• Company expects insurance payout following deadly April blast
  • Spotty ethane supply from Pemex has Mexichem considering move

Mexichem SAB expects to get insurance money to rebuild the chemical plant in Pajaritos destroyed this April in a deadly explosion. But unless ethane supply from Pemex improves, it’s not so sure it wants to.

The vinyl chloride monomer (VCM) plant that was hit earlier this year by a blast that killed 32 and cost the company an estimated $286 million may not be rebuilt in the same location -- or at all -- as Mexichem struggles to secure supplies of the raw material ethane from its joint-venture partner Petroleos Mexicanos, said Antonio Carrillo, chief executive officer of the Tlalnepantla-based chemical producer.

“We have to make sure that if we are going to invest this huge amount of money that we have certainty that we are going to have the ethane, and we are working with Pemex on that," Carrillo said in a phone interview Thursday, the day after Mexichem reported second-quarter results. "One of the options is not to build it, or build it in a different place, or build a different kind of plant.”

A Pemex press official declined to comment on the company’s ethane supply.

Ethane Issues

Carrillo said the expected insurance money will likely cover the cost of the plant to be rebuilt in the same location but will not provide for additional expenses if the plant is moved elsewhere. Mexichem is in discussions with state-owned Pemex now about raw material supply issues, he said, adding that the company will decide soon on whether to rebuild and if it will choose to do so closer to a stable source of supply.

Ethane supplies, a key ingredient for Mexichem’s plastics products, have dwindled as Pemex has failed to invest in gas fields amid three years of losses. At the same time, the opening of the Braskem Idesa polyethylene plant in Veracruz has increased demand for already-limited raw material supply in Mexico.

“Between reduction of supply in Pemex fields and Braskem opening its plant, the supply of ethane is not stable at the moment. There is a lack of ethane for the four plants that consume it in Mexico," Carrillo said. "At the moment there is not enough for all."

Evaluating Options

According to Carrillo, the company has enough supply of VCM for this year and next even with the Pajaritos plant offline, and the start of operations at its ethylene cracker in Texas in the first quarter of next year will help reduce production costs. "When you have an accident like this and you lose a key part of your supply, you re-evaluate your options," he said.

Duncan Wood, director of the Woodrow Wilson Center’s Mexico Institute, said he doesn’t think the challenges facing the Pajaritos joint venture bode poorly for Pemex’s plans to find new partners in the country across its products.

"The specific problem related to Pajaritos highlights the very difficult situation that Pemex is in right now, which is that it is finding itself squeezed of resources and still undergoing a major restructuring," he said by phone from Washington, D.C. "I don’t see this as being necessarily a reason why you shouldn’t partner with Pemex; I see it as underlying the importance of Pemex finding partners and the very real opportunity that exists for companies to fill the growing gap in the value chain."

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