Chemical sector: Geo-political uncertainty economic slowdown continue stymie momentum

Chemical sector: Geo-political uncertainty and economic slowdown continue to stymie momentum

10:29 AM, 7th April 2018
Chemical sector: Geo-political uncertainty and economic slowdown continue to stymie momentum
While the global chemical sector is witnessing an exponential growth, South American chemical sector is in a state of sluggish growth. (File photo)

By Aditi Yadwadkar

Chemical sector plays a vital role in the industrial growth of any geographical region. As the fallout of economic recession continue to ebb, global economic recovery is being supported by increased industrial production in the world. Although, the recovery is not consistent across the globe, many South American countries are still grappling with economic uncertainty. While the global chemical sector is witnessing an exponential growth, South American chemical sector is in a state of sluggish growth.

Overview of chemical sector in South America

According to The International Monetary Fund (IMF), economic growth in Latin America and the Caribbean in 2016 was the third-lowest in past 30 years. While Brazil and Argentina are showcasing signs of economic recovery, a majority of other South American countries including Venezuela and Colombia continue to be in a deep recession. Needless to say, the broader economic climate in South America is negatively impacting the region’s chemical sector.

In addition to the economic slowdown, political instability and unfavorable regulations have also thwarted growth of the sector in the recent past. The decline can also be traced back to the inadequate production and lack of competitive edge over the leading manufacturers in the region.

Economic recovery in Brazil central to the prospects of South America chemical sector

The Brazilian economy is recovering from the economic recession. Although complete recovery is still a long road ahead, the momentum in the market is likely to create growth opportunities. Being the largest economy in South America, Brazil remains central to the prospects of the chemical sector in the region.

A study published by the US Department of Commerce’s International Trade Administration states that over $34.2 billion worth of chemicals were imported by Brazil in 2016. Being an importer of chemicals directly reflects the inadequate and poorly-equipped chemical production facilities in the region. However, the study also predicts that, with the improvements in economy, there will be a marginal increase in chemical exports of Brazil in coming future.

Before the global economic recession, prices of minerals were high and so, the oil and mining industry in Colombia was flourishing. After the devaluation of the peso and decline in the international commodity prices, manufacturers in the Colombian chemical industry started focusing more on other industrial sectors.

Venezuela, too, is among those South American countries that are on the path to hyperinflation. Constantly falling GDP shows no signs of economic recovery in the country. Apart from the economic crises, lack of production facilities and sluggish growth of the oil industry in the country is impacting the performance of the chemical sector in South America.

On the contrary, improvements in the Brazilian economy are likely to shape the outlook of the South American chemical sector. As Brazil recovers steadily from the worst economic recession, the chemical industry in the country has become the 8th largest industry in the world, after France and India. Even though Brazil imports more chemical products than it exports, the Brazilian chemical industry is expected to witness improvements in the production capabilities and exports with the help of increasing foreign investments.

Similarly, in Argentina, economic progress is underway, which is expected to prove beneficial to the growth of the South American chemical sector. Notable developments in the petrochemical industry in the country coupled with favorable government policies may provide an impetus to the performance of the chemical industry in Argentina. 

International policies influencing the regulatory environment

As an effect of the Paris Agreement and other developments in the global environmental regulations, policymakers are developing standards to mitigate the pollution caused by the global chemical industry. South American countries have adopted a heavy environmental regulatory agenda and imposed environment-friendly standards and regulations on chemical manufacturers in the region.

Most of the leading South American countries including Brazil, Argentina, Chile, and Colombia are focusing on introducing appropriate regulation on manufacturing and distribution activities, and imports of chemicals in the region. The Brazilian Ministry of Environment has put forth the draft of the Industrial Chemical Regulation. The regulation can reduce the ambiguities in the chemical sector in the region. However, limited consistency in the extensive regulatory framework in the South American chemical sector may impact the growth prospects for chemical manufacturers in the region.

Volatile geopolitical scenario continues to impact growth

Geopolitical problems such as corruption and political instability in Brazil, Peru, and Colombia are as severe as the major economic slowdown in Venezuela. The socialist policies of the government in Venezuela are being blamed for the economic turmoil in the country. The complex geopolitical dynamics in South America are affecting the outlook of the chemical sector in the region.

Notable developments and market opportunities for manufacturers

With the recovery from economic recession, as stated by the Brazilian Chemical Industry Association (Abiquim), Brazilian chemical industry is witnessing a slight incline in domestic chemical demand. Yet, imports are expected to ramp up in the South American chemical sector in near future. While the global chemical industry is progressing on the grounds of attaining sustainability and digital innovations, South American chemical sector is struggling to expand local production capacities. A rise in the prices of energy and raw materials in the region remains the biggest issue that reduces the competitiveness of the chemical companies in South American countries. Nevertheless, lack of local players in the regional market may open a window of possibilities to capture the untapped opportunities in the South American region.

Key company developments

Recently, the merger of two chemical giants in the market – The Dow Chemical Company and E I du Pont de Nemours and Company (DuPont) – received a positive antitrust review by Brazil’s antitrust regulator. The presence of the newly formed company – DowDuPont – is likely to change the dynamics of the market.

GTM, a leading distributor of chemicals and raw materials in Latin America, announced the acquisition of quantiQ, one of the largest chemical distributors in Brazil. Industria Quimica Anastacio – one of the biggest chemical distributors in Brazil and Argentina – declared that it is optimistic about the current Brazilian government. The company also revealed its plans to expand the company network across the Latin American region with the help of technical support from its partners and foreign investors.

As Brazil and Argentina are at a better economic position as compared to other South American countries, most M&A activities can be observed in the aforementioned countries. Leading chemical companies such as AkzoNobel, Braskem, Evonik, Solvay, F. Heringer, Covestro, DowDuPont, BASF are likely to wait out the short-term turbulence to plan long-term growth strategies.   

Conclusion

Ultimately, the stabilizing macroeconomic environment in Brazil and Argentina is anticipated to open an ideal window of opportunities for manufacturers and distributors of chemicals and raw materials in the region. However, political uncertainty is likely to pose challenges to the growth of the sector.

Author: Aditi Yadwadkar is Features Writer at Future Market Insights.

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