Raúl Baz
Director General
Grupo Petroquímico Beta
View from the Top

Competitive Pricing to Increase Product Value

Wed, 01/20/2016 - 11:39

Q: How is the downward curve in the price of oil impacting the petrochemical sector in Mexico?

A: The drop in oil prices is having serious consequences for all chemicals that use it as a main raw material, and these effects are expanding into its derivatives. Players are becoming more competitive while seeing less revenue, and the struggle is spreading fear and making everybody scramble to maintain market share in their regions. Operators that manufacture ethylene are greatly affected by the lower profit margins coming from the fixed costs inside the capital intensive industry. The impact a company experiences depends on the type of pricing the product sees in the market. For instance, in the US, cost-plus pricing of ethylene oxide has lowered the cost, yet supply has failed to rise because of the lack of manufacturing plants. From this perspective, revenues continue flowing. On the other hand, negative consequences are being generated by the price changes in raw material resulting from competition. Manufacturers can adjust by fully integrating themselves and avoiding the responsibility of having to buy their own materials.

Q: In what ways does the creation of PEMEX Industrial Transformation impact the petrochemical sector?

A: First of all, petrochemicals were excluded from PEMEX Industrial Transformation completely and were included under PEMEX Ethylene. As a result, all the prices of the resources that PEMEX Industrial Transformation sells to PEMEX Ethylene will be at market price instead of at transfer price. This means that the cost base of PEMEX Ethylene is going to increase as well as the market level price of sold raw materials, and ethoxylate products will undergo a total change. Although it not yet set in stone, the new PEMEX perspective is predicted to allow more ethylene oxide production at a higher price. It used to be based on a cost-plus priced quota that gave it an attractive price, though limited the amount. In the past, our strategy was to increase our margin of specialized products, but manufacturing a wide variety of products was not possible with the lack of ethylene oxide.

Q: How will the developments within the petrochemical sector affect the commercialization of ethylene oxide?

A: Now, there will be a competitive price centered around bidding, where players that want to produce more will have to pay more. This represents an increase in product price that affects the commodity industry. In Mexico, the ethylene oxide sector was essentially a commoditydriven industry, rather than a specialty-driven industry. The national price for ethylene, which is 80% of that of ethylene oxide, includes a fee that will increase the cost, meaning that economic benefits can be achieved for the entire country through the new prices. Similarly, there are opportunities in the specialty export business. In the US, the cost of ethylene depends on proximity to the source of raw materials. Many companies use ethylene oxide that originates from outside the area 483km around the petrochemical site. Cost is affected, but if well managed, favorable circumstances could be found because the cost base will remain leveled with competition in the US. The industry is moving in sync with PEMEX’s vision of privatizing petrochemicals by acquiring specialized technology. Companies that do not specialize and adapt to the changes of the landscape will be gravely affected.

Q: What are your predictions for the development of the Mexican petrochemical sector in the coming years?

A: There will be more gas and oil coming out of the southeast of Mexico, and this is a highly needed development. The polyethylene industry, which makes up about 60-70% of the ethylene derivatives market, will not be as badly affected because it has always remained at market-level prices. Be that as it may, ethylene oxide products are destined to be relatively distressed. Ultimately, the availability of more specialized products centered on raw material like ethylene oxide will be a positive step for operators and the country. Ethylene oxide can offer a brilliant future to those willing to specialize. The refining capacity of ethylene oxide in Mexico is the greatest in the continent, and even the US cannot produce this resource without further investment. If PEMEX is able to set a market oriented price for ethylene oxide, where volume defines how much one is willing to pay, operators in Mexico will be more motivated to work with specialty industries and products will have added value.