in demand for LLDPE has been the norm ever since, albeit through displacement of LDPE consumption. Assuming that LLDPE will continue to capture most of the organic growth in the lower density segment of the market, similar boots in demand growth for LDPE and HDPE in Mexico starting this year could result in as much as 400 KT of additional domestic demand for HDPE and about 125 KT of additional domestic demand for LDPE by 2018. This would reduce the required level of displaced imports to about 300KT of HDPE and 150 KT of LDPE.

Closure of Pemex’s HDPE Morelos plant, HDPE swap: Pemex currently owns two aging HDPE plants in Morelos. These plants are fed with ethylene from a 27 year old, 600 thousand tons ethane cracker. Pemex as a whole has been negatively impacted by the drop in oil prices, and is currently mulling the sale of its ethylene and derivatives units in order to help its finances and to re-focus on its core businesses of exploration and production of oil. The company is also under contractual obligation to supply ethane to the Etileno XXI cracker; terms of the deal are not public, but the contract includes damages for non-performance of supply. Although far-fetched, it is not difficult to envision a scenario under which Pemex disposes of some of its older assets and works an HDPE swap deal with Braskem Idesa. This would reduce the domestic polyethylene supply by 200 thousand tons, again facilitating the absorption of the new material coming from Etileno XXI.

We will continue to monitor the Mexican petrochemical market in the near future. If you are interested in any of the background information included in this report, please send us a note.

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