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Monday 17 April 2017

South American chemical industry losing its momentum

By Gautam Rashingkar
For a better part of the previous decade, South America’s robust economic acceleration suggested that the region was perhaps on its ways to become the next hot destination for investors. Brazil, alike China and India, has been witnessing a robust growth. The country accounts for a considerable share in the overall GDP growth of the region. However, global economic recession in 2008/2009 came as its first massive market mayhem.
Between 2000 and 2008, the region’s gross domestic product (GDP) was averaging over 3 percent annually. The momentum was slowed down to a significant level by the global financial crisis. Since then, the region has struggled to repeat such staggering growth rates. Going by the current market scenario, the region’s GDP is most likely to continue to perform poorly.
Currently, South America is dealing with a serious slump in the economy and is unlikely to recover anytime soon as other neighbouring regions increasingly implement protectionist policies. The extensive dependency of export, coupled with relentlessly dropping commodity prices, is making it even worst. Investors are postponing projects and foreign direct investments have become thinner. The recent devaluation of currencies, combined with the risk of interest rate hikes in the US, is further adding up to the bleakness. A majority of countries in South America will continue to remain vulnerable to economic crisis, owing to the ongoing sluggish development of various industrial verticals.
This economic slowdown partly characterises South America’s relegating chemical industry as well. Lately, the mining ratio in countries such as Brazil, Chile and Argentina is witnessing meagre growths, which may fail to receive any major stimulation over the next couple of years. On the contrary, the region’s chemical industry has witnessed a decline in previous three years. This depression in the chemical industry could also be linked to factors such as inadequate production volume, lack of competitive edge over foreign players, and low quality of end products. Meanwhile, homegrown problems in many of the Latin American countries are compounding problems for the chemical sector. In spite of the overwhelming growth in the early 2000s, South America failed to make any major mark in the global chemical market.
Why Brazil is Important
Brazil has the largest economy in the region, hence, the country’s industrial performance will always be of great significance to the overall development of the region. In an effort to boost the economy, authorities in Brazil are trying to make condition fairer through launching industry-friendly programmes, but the ongoing political tussle in the country has created a disarray amongst investors. Political brawl over industrial reforms that allows more transparency in private financing also suggests that corruption is a major issue for stakeholders. Other countries such as Chile and Argentina heavily depend on raw materials export businesses, however, China’s growing supremacy over such segments are pushing these South American countries to the back seat.
In 2015, investments in Chile’s mining sector dropped to a substantial level. Chilean suppliers also face a major challenge when competing with foreign vendors. Over the past two decades, Chile’s industrial productivity has increased on an average of around 0.2 percent, giving it very little scope to gain any significant edge on a global stage. In little over a decade, Argentina went close to declaring its second national bankruptcy and is still recovering from it. Therefore, growth has been sluggish in the country. The investment scenario continues to remain gloomy and peso devaluation mainly triggered by the change in consumer expenditure brings no good news either.
On the other side, Argentina’s year-old new government has brought in a level of confidence amongst investors. Incidentally, demand for chemicals surged dramatically across the globe in recent years, but a lack of competitiveness is inhibiting the South America chemical industry. Production capacities of various types of chemicals in the region are failing to meet both domestic and global demand. This increasing trend imbalance for chemicals is pointing out that the chemical sector has to undertake some serious improvement measures. For many of the suppliers operating in the region, red-tapism, bureaucracy, poor infrastructure and corruption remains a major consideration while making business decisions.
Change in policy, countermeasures can help the Industry
Owing to its abundance of natural resources, the chemical industry in South America is mainly focused on supplying raw materials. On the contrary, basic chemical accounts for a massive share of all the chemicals produced in the region. Other primarily produced chemical segments include speciality, pharmaceuticals and fine chemicals, whereas, the production of consumer chemicals remains minuscule. Europe is a major market for the South America chemical industry. Many of the German chemical companies are operating in the region. Over the past few years, South America has successfully lured European companies to invest in the region’s chemical sector. Currently, more than 100 subsidiaries of European chemical companies are operating in South America.
While global economic turmoil and domestic irregularities impede the growth of the chemical sector in the region, persistent efforts to overcome economic low points in countries such as Brazil and Argentina might provide an impetus to the industry in the forthcoming years. Industry insiders believe that the region can resolve its various structural faults and create a sustainable environment for the industry in the long run. Additionally, increased government efforts can allow the region to develop all the existing industries and create opportunities for new domains. The growing population in the region is anticipated to be a major factor driving this growth well complemented by the rising per capita income. Lastly, countries such as Chile, Brazil and Argentina have sizeable deposits of raw materials, which could promote these countries as the source of core commodities. 
Author: Gautam Rashingkar is Senior Consultant, Chemicals Dept at Future Market Insights (FMI).
© Chemical Today Magazine
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