Jonathan Lopez
SAO PAULO (ICIS) – Brazil’s healthier than expected growth in 2024 has greatly propped up the chloralkali sectors, while Argentina’s woes, although improving, will take some time to be fixed, said the director general at Brazil’s trade group Abiclor.
Milton Rego added that the nascent Latin American lithium mining sector – with operations in Chile, Argentina, Bolivia and Brazil, among other countries – is increasingly proving a profitable end market for chloralkali players.
Brazil’s Abiclor is the commanding voice within the sister trade group for the wider Latin America, CloroSur, of which Rego is also the executive president. CloroSur is to hold its annual meeting in Lima on 21-23 October.
Rego added that Brazil’s chloralkali sectors – chlorine or caustic soda, among others – share some challenges with the wider chemicals industry which overall dent competitiveness: among others, high input costs, infrastructure challenges and in the past two decades, fierce competition from China in all industrial products.
However, given chlorine’s specific characteristics and its highly dangerous nature, for example, shipments are more difficult – a blessing in disguise for the sector in Brazil as it has allowed it to partly isolate itself from the relentless flow of imports at more competitive prices seen in other chemical markets.
Brazil’s ongoing Sanitation Legal Framework, or Novo Marco Legal do Saneamiento in Portuguese and which is set to bring sanitized water to the 33 million Brazilians who do not yet have it is also another factor propping up chlorine’s demand, said Rego.
Considering how Brazilian domestic chemicals producers have been besieged by cheap imports coming into Brazil for much of the past two years, the caustic soda situation may look enviable.
Operating rates are hovering at around 70%, a healthier figure compared with rates below 60% in the wider chemicals sector, according to Brazil’s chemicals trade group Abiquim. In fact, Rego said the sector has already reached pre-pandemic levels.
Brazil’s caustic soda output stands at around 1.5 million tonnes/year, but the country’s demand is at around 3.0 million tonnes/year.
Rego calmly reminds how chlorine and derivatives demand and GDP growth tend to go hand in hand: given the sharply higher GDP growth this year, chlorine has also taken advantage. Most GDP forecasts are now predicting an expansion of around 3%, up sharply from the figure at around 2% expected just a few months ago.
As such, Rego also reviews the state of play in Argentina and Mexico, the two largest economies in the region after Brazil. For the former, he said his fears are increasing about the social, economic and political mounting problems: if Argentinians do not start feeling some green shoots soon, the situation could just be a ticking bomb, another one in Argentina’s rather convulse past half a century.
Mexico’s economy and politics remain deeply intertwined with events in the giant northern neighbor. ‘Corporate Mexico’ is holding its breath until US voters go to the polls, said Rego, as another term of Donald Trump could upend practically all trade policies Mexico’s system has been modeled to, if the promised hefty import tariffs increases are implemented.
FISCAL WORRIES – AND THE REAL ECONOMY
ICIS last interviewed Rego in April. Brazil’s financial news cycle has been intense since then, with monetary policy easing reverted as of late, investors continuously worried about the cabinet’s unapologetic higher public spending – financed via deficit – and the real economy indicators truly booming.
In the past few months, Brazil’s economy has proved the pessimist wrong and GDP forecasts for this year have been upgraded from around 2% to over 3%.
If the old mantra of chemicals and chlorine demand is to be forecast to go in line with GDP growth, plus some, the year has definitely been one to celebrate by the chloralkali sector.
Chlorine consumption in Brazil and elsewhere presents what they call ‘GDP elasticity’, said Rego the sector always grows a little more than the economy as a whole.
From April to now, there has been a positive change in terms of GDP expectations, a positive surprise for the sector.
“But what has really changed in the economy from April until today? Why the new forecasts are, on average, 50% higher than those earlier in the year? Well, quite a few macroeconomic factors have been very positive, not least unemployment, which has decreased, while the number of jobs in the formal economy has increased,” said Rego.
“But another thing that explains the current woes while the economy is actually booming is, in my opinion, that growth expectations tend to have a negative bias, and did so even more in 2024 – the main investment banks focusing on the fiscal issue [the government running a deficit], which is indeed a problem, but they have not paid enough attention to the ‘real economy’, so to speak.”
ARGENTINA WOES ARE BRAZIL’S EXPORTS WOES
Rego went on to say Argentina’s situation remains a “big problem” for the region in general and for Brazil in particular, given that it is the largest trade partner for Brazilian companies.
The recession has deepened as President Javier Milei’s implements his “neoliberal prescription”, as described by Rego, which has added further woes to demand as both private and public spending take a hit.
Milei’s cabinet practically put on hold all public works on infrastructure, for instance, when it took office in December, although the purses are starting to be loosen up again – according to sources in Argentina, basic public works cannot be put on hold for too long unless it is at the expense of safety, for instance. Along the way, chemicals demand may pick up.
“In Argentina, we are seeing a very large reduction in GDP. Inflation has started to fall but that is not strange given the harsh fiscal adjustment: with containment in spending, the rate of inflation will invariably fall. So, from an inflationary and fiscal point of view, Argentina’s situation is improving,” said Rego.
“However, the big issue for Argentina is the trade balance: the country has been years without making enough dollars, without building reserves of foreign currency. Argentina’s exports currently are mostly coming from the agricultural sectors: and it is not enough to guarantee a positive trade balance. Summing up: right now, the glass can be half full (fiscal situation, inflation) but also half empty, due to poor foreign reserves.”
Rego went on to say that, according to official figures, poverty levels currently surpass 50% of Argentina’s population, so the “very big social issue” at play here could end up in social discontent and revolt, something Argentina is not a stranger to.
The social and economic troubles are compounded by political ones: while Milei has found it relatively easy to pass reforms up to now, his party is in a minority in parliament and, moreover, its policies are strongly opposed by several governments in the powerful provinces
“How long is all this sustainable? I don’t really know,” concluded Rego.
MEXICO: LOOKING NORTH, LOOKING UP
Rego said that another term of Donald Trump in the White House, with higher import tariffs and higher restrictions to migration could make things “a little bit more difficult” for Mexico.
Moreover, Mexico’s imports many of its inputs from China, which are transformed in Mexico and trade without barriers thereafter in the North American USMCA free trade area.
However, this may be a point of friction in coming years – whether the political color of the US Administration – as the US seeks to decouple from China, said Rego.
Add to that the latest moves by an emboldened governing Morena party, which achieved a ‘supermajority’ of two thirds in the June general election allowing it to pass structural one-party reforms, and the points of friction are only set to increase.
In fact, both the US Administration and the country’s American Chemistry Council (ACC) trade group have already spoken publicly about their unease with some of the reforms.
“The entire Mexican manufacturing sector is dependent on the US. The problem with Mexico, as the saying goes, is to be so far from God and so close to the US. [As friction grows] What is clear is that, of course, Mexico will not go against US investors: obviously not,” said Rego.
“The big issue here in general, and one that worries me greatly, is that the world is clearly deglobalizing. And while this may be good in some respects, some important issues are not being addressed because of this: climate change is one of them – I am very pessimistic about this, more pessimistic than I was a few years ago. Our generation is leaving this issue to future generations, but I worry if it will be too late.»
“When the Cold War ended, I think we were naïve. We imagine a unipolar world centered around the US but, as we have seen in just 30 years, the world is very different to that. Add to that this decade’s daunting challenges, regarding AI and how it will be use for the good or bad of humanity, and we are pretty much facing a perfect storm,” concluded Rego.
Interview article by Jonathan Lopez.