Analyzing Mexico's Petrochemicals Industry Performance

In 2013, the energy reform in Mexico brought significant changes to the petrochemical industry, which was previously controlled by the state through Pemex. The decline in Mexico’s petrochemical production had been ongoing for several decades. When Mexico joined the General Agreement on Tariffs and Trade (GATT) in the early 1990s and later NAFTA in 1994, the market became flooded with petrochemical imports, leading Pemex to reduce its investments in the industry. As a result, both Pemex and the private sector in Mexico invested less in downstream capacity.

However, a pivotal moment for the industry came in June 2016 when Braskem Idesa, a joint venture between Brazilian petrochemical producer Braskem and Grupo Idesa, one of Mexico’s largest petrochemical companies, inaugurated a new integrated polyethylene complex in the state of Veracruz. This complex, known as Ethylene XXI, represented a massive investment of US$5.2 billion and had a production capacity of 1.05 million metric tons per year. The primary objective of the project was to address Mexico’s significant trade deficit in polyethylene, replacing billions of dollars’ worth of imports.

The scale and significance of the Ethylene XXI project cannot be understated. Stefan Lepecki, the CEO of Braskem Idesa, describes it as the most significant project in Latin America and one that has not been seen in North America for several decades. The initial results of the project have been positive, with José Luis Uriegas, CEO of Grupo Idesa, reporting that the plant’s operation rate exceeded 90% in 2017, and Braskem Idesa consistently selling around 80,000 metric tons per month. By November 2017, the company had already sold 1.2 million metric tons of polyethylene, commanding a 43% market share of high and low-density polyethylene in Mexico. Although there were minor setbacks in the third and fourth quarters of 2017 due to supply issues with Pemex, Braskem Idesa remains confident that these challenges will not impact future operations. Lepecki emphasizes the importance of maintaining a good level of investment to sustain production rates, not only for Braskem Idesa but also for Pemex.

The success of the Ethylene XXI project has raised hopes for further development along the supply chain. Miguel Benedetto Alexanderson, the general director of the National Association of the Chemical Industry (ANIQ), notes the project’s significance in setting a precedent for the industry. It has stimulated the opening of new projects and created conditions for long-term contracts, signaling positive growth for the industry.

The Ethylene XXI project represents a turning point for the Mexican petrochemical industry. With its impressive production capacity and positive performance thus far, it has helped address Mexico’s trade deficit in polyethylene and has the potential to drive further growth and investment throughout the industry. The successful collaboration between Braskem and Grupo Idesa serves as a testament to the opportunities unlocked by the energy reform, setting a positive trajectory for the Mexican petrochemical sector.

Continued Decline in Mexican Chemical Production Raises Concerns

Despite the success of Braskem Idesa’s Ethylene XXI project, the overall production of chemicals in Mexico has experienced a downward trend in recent years. The National Association of the Chemical Industry (ANIQ) reports a decline in petrochemical production volume from approximately 9.67 million metric tons per year (mt/y) in 2015 to 8.47 mt/y in 2016. In the same period, imports grew by 7.8%, while exports decreased by 11.9%. Specifically, the production of high-density polyethylene saw a significant decline of 28% from 2015 to 2016, while low-density polyethylene production decreased by 12.6%. As a result, imports of polyethylene increased by nearly 30% in the first ten months of 2017 compared to the same period in 2016.

ANIQ further reveals that production decreased for all major categories of petrochemicals from 2015 to 2016. This includes derivatives of methane, derivatives of ethane, aromatics and derivatives, propylene and derivatives, and ethylene. Interestingly, despite the large-scale Braskem Idesa project, private petrochemical production actually declined from 2.41 million mt/y to 2.34 million mt/y in the same period. Consequently, Mexico faced a substantial trade deficit in petrochemicals amounting to US$5.4 billion in 2016, with a significant portion attributed to trade with the United States.

One of the primary contributors to this decline is Pemex, Mexico’s state-owned oil company, which has experienced decreasing production rates of basic petrochemicals and a decline in refining capacity. In 2016, Pemex’s total production of basic petrochemicals plummeted by 17.6%, and its ethylene production declined by almost 12% between 2013 and 2015. Pemex’s decision to prioritize oil investments over gas during the period of high oil prices severely limited its production and refining capacity of gas. As a result, Mexico’s natural gas production decreased from approximately 84 billion cubic feet per day (bcfpd) in 2010 to 70 bcfpd in 2016. This decline in gas production has had a profound impact on Mexico’s entire chemical supply chain. Abraham Klip Moshinsky, the general director of Unigel Mexico, a company previously producing methyl methacrylate (MMA) in Mexico, stated, “Unfortunately, Pemex’s refineries are not operating efficiently and probably only at 30% capacity, so there is not enough propylene available. Indeed, Mexico imports 70% of its gasoline needs.”

Additionally, companies relying on ethylene oxide have been adversely affected by Pemex’s reduced output, with ethylene oxide volumes falling by 8% from 2013 to 2015. This situation has led some companies to operate at only 50% capacity due to the insufficient supply of ethylene oxide.

Downstream, specialty chemical producers are hesitant to invest due to the lack of certain petrochemical products. Evonik Industries, for example, highlights the availability of raw materials as a constraint on expanding its manufacturing footprint in Mexico. Martin Toscano, the president of Evonik Industries de Mexico, states, “We will see what happens with the implementation of the energy reform, but at the moment, there are certain derivatives from petrochemicals of which there are not enough or the supply is not consistent or competitive.”

Furthermore, Mexico has not fully tapped into its shale gas potential, despite sharing the Eagle Ford basin with Texas. Moshinsky laments, “Mexico used to produce 3.5 million barrels per day (mbpd) of oil, but now it is below 2 mbpd, and less gas is being produced. The country has not invested in shale gas even though it has the same shale formation as in Texas; the government needs to incentivize the exploitation of this resource.”


Anticipating Change: The Energy Reform’s Potential Impact

In light of Pemex’s challenges, the Peña Nieto administration initiated the ambitious energy reform in 2013. Although the energy reform holds great potential to improve Mexico’s feedstock supply, significant changes will take time. In the most notable auction since the reform, held in January 2018, Royal Dutch Shell emerged as the winner of nine out of 29 deepwater Gulf of Mexico blocks available. Malaysia’s state oil firm Petronas and Qatar Petroleum also secured multiple winning bids. Ironically, Shell was responsible for over 60% of Mexico’s oil production before all foreign assets were expropriated in 1938, leading to the formation of Pemex.

Previous auctions have yielded promises of US$61 billion from winning companies. However, the government estimates that a staggering US$600 billion is required to restore Mexico to record production levels achieved in 2004, indicating that Mexico is still far from reaching this goal. Moshinsky explains, “Once there is more oil and gas production, private players will be willing to invest in the refurbishment of refineries.”

However, the realization of these goals will take time, as the first production from the recently auctioned blocks is not expected before 2028. Although some production may commence earlier, it will not be sufficient to significantly alter the dynamics of domestically produced feedstock in Mexico.

To address the deficiency in refining capacity, Pemex made a symbolic move by importing ethane from abroad for the first time in January 2018. It imported 4,200 metric tons from Texas at spot prices, with another shipment expected in February 2018. If the outcome is favorable, Pemex may consider a medium to long-term contract. This step is crucial for Pemex as it has a 20-year supply contract to provide Braskem with ethane at a rate of 68,000 barrels per day (bpd), in addition to supplying its two ethylene plants at the Cangrejera and Morelos complexes on the Gulf of Mexico. Until oil and gas production increases in Mexico, Pemex’s spot imports are likely to continue.

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