Latin America's LPG imports rise against economic contraction

13:20 PM | May 12, 2020 | Francinia Protti-Alvarez

A boost in residential demand and lower liquefied petroleum gas (LPG) output from regional refineries are expected to drive up Latin America’s LPG imports this year despite a contraction of the region’s economies, says Adrian Calcaneo, director, midstream and liquids at the Latin American Petrochemical Summit session of IHS Markit’s live WPC Online Forum.

As pandemic containment measures curtail transportation, commercial and industrial activities, and petrochemical production, residential demand is growing as more people stay at home. “It is still too early to say whether LPG demand growth from residential will outweigh the drop in demand from the commercial segment. Latin American countries entered quarantine much later, so we are just about to receive the first round of data. [T]he impacts depend on each country supply and/or demand profile,” Calcaneo says. “Latin LPG demands grows at about 2% per year. I don’t expect that to change.”

The LPG demand profile varies greatly from one Latin American country to the next, but residential and commercial demand represent nearly 70% of regional LPG demand.

“In Brazil, the vast majority of LPG demand is residential and commercial, and within this category, 93% of the demand is residential. Over the last few weeks, LPG demand in Brazil has grown 6% over the last few weeks—despite the crisis,” Calcaneo remarks.

Meanwhile, the region’s LPG production tied to refinery output, which accounts for 25% of regional output, will drop as refineries slow down production on weak operational economics, oil oversupply, and slower global demand for refined products, Calcaneo says.

The remaining 75% of LPG output tied to natural gas processing will remain stable in the short term, according to IHS Markit. However, it faces an eventual decline toward the end of 2020 and a protracted recovery period when economic conditions improve. Investments in Brazil’s presalt fields and Argentina’s Vaca Muerta will continue slowing, and those in Mexico’s energy sector will decline further.

“The gap in supply will largely be covered by imports. There is enough supply of LPG from the United States to satisfy Latin America’s propane and butane demand, and we do not expect a quick decline in availability,” he says.   

The spread of the coronavirus disease 2019 (COVID-19) is generating unprecedented political-, security-, and economic-related challenges in Latin America. The region’s economic outlook is bleak, with a 4.9% economic contraction expected in 2020, according to Rafael Amiel, chief economist/Latin America at IHS Markit.

Across the major economies in the region—Brazil, Mexico, Argentina, Colombia, Chile, and Peru, “Mexico is taking a threefold hit: the oil shock, the US recession [the US imports 80% of Mexican exported goods], and COVID-19,” says Amiel. Mexico’s economy is forecast to shrink by 7.1% this year, according to IHS Markit.

The region faces many shocks compounded by the pandemic. The simultaneous collapse of commodity prices, the fall in global demand, and rapidly depreciating currencies are hitting Latin America hard. Although governments across the region are taking measures to help their respective economies, in the context of fiscal constraints, these issues will be tough to address via countercyclical policies,” Amiel says.

However, countries in the region cannot afford to execute fiscal stimulus because many countries [in the region] have very high levels of public debt to GDP ratios. “We have seen Argentina, Chile, and Peru go in that direction, while Colombia is sitting on the fence and Mexico is not following this route at all,” Amiel says.