Mexico’s petrochemicals potential

What challenges has the petrochemicals sector experienced in recent years?
The challenge of availability and supply of raw materials has been a problem in Mexico for many years. For years the government has decided to invest in E&P rather than make investments in the downstream. In theory, one barrel of crude oil is more profitable than developing the downstream and petrochemicals sector. Limited economic resources have forced the government to invest in areas that are profitable on a short-term basis. In other words, the ROI is quicker when selling a barrel of oil.
The reality is that previous administrations did not make significant investments in refining and petrochemicals despite it being elemental for the development of many industries. This has given way to a very weak petrochemicals arena which lacks sufficient assets to produce the raw materials it needs, such as ethane, to mention one of them. As a result, Pemex’s assets need significant investments in order for Pemex to improve its operations’ reliability in plants such as natural gas processing units and downstream-petrochemicals ones.
Additionally, before the 2013 energy reform, private companies were not allowed to invest across the oil and gas value chain, which limited our participation in the sector. Before this last energy reform, many petrochemical products were reserved for the State and Pemex alone. This changed over the years, which opened the possibility for private companies’ involvement. This is one of the key reasons why the petrochemicals industry has not developed the way it should have, despite the natural resources we have. The high dependence on Pemex created the low rate of investment in our industry.
Today, there is a more open industry where Grupo Idesa has a pivotal role, not only being a pioneer in the petrochemical arena, but also leading the way in the different processes of the value chain.

What factors triggered the recent agreement between Braskem Idesa and Pemex and what impact could it have on the industry?
Braskem Idesa had a contract that was signed in 2010 to plan, develop, construct and operate a petrochemical facility – Ethylene XXI, which started operating in 2016. Through it, Pemex was obligated to supply 66,000 boepd of ethane in order for the plant to operate at full capacity.
However, in 2010, the production of crude oil stood at approximately 2.8 million bopd, while today it stands at around 1.6 million bopd. As a result, there is not enough ethane in-country and Pemex has not been able to maintain its supply commitment with Braskem Idesa.
Both counterparts came to an agreement in September 2021, establishing new schemes of obligation in the supply of feedstock to Braskem Idesa in terms of volumes and price. In addition to the agreement, Braskem Idesa was granted the permit to build its own import terminal for ethane – valued at USD 400 million, to complete the full amount of ethane they need. In fact, they can import more and increase the total capacity of ethane feedstock in this country. Although the terminal will be owned by Braskem Idesa, it will be a standalone asset that can serve any other participant in the industry.
This agreement will allow Braskem Idesa to significantly reduce the uncertainty of supply, and this will bring additional benefits for having additional sources of ethane. The terminal will also benefit the industry. Meanwhile, Pemex should increase the availability of ethane in order to operate its own crackers. If not, it will need to start importing ethane as well. More ethane feedstock is required in Mexico to make the petrochemicals sector flourish and improve the conditions of the industry as a whole.

Tell us about the long-term strategy Grupo Idesa has formed.
Mexico is a manufacturing country, which means that there is enormous potential for the petrochemical industry to grow. The commercial deficit of the trade balance in 2021 in this sector was around USD 21 billion. That is precisely the potential that the industry has in order to produce many of the products that we import today. We can produce them here, adding value to our hydrocarbons and creating jobs, in order to sell them to the different industries that consume them.
Our industry is cyclical and, as we witnessed last year with the winter storm in Texas, there are always new opportunities in the market. However, Idesa’s strategy and mindset has always been establishing long-term relationships rather than taking a short-term opportunity to increase prices due to a specific moment in the market. Even though Grupo Idesa runs a commodity business, and companies dealing with commodities focus on the price and try to obtain the best conditions possible, we believe that when you have a long-term vision with your clients and suppliers it pays off in the end. That is one of the key elements in order for us to maintain our position.
Aside from Pemex, we have always had a very good relationship with many petrochemical companies around the world who we buy raw materials from. We do this more today because Pemex has reduced the supply of many of these raw materials.
Throughout the years, we have always purchased raw materials wherever we could find them, particularly from the US but also from Europe and other parts of the world. That relationship and long-term vision with customers and suppliers is one important aspect that brought us to where we are today.
Aside from any difficulties – in economic crises or the political environment – Grupo Idesa has always believed in Mexico. Even if sometimes it is easier to invest overseas, we have decided to invest intensively in Mexico. We are fully committed to this country and we will continue to be here for many more years to come.

What values do you bring as an integrated group invested in the production, storage and distribution of chemical products?
We have different divisions that work in an integrated manner to render solutions and attend the needs of the different industrial sectors in this country. As of now, we have five production plants: two in Tlaxcala, Tlaxcala; two in Coatzacoalcos, Veracruz; and one in Irapuato, Guanajuato.
As a diversification strategy, we have also started in the distribution business of petrochemicals. For example, in 2007 we bought Negociación Alvi, which is a company that distributes chemical products, along with its subsidiary Excellence Freights of Mexico. In 2009, we continued expanding after the acquisition of Egon Meyer, a distributor of chemical products.
These companies were merged in 2011 under the name of ALVEG Distribución Química. This company distributes chemical products for other companies in the sector, while also doing so with 5% of our products. We now have 10 distribution centres in Tijuana, Culiacán, Saltillo, León, Querétaro, Guadalajara, Coatzacoalcos, Dos Bocas and in the State of México. In addition, we have a terminal in the Port of Veracruz.
This exemplifies our presence across the whole value chain of petrochemicals, where we not only produce but also distribute them in-country. The diversification strategy we have carried out across the value chain has been very important as it has reduced our reliance on other players, allowing us self-sufficiency, and has also diversified our risk portfolio.

Which clientele segments have been demanding more of your chemical products?
We don’t have a particular segment or sector that has a significant percentage of our market share for sales. It is split rather equally between them. However, we do see improvement in the construction sector in the US, leading to greater demand for polyurethane, which has been challenging to obtain. Consequently, expandable polystyrene (EPS) demand has spiked, as this is a quicker and cheaper alternative.
We are seeing improvement in margins generally in that sector. Another very profitable segment in 2020 and 2021 has been the sanitiser ambit, as in alcohol used in gel and sanitiser products, due to the pandemic.
On the other hand, the demand for chemicals for drilling fluids has stalled over the last few years. The projections for an uptick in oil production in Mexico, especially coming from maturing fields, suggests there could be an increase in the need for drilling fluids. We have yet to see whether the demand increases or stays the same in this particular sector.

What strategy does Grupo Idesa have to cement its position and grow in the coming years?
In the coming years we aim to grow more strategically in the distribution division, not only in Mexico but also in North and South America. We also see a part of our growth being in logistics. We want to offer more storage capacity for our clients in petrochemicals, providing an integrated logistics service for them and the products that they need to handle both in the Mexican territory or as imports.
Growing our presence beyond national borders is also something to be considered. We are evaluating options for business outside of Mexico. In spite of this, we are fully committed to this country and we will continue investing. We have a very good relationship with the government as we understand that Pemex needs private companies the same way as we need them. At the end of the day, we need to strengthen public-private ties for the benefit of a stronger industry to the benefit of the country. This is a win-win for all.