The world economy is fraught with uncertainty due to the continuing European debt crisis, and the recovery in the United States, Latin America’s important trading partner, remains stubbornly mild. These unfavorable foreign economic environments are beginning to affect financial markets and commodity prices in Latin America.
There are already some signs of 3Q 2011 deceleration in Brazil, which has the region’s largest GDP, and in other countries. The International Monetary Fund’s (IMF) most recent review (World Economic Outlook, September 2011) reports that Latin America will continue growing, but at a slightly slower pace than anticipated in its April 2011 projection.
Helped by high commodity prices, favorable terms of trade, and low international interest rates, Latin American economies grew strongly in the first two quarters of 2011, and local currencies appreciated, especially in Brazil. The third quarter brought signs of deceleration, especially in some export markets, and a negative flow of capital to the region, as the world economy felt the effect of the unstable situation in Europe.
Latin America crude steel production grew by 12.5 percent over the previous year in the nine months through September 2011.
In spite of the serious financial issues in the world economy, Latin America is still predicted to grow a healthy 4.5 percent in 2011 and at a lower 4.0 percent in 2012. There are significant downside risks to these estimates due to the volatility in Europe, its potential effects on other regions, and the still-weak recovery in the United States, as mentioned above.
Latin American economies are in a good position to overcome the expected complications, however. Most countries in the region have built up high foreign reserves in previous years, have a manageable foreign debt, and have followed prudent macro-economic policies that will allow governments to enforce anti-cyclical policies if the world economy worsens and if commodity prices go down.
Latin America is highly dependent on commodity exports, especially oil, metals, and food products. The degree of dependence varies, as shown in Figure 2. Venezuela, Ecuador, and Bolivia—large oil and gas exporters—are the most exposed with more than 70 percent of their total exports in commodities. Colombia has between 60 and 70 percent in gross commodity exports and is also an energy exporter. Metals exporters like Chile also fall into the 60 and 70 percent range with Peru’s commodity exports as percent of total exports between 50 and 60 percent. Larger economies like Brazil (40 to 50 percent range), Mexico (less than 30 percent dependence) and Argentina (30 to 40 percent), have more diversified export bases.
Mexico, Central America, and the Caribbean are the most exposed to the future behavior of the United States economy, as well as to tourism and remittances from nationals living abroad. During the crisis of 2008, Mexico’s GDP decreased by 6.1 percent in 2009 and was the most affected in the region. It is expected, however, that Mexico will continue growing in 2011 and 2012 by 3.8 percent and 3.6 percent respectively. Mexico represents 21.4 percent of the region’s combined GDP. (See Figure 3 on p. 35)
Brazil, which accounts for 43.2 percent of Latin America’s GDP and is the engine for the Mercosur economies [Mercosur refers to the economic and political agreement among Argentina, Brazil, Paraguay, and Uruguay that promotes free trade and the fluid movement of goods, people, and currency], is also expected to grow in 2011 and 2012 by 3.8 percent and 3.6 percent respectively. Brazil’s currency (Brazilian real, R$) appreciated by more than 10 percent in the first half of 2011, affecting exports, but recently went back to previous levels at around 1.8 R$ per 1 US$.
Argentina, responsible for 7.7 percent of the region’s GDP, is growing at a strong 8.0 percent in 2011. With inflation and overheating concerns now emerging, growth in 2012 is expected to be a quieter 4.6 percent.
Venezuelan GDP accounts for 6.1 percent of total regional product. Venezuela’s GDP grew by 2.8 percent in 2011 after two years of dismal performance and is expected to continue growing at a rate of 3.6 percent in 2012. High inflation in that country is expected to persist, however.
Colombia continues to perform well, with estimated GDP growth rates of 4.9 percent in 2011 and 4.5 percent in 2012. Colombia accounts for 4.2 percent of the region’s GDP.
Chile, the sixth largest economy in Latin America, represents 4.2 percent of the region’s GDP. It benefited from this year’s strong copper export prices and its GDP is estimated to have grown by 6.5 percent in 2011, while still recovering from the effect of the February 2010 earthquake. Growth in 2012 is estimated at 4.7 percent.
Peru, representing 3.2 percent of the regional GDP and a strong metal exporter, has estimated growth of 6.2 percent in 2011 and 5.6 percent in 2012.
Industrial Gas Company Results
Industrial gas companies reported very strong results for the first nine months of 2011, on top of very good results for 2010. This is largely thanks to the performance of the region’s economy, especially during the first half of the year.
Praxair, the market leader in the region, reported growth across all markets in South America and strong performance in merchant and packaged gases, especially coming from the manufacturing sector. On-site volumes increased due to new start-ups, but reflected the deceleration of steel export volumes in the third quarter. Praxair also reported a strong pipeline of new projects and signed several new on-site contracts in various South American countries.
Praxair sales increased 22 percent for the nine months ending September 30, 2011, over the same period of 2010, while operating profit improved 21 percent. (See Figure 4.)
Volumes were up eight percent and prices five percent, while currency variations explained eight percent of sales growth.
No details were provided about Praxair’s Mexican operation, although with the good performance of the Mexican economy and good level of activity in the EOR (Enhanced Oil Recovery) market, results should also be positive.
Linde, which reports figures in Euros for North and South America combined, indicated that sales for the whole Americas region increased by 10.5 percent on a comparable basis, and operating profit improved by 7.4 percent against the previous year. But considering that the US$ devalued 6.8 percent against the Euro during that period, results measured in US$ currency are significantly better. No separate details for Linde’s South American region were supplied.
Air Liquide reported 16 percent growth in YTD sales 2011/2010 in South America, on a comparable basis, excluding foreign exchange, natural gas, and significant perimeter impacts. The company also reported dynamic Industrial Merchant and Large Industries growth due to ramp-ups and a strong development in Healthcare. Air Liquide recently announced a large investment in Mexico to supply a steel mill and at the same time establish its presence in the merchant market in that country. (See “Air Liquide Enters Mexican Market,” CryoGas, July 2011, p. 7.) Air Liquide will also expand its merchant capacity in central Chile by investing in a new plant and is expanding its capacity in Brazil in the on-site and merchant business, on top of an acquisition in Healthcare. (See “Air Liquide Busy Around the World,” CryoGas, August/September, p. 4.)
Air Products reported that sales within its Latin America/Others segment increased by 10.3 percent in the twelve months ended September 30, 2011, excluding its equity affiliates. Recent company presentations showed an important growth of its 40 percent owned joint venture in Mexico with the Infra Group, which has achieved sales of $0.7 billion in FY 2011.
Indura results through September 2011 were very good. Consolidated sales and operating profit in Chilean pesos increased 16.5 percent and 26 percent respectively over the same period of the previous year. Due to the 7.5 percent revaluation of the local currency [measured in US$ translated at the prevailing average ChPeso/US$ rates for both periods], sales increased by 26.5 percent, achieving US$362 million. Sales grew in all the countries where Indura operates. US dollars sales of gas and non-gas products increased by 20 percent in Chile, 20 percent in Colombia, 33 percent in Argentina, 25 percent in Peru, and 23 percent in Ecuador. Unconfirmed rumors in the Chilean press indicated that the Briones family, Indura’s controlling shareholder, has cancelled the negotiations regarding the sale of the company due to instability affecting the markets.
Esab, a leader in South America, reported that sales in the region for the first half of 2011 increased 6.8 percent against same period of 2010, measured in pounds sterling . If the 5.2 percent devaluation of the US$ against the pound sterling is taken into consideration, sales would have increased by 12 percent. Due to the announced acquisition of its parent company Charter by Colfax, results through September 30, 2011, are not available. In July, Esab acquired a 60 percent share in Condor Equipamentos Industriais Ltda, a leading Brazilian gas apparatus manufacturer based in Minas Gerais, with sales of US$13 million in 2010.
Lincoln Electric sales in Latin America grew by 36 percent for the nine months ended September 30, 2011, to $116 million dollars, with 22.6 percent higher volume, 8.7 percent better prices, and 5.2 percent more favorable exchange rates.
Peruvian based Soldex S.A. reorganized its subsidiaries and results are not comparable with those of previous year.
Projects of Note in Latin America
After a stellar 2010 and first half of 2011, several new projects were announced by industrial gas companies during the year, as shown in Figure 5.
Praxair indicated that it had a project backlog in South America of $380 million dollars at the end of March 2011 and made several announcements including: a contract to install a 200 ton per day (tpd) air separation plant (ASU) that will supply Braskem’s PVC complex in Alagoas, northeastern Brazil; a new 780 tpd plant to supply ArcelorMittal’s steel mill expansion in Monlevade (that probably will be delayed by the customer); the installation of a new 400 tpd merchant plant in Argentina; and more recently, the signature of a contract to install a 126 tpd oxygen VPSA plant to supply a new export-oriented pulp project in Uruguay. Praxair, in a recent presentation, also mentioned that they have recently won one project in Colombia, nine more in Brazil, and two in Peru.
Air Liquide announced that it will be installing a new 150 tpd merchant plant in central Chile to expand its operations. Air Liquide is also entering the Mexican industrial gas market with the installation of a 1,700 tpd ASU at Ahmsa’s steel mill, northeast of Monterrey, which will also produce liquid for the merchant market.
Indura was also very active, announcing the installation of a 60 tpd merchant plant in Puerto Varas, in Chile’s southern region, as well as small VPSA plants in Ecuador and Argentina to free liquid production for the market. Indura also announced that the company is studying the installation of a large ASU in Argentina.
Linde announced that they are working on various projects in hydrogen and atmospheric gases in Brazil that will require an investment of about $120 million dollars. In April, Linde also announced the start-up of a 100 tpd merchant plant outside Buenos Aires, which will expand Linde’s capacity to serve that growing market.
In spite of the uncertain economic environment, several attractive developments continue to move forward in Latin America. The expansion and modernization of refineries is progressing in Brazil, Argentina, Colombia, Ecuador, and Peru, as are petrochemical projects based on the abundant natural gas resources in the region. Steel production also is expanding. A special mention should be given to the development of Brazil’s recently found large offshore oil fields, which Petrobras is developing with massive investments; the continuous expansion of Colombia’s oil production; and the development of the recently confirmed large shale and tight oil and gas reserves in Argentina. Investment in infrastructure and housing, as well as strong internal demand due to improving standards of living, will maintain industries such as Steel and Food & Beverage, which in turn will support demand for industrial gases.
Turbulence outside the region, especially the uncertainty created by the European debt crisis, may affect Latin America’s economies and consequently decrease future growth of the industrial gases market, but if 2009 is taken as a reference, the region appears to be well prepared to defend the continuation of its current expansion cycle.