Flexible and resistant: Petrochemicals show much potential with a growing plastics industry

By far the most popular sectors for foreign direct investment in 2012, oil and mining have seen a number of successful business ventures, contributing significantly to the country’s overall economic development. This has boosted the potential for an array of other industries further downstream, such as petrochemicals, which provides a very promising outlook in the near future due to major expansion projects and heightened local and international demand.

OIL ORIGINS: Partially state-owned oil company Ecopetrol has played a leading role in expanding the industry, specifically through the project Petrochemical Infrastructure Growth (Crecimiento Infraestructura Petroquímica). Within this framework, the company has performed several major upgrades not only to increase installed capacity for petroleum and refined products, but also to delve more into the research end of petrochemicals, laying the foundations for a broad and productive industry. Ecopetrol’s Reficar refinery has received the bulk of investments with some $6.5bn aimed at bringing average output to 650,000 barrels per day by 2015. Expansion work began in 2006 and has made speedy progress during the past year, with more than 80% of the project already completed. For 2013 the company has approved an additional $502m for Reficar, of which $58m will go to Kentz Consortium over a 15-month period to install electrical and instrumentation works for process units.

Ecopetrol’s Barrancabermeja refinery, located along the Magdalena River, has also received significant investment, and the company plans to strengthen the synergies between the two plants. In terms of research, the refinery has already succeeded through the development of two new petrochemical products called Ecoil paraffin 10h and 15h. Used in the manufacturing of fungicides for anti-plaque chemicals, the new products should directly benefit the national agriculture sector. Upgrades are also planned that are aimed at making operations more efficient, profitable and safer, for employees and the environment where plants are located. These projects are mainly intended to close Colombia’s large energy deficit and increase exports of crude oil. In addition, the expansions will benefit the petrochemicals segment by increasing feedstocks for chemicals and plastics producers.

PLASTICS: Though only comprising a portion of the national petrochemicals industry, plastics companies contribute to the manufacturing of a wide variety of consumer and intermediate products. Propilco, Colombia’s only producer of polypropylene (PP), supplies clients with resins that eventually go into the production of plastic bags, bottle tops, transparent films, packaging, synthetic fibres, vehicle upholstery and furniture, among many other consumer products.

The central component used in PP is propylene, which Colombia does not currently produce widely, meaning Propilco has to import it, mainly from the US and Brazil.

As a subsidiary of Ecopetrol, Propilco receives 30% of its propylene from the oil company. This amounts to 130,000 tonnes annually, but once expansion on Reficar is completed in 2015, this figure should increase to 270,000 tonnes. The total should amount to approximately 330,000 tonnes after the Barrancabermeja refinery expansion comes on-line in 2018.

Sebastián Zapata Posada, Propilco’s vice-president of planning and strategy, told OBG, “The FTA with the US presents both opportunities and risks – opportunities due to the new market that opens up for exportation and risks because tariffs will be reduced on polypropylene imports. Currently, there is a 5% tariff on those imports, down from 15% a few years ago. The tariff is expected to be reduced to 0% in the near future.”

MARKET SHIFTS: Prices of propylene on the global market are volatile, which ultimately determines Propilco’s production patterns. While in April 2012 prices surpassed $1500/tonne, in April 2013, they dropped to $1247/tonne, mainly due to lower costs of raw materials and less demand for propylene by-products, according to Platts Global Petrochemical Index. Ecopetrol’s expansions will therefore significantly reduce Propilco’s production costs in the near future. This is a vital factor in light of Colombia’s recent industrial slowdown, with decreased internal demand and the consequent accumulation of inventories. In terms of competition, the growing role of Asian PP producers presents a new challenge that Propilco is countering by emphasising customer service. Although Propilco has expressed interest in expanding operations through the creation of a propane dehydration plant, the company told OBG that this project has been put on hold due to high costs. Another strategy involves searching for new markets.

MARKETS: Currently, Propilco mainly sells within Latin America, covering markets in Mexico, Peru, Central America as well as several Caribbean countries. While Peru is still in the planning stages of developing a petrochemicals industry, which could take years, that market should prove solid in the short term. On the other hand, Guatemala, El Salvador and the Caribbean are emerging as promising potential customers.

At present, installed capacity amounts to 500,000 tonnes per year in comparison to top regional players such as Brazil, which produces 2.1m tonnes. External markets may prove valuable in the future for plastics companies, such as Propilco, which are looking to expand their operations. Exports for the plastics and rubber sub-sectors have been displaying an upward trend. In 2012 Colombian exports were worth $1.54bn, up from $1.49bn the previous year and $1.35bn in 2010, according to Colombia’s tourism, investment and export promotional agency Proexport.

PVC: While Propilco represents the national side of the industry, foreign firms have been tapping into Colombia’s potential for other plastics, like PVC, for which local demand amounts to around 200,000 tonnes per year, according to Mexichem, Latin America’s largest PVC producer. Mexichem has a total installed capacity of 750,000 tonnes, including its plants in Mexico and Colombia. In 2012 Dutch chemicals and paints company AkzoNobel sealed a deal with Mexichem to supply its Mexican and Colombian plants with continuous initiator dosing technology. With $11.3m invested, this enhancement will increase productivity and create safer production conditions. Pavco, a subsidiary of Mexichem, recently invested $24m for the expansion of three plants in the north of the Valle del Cauca region, raising operating space from 15,000 sq metres to 62,000 sq metres. One of the new plants began operations in March 2013, producing industrial packaging for use in the chemicals, food, cement and mining sectors, among others. The other two plants will produce pipes and structural pieces for construction and agricultural needs and should come on-line during 2013, increasing installed capacity to 68,000 tonnes per year. Pavco’s performance to date has been positive, closing 2012 with sales of $250m, which represents year-on-year growth of 5%.

INTERNAL DEMAND: According to petrochemicals association Acoplásticos, the plastic processing industry has seen annual average growth of 7% over the past 25 years and is set to continue this upward trend despite a brief setback in 2012, when plastic production dropped by 6.5% and oil refining decreased by 5.1%. Plastics consumption in Colombia is still below the average in most developed countries. While the US consumes about 100 kg per capita, Colombians consume 19 to 20 kg per year. Carlos Alberto Garay, the president of Acoplásticos, said this is due to an underdeveloped national industry, especially for auto parts and electronics, but believes there is room for growth. One area that is showing potential on the demand side is fast-moving consumer goods (FMCGs), especially food packaging. With a budding food industry and the many free trade agreements signed recently by Colombia, FMCGs are being promoted nationally and internationally. “Colombia's emergence as a food exporter to neighbouring countries is one of the causes of growth for the petrochemicals industry, as it will encourage the use of plastics for packaging,” Garay told OBG.

Other significant indicators of demand for plastics can be seen in the large infrastructure and housing deficits (see Construction and Real Estate chapter). Public-private partnerships to address these problems are a high priority on the government’s agenda and construction work in both areas will require the use of plastics, like PVC pipes for water management and electrical systems or plastics for amenities and upholstery, among other uses. Both Pavco and Propilco have their own social housing programmes using recycled plastics to construct homes, providing an affordable and sustainable alternative to social housing projects. While internal demand did not make 2012 the most productive year for plastics companies, the onset of major projects in which plastics are a fundamental requirement should boost production. Meanwhile, many companies will continue to look abroad at emerging export markets. Continued work on expanding the production capacity and efficiency of key refineries around the country should also add to the industry’s potential. The recent expansion of assets through major acquisitions suggests that companies that are already familiar with the terrain have identified specific opportunities for capitalising upon this growing industry.