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Latin America to boost US refined product imports as middle class grows

01.27.2014  | 

Freight traders booked tankers to send 19 million metric tons of fuels from the US to Latin America in the spot market last year, 5.4% more than in 2012. Volumes may rise again because demand is expanding and no new regional refining capacity will be added in the short term, a new report finds.



Latin American nations are poised to accelerate imports of US refined-oil products after failing to build refineries to meet demand from a growing middle class.

Freight traders booked tankers to send 19 million metric tons of fuels from the US to Latin America in the spot market last year, 5.4% more than in 2012, data compiled by Bloomberg show. Volumes may rise again because demand is expanding and no new regional refining capacity will be added in the short term, according to Houston-based Hart Energy Research & Consulting.

While growth in some Latin American economies slowed in 2013, the region has outpaced the world for the past seven years, helping lift more than 50 million people out of poverty. For the first time there are more Latin Americans classified as middle class than poor, according to a 2012 study by the World Bank. Lower unemployment rates than the US since 2009 drove demand for energy products.

“Demand in Latin America will keep expanding this year amid a growing middle class,” said Rodrigo Favela, an executive director for refining, planning and evaluation at Hart Energy in Mexico City. “I wouldn’t be surprised to see another year of record imports.”

Latin American refiners, including state-controlled Petroleos de Venezuela SA and Petroleo Brasileiro SA, doubled US imports in the past five years amid delays in building new refineries, Favela said. Their US counterparts are shipping record volumes as oil companies pump the most crude in 25 years.

Imports Doubled

Motor-fuel consumption in Latin America doubled from 1990 to 2011, according to the Paris-based International Energy Agency. The last refinery built in the region was Refinor in Argentina in 1992, which can process 32,000 bpd, adding less than 5% to the country’s combined refining capacity of 630,575 bpd, IEA data show.

“The US, because of proximity and its cheaper feedstock, is the natural export market to the Latin American market,” said Jonathan Chappell, a shipping analyst with Evercore Partners, the New York-based investment bank.

The largest US output of crude oil since 1988 coupled with a ban on exports of unrefined products dating back to 1975, prompted refiners to boost output and shipments of products from gasoline to diesel.

US Output

US crude production expanded to a 25-year high of 8.16 million bpd in the week ended Jan. 10, according to the government’s Energy Information Administration. Exports of gasoline, diesel and other refined fuels reached a record 3.58 million bpd in the four weeks ending Jan. 10, data from the EIA show.

Drivers in the US paid on average $3.66/gal in the third quarter, the 11th-cheapest gasoline in the world, data compiled by Bloomberg from 61 nations show. Among those with cheaper gasoline are some that subsidize it to curb inflation, including Venezuela, the United Arab Emirates, Mexico and Egypt.

Latin American economies will expand a combined 2.9% this year, from 2.38% in 2013 and 2.85% in 2012, according to economist estimates compiled by Bloomberg. Growth was 5.46% in 2006, a year in which the global economy expanded 4%. World growth will be 2.87% in 2014, compared with 2.03% in 2013, the forecasts show.

Freight Rates

The anticipated increase in fuel imports by Latin America this year may not mean higher freight rates, said Court Smith, the head of research at Poten & Partners, a shipbroker.

“With poor demand coming out of Europe, owners may relocate ships to the US Gulf and that would curb the potential for a strong surge in freight rates,” Smith said from New York.

The average price to ship refined oil in 38,000 metric-ton medium-range vessels from Houston to Rio de Janeiro rose 33% to $16,574/day in 2013, compared with $12,422 the previous year, according to data from London-based Clarkson, the world’s largest shipbroker. The average for Houston to Quintero in Chile rose 32% in 2013 to $17,231/day.

The proportion of product tankers in use in the global fleet, also known as the utilization rate, rose 1.5 percentage points to 85.5% in 2013, according to data from RS Platou, the Oslo-based shipbroker.

Capital Intensive

“Just from a volume perspective and from a utilization of vessels standpoint, it’s been a welcome surprise,” Chappell of Evercore said of the rise in US exports to Latin America. “I don’t think anyone was building ships just for the purpose of moving that cargo. But it has been providing employment opportunities and therefore boosting global medium range tankers utilization.”

While no ship owner is dependent on one particular route, those in the medium-range tanker spot market, whose journeys can vary by thousands of miles, may benefit most from rising Latin American demand. These include Scorpio Tankers, Ardmore Shipping, Navios Maritime Acquisition and Torm A/S, according to Chappell.

In the past decade, oil companies in Latin America chose to invest in exploration instead of more capital intensive refining capacity, Hart’s Favela said. It’s cheaper to import from the US than to produce domestically, he said.

In Brazil, Latin America’s largest economy, Petrobras plans to start the Abreu e Lima refinery by the end of this year after a three-year delay. Its Comperj refinery, initially expected to start in 2013, won’t open until next year. Petroleos Mexicanos postponed plans to build the Tula Bicentenario refinery, CEO Emilio Lozoya said Nov. 20, without saying when he plans to start construction.

Full Capacity

Latin America’s 12 main economies take about a third of US petroleum product exports, government data show. Brazil, Mexico, Argentina, Venezuela, Chile, Colombia, Ecuador, Peru, Honduras, Guatemala, Costa Rica and the Dominican Republic imported a combined 1.36 million bpd in the first ten months of 2013, according to the latest available data, more than double the 657,000 bpd in 2008.

New refineries from Petrobras that are starting in the fourth quarter may not provide relief any time soon because the region’s economies are still expanding and it takes time for plants to reach full capacity, Favela said.

“Growth is still there,” Favela said. “The region will remain as a good opportunity for US refiners.”

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