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Mexico’s Alpek suspends construction at the PTA and PET plant in Texas due to inflationary cost pressure

21 Oct 2023 10:55 IST
Mexico-based Alpek, one of the largest petrochemical companies in the Americas, has decided to temporarily suspend construction at its Corpus Christi Polymers (CCP) project in Texas due to rising costs. The decision comes shortly after the announcement of the closure of a filament plant in Mexico due to profitability challenges. Alpex has already obtained consent from its partners for this project for the temporary suspension of construction at the CCP project.

The CCP project offers the most efficient and innovative production of polymers such as purified terephthalic acid (PTA), and polyethylene terephthalate (PET). PTA accounts for the majority of the total annual capacity of the project, followed by PET. The project uses innovative processes and products for technical advantages compared to the competing packaging materials in its versatility. The CCP was originally scheduled to commence commercial production in 2025.

Reports said that the construction and labour costs have surpassed the initial expectations due to a sustained period of high inflation. Hence, CCP and its partners decided to pause the project temporarily. The promoter, partners, and financiers are expected to meet in the near future to decide the re-commencement of the construction work and commercial production. Sources said that the project will be adequately preserved to restart construction in the near future.

Jorge Young, Chief Executive Officer of Alpek, stated, “The company keeps its compromise to maximise the value of CCP. We are confident that taking time to evaluate different options will allow us to improve capital expenditure (capex) and establish the best route to go forward, considering our group's interests and customers. The company will always strive to maximize the value of the CCP. It’s not surprising that some projects are being paused. In fact, I am surprised not to have heard of more deferrals and even cancellations.”

Rising construction and financing costs
According to reports, the key construction and finance costs have significantly gone up in recent years due to high-interest rates and inflation. The continuous increase in interest rates by the United States Federal Reserve (US Fed) forced banks to pass on the finance cost to their customers and thereby raise lending interest rates proportionately. As a result, all borrowers face escalated borrowing costs which continuously raise capex at the brownfield and greenfield projects.

Sources said that the Producer Price Index (PPI) for concrete products (ready-mix, precast, prestressed, pipe, etc.) has risen significantly during 32 of the past 33 months. Another key component i.e. labour costs, as measured by average hourly earnings for production and non-supervisory employees in construction (i.e. most hourly craft and office workers) rose by 5.7 percent in the last year ending August 2023. Additionally, labour costs in the supervisory scale have also risen sharply during the last year, resulting in an exorbitant increase in overall construction costs.

Explaining the rationale behind the increase in the finance costs, an analyst tracking the US markets, said, “The US Fed raised its short-term interest rate target by 11 times since early 2022, which raised long-term rates proportionately. The US Fed raised interest rates continuously in order to bring the retail inflation to the targeted level of 2 percent (at 3.7 percent in September 2023). In fact, financing costs have also risen steeply at the US Fed’s increase in the short-term lending rate target.

Construction starts in 2022
The suspension of the CCP project was announced only a few months after the resumption of its construction. Aplek commenced the construction activity in June 2022, along with its three partners in the polymer project, DAK Americas LLC, an Alpek polyester business, and a subsidiary of Alpek, Indorama Ventures Corpus Christi Holdings LLC, a subsidiary of Indorama Ventures, and APG Polytech USA Holdings. The company planned to resume construction of the integrated PET-PTA complex in the Texan port of Corpus Christi.

In June 2022, Alpek said, “CCP will re-start construction of the facility in August 2022 and expected the completion of the projection by early 2025. The project will have an overall annual capacity of 1.1 million tonnes of PET and 1.3 million tonnes of PTA. Back in March 2020, Alpek had extended the ‘pre-construction period’ by the end of 2020, citing the same reasons i.e. high financing and labour costs.”

Alpek shuts filament plant in Mexico
In August 2023, Alpek announced the shutting down of its filament facilities in Monterrey, Mexico which was built in 1962, with an installed capacity of 100,000 tonnes of polymers. The company attributed the closure of this plant to the excess capacity worldwide resulting in pressure on its prices globally. Also, Alpek had announced the refinancing of the outstanding balance from the 2023 bond with the new debt that included an environment, social, and governance (ESG) component.

The company is continuously looking for opportunities to create value by streamlining its operations to meet the demands of the competitive markets it serves and assure its financial strength. The production oversupply experienced globally in recent years for the filament industry, among other factors, has significantly reduced its profitability, and as this situation is not expected to change in the near future, the Company has made the challenging decision to close its operations at such facility and will not be substituting production.

“The Company will provide a comprehensive separation package for all collaborators and all necessary support as part of the closure. Although efforts were made, unfortunately, this is the only option available at the time. I want to express my heartfelt gratitude to each of the employees of this site for their commitment to the company throughout the years,” Young said in a statement.