Mexichem Falls as Plant Blast Seen Tightening Region Vinyl Chain

  • Mexico largest petrochemical maker down 8.3% since accident
  • Plant shutdown seen disrupting regional PVC supply chain

The fatal blast at Mexichem SAB’s Clorados III plant this month has sent shares of Mexico’s largest petrochemical maker to their biggest three-day slide since January 2015. And that may be only the beginning.

The Clorados III plant, which is expected to be shut for several months, produces more than 10 percent of the company’s vinyl chloride monomer, a chemical known as VCM used to make PVC plastics, Chief Executive Officer Antonio Carrillo said in an April 22 interview. The shutdown may tighten VCM supplies in the Americas in the first half of the year for companies such as Occidental Petroleum Corp., Axiall Corp. and Shin-Etsu Chemical Co., according to an April 21 research note by Jason Miner, a senior analyst at Bloomberg Intelligence.

"The PVC and VCM chain will be affected by this," Pablo Alvarez, head of logistics at Grupo Idesa SAB, a Mexican chemicals company, said by phone on April 22. "That is going to hurt not only Mexichem but also consumers."

The April 20 explosion that killed at least 32 people was the deadliest industrial accident in Mexico since 2006. Tlalnepantla-based Mexichem, which has tumbled 8.1 percent since the blast, will miss a target to produce 330,000 tons of VCM this year, according to Alik Garcia, equity analyst at Intercam Casa de Bolsa SA. The plant produced about 1,000 tons a day of the ethylene-derived resin, he said.

PVC is used in everything from water and gas pipes to medical devices, credit cards and children’s toys.

Supply Chain

Mexichem’s joint venture with oil producer Petroleos Mexicanos said it doesn’t know how long repairs will take and that the explosion will impact the availability of PVC for months. That will affect the entire supply chain, Martin Hernandez, an analyst at Punto Casa de Bolsa SA, wrote in an April 22 note. Hernandez lowered his recommendation on Mexichem to hold from buy.

"We’re going to see a fall in the shares not only in the next few days, but likely for a longer period of time," Garcia said in a phone interview from Mexico City. "The PMV joint venture is the beginning of the production chain and is where all the products originate from, including VCM and PVC resin, which, if supply is down, impacts the volume of pipe production."

Mexichem will "give as much information as available” about the accident on its April 28 conference call a day after the release of first-quarter earnings, CEO Carrillo said. Increased production of VCM at the Clorados III plant and output from an ethylene cracker expected to begin production in 2017 are key to making Mexichem’s PVC production among the most cost-efficient in the world, Carrillo said on a Feb. 25 earnings call.

Higher Costs

"I think we can mitigate most of the impact of the loss of the raw material with other sources,” Carrillo said. The company will probably have to sell more chlorine and caustic soda to make up for losses from the blast, he said.

Mexichem is working to fulfill all client orders and hopes to have the company’s full PVC production restored by July, according to Berenice Munoz, head of investor relations. The company has no comment in regards to the recent share price movements, she said.

Mexichem has 17 buy recommendations and 2 holds, and is one of the highest-rated companies on Mexico’s stock exchange, according to analysts surveyed by Bloomberg. Shares returned 19 percent this year through April 20 before falling 8.4 percent over the two days following the accident.

The effect of the explosion likely means "an increase in its costs and lower margins than expected for the rest of the year," Hernandez said. "It’s still too early to evaluate total damages and it’s probable it will take several weeks for the company to evaluate the financial effects."

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