The advantages of external pressures

Latin America had an important development in the field of CVAC/R. However, there is still much to improve to see a region located next to the large markets. You still buy a lot based on prices.

by Julián Arcila

The statements of those who are directly related to this market are quite positive and generally offer growth expectations that are above the growth forecast of the region, which although at the beginning of the year had been set at 5%, was corrected a little after the second half by ECLAC, finally standing at 4.7%.

To make an objective analysis of the most relevant facts of this region with regard to air conditioning it is important, however, to understand that there are still many scenarios in which Latin America can be and is being an interesting market, but that development and growth will occur in a rather slow way, given the nascent investment culture of local companies and the importance of the price factor when buying, the latter element with great impact when it comes to slowing down the evolution of Latin countries as globalized markets.

However, growth is a reality and part of the need that different continents have to implement energy-efficient solutions, but also to apply environmentally friendly equipment; Latin America was no exception and the last four years, which were very positive from the financial point of view and this element boosted the economic condition and led to important investments to improve the installed capacity in not a few markets.

Economic scenario

This year will go down in economic history as the period in which it was proven that not even the most powerful nation in the world could be safe from an economic debacle caused by multiple factors such as the erroneous figures of the banks, derived from the moratorium on subprime debts; the growth of the US trade deficit; falls in consumption and job creation; in addition to the moratoriums on not a few financial products that only produced huge gaps in the bank coffers, with the well-known fall in stock values that dragged the most important stock exchanges in the world to losses. Latin America, as expected, could do little to free itself from this economic spiral, and in addition to the falls in the most important stock markets in the region, these countries have had to face quite negative elements such as the fall in the prices of several raw materials such as copper and oil thanks to cuts in demand; this in turn will lead to a fall in consumption in the region, as purchasing power in these countries is obviously being reduced. The first indication of a complicated environment for the region is related to a growing inflation (it is expected that for this year this indicator will be between 9 and 10% in the consolidated of the region), which has been accentuated mainly in economies such as Venezuela and Argentina. The dollar, which had been a currency coming to less, began with a phase of strengthening generating a vicious circle in which import becomes more expensive, but export is more profitable for local producers; however, with the fall in demand in the first economies and with a possible entry into recession by the European bloc, expectations, without being bad, must be cautious for Latin countries. Perhaps for this reason, the Economic Commission for Latin America and the Caribbean (ECLAC) corrected the region's economic growth target for 2008, which was initially proposed at 5 per cent, to officially stand at 4.7 per cent. However, at the end of the year, growth expectations will still be maintained derived from fiscal surpluses and reductions in public debt in several of the Latin Economies. But where there is a big rudder blow is in the projections for 2009. Everything seems to indicate that next year will be the first to bring global recession after the Second World War and Latin America will not be able to escape it. Preliminary figures from the IMF indicate that in the coming year the region will grow by only 2.5% and some of the most profound cases are expected for Mexico and the United States, where the growth expectation is around 0.9% and 0.7%, respectively. To avoid this, several of the central banks of the world's major economies decided on a major reduction in interest rates. The CVAC/R segment

Overall, 2008 was a positive year for the CVAC/R and automation industry in general. This article will basically deal with what happened in front of refrigerants, controls and evaporators and condensers, elements that are directly related to the industry as a whole.

Once again, the growth that has been seen in regional economies, at least until the end of this year, can be seen as the factor that most boosts the consumption of air conditioning solutions -added to some growth observed in construction-; the increase in food production, on the other hand, boosted the consumption of refrigeration solutions and this in turn was reflected in the demand for evaporators and condensers.

On the other hand, global concern about energy consumption also reached Latin America, more specifically the Central American countries, which are importers of oil. This situation boosted the commercialization of control devices; refrigerants are not far behind and the current transition of substitution of substances harmful to the environment did the same with the consumption of "ecological" substances.

One year of business expansion¹.

For the air conditioning segment 2008 was a positive year. The market maintained a growth trend driven, in part, by the improvement in the technical level of Latino professionals. The demand for control and air conditioning solutions found several factors that drove it, among which it can be said that the most important was the realization of important investments by large commercial chains in different countries, which led to the construction of commercial properties, in addition to residential ones driven by third parties.

The Latin market enjoyed a certain maturity, but this can be described as relative, since although there are advances, more work is still needed in education so that the public can more easily adopt the technologies available in the market. Another outstanding element in the face of maturity is the one that end users gain every day, worrying more about elements such as energy efficiency and environmental protection, which has positively resulted in the segment of controllers, air conditioners of superior efficiency, but also those that use environmentally friendly refrigerants.

An important fact is that the efficiency or conservation of the environment factor has lost importance when those who make the decisions are contractors or builders, when the person who exercises this last function is different from the owner of the work.

The short-term factors that have driven the market forward can be summarized in a progressive growth (seen more clearly during the first half of 2008) of the construction sector, both residential and commercial; such a situation stems from the political stability that, with the exception of Venezuela, could be seen in Brazil and South America.

For some companies like Full Gauge, the performance during 2008 has been so positive that they expect an 80% growth in sales throughout Latin America.

The main trends

The world of controls is directly related to that of air conditioning, although since the last three years more and more solutions have been developed aimed at controlling energy consumption and various functions in refrigeration systems, both industrial and commercial.

With regard to the application of climate control devices, the market had a notable inclination towards the consumption of solutions for the control of energy expenditure, combining them with automation management systems. The important thing in this aspect is that end users are much more concerned with knowing in detail the consumption figures before and after the application of drivers, a function that mainly falls on device management software. The latter was strongly observed in Venezuela, Peru, Colombia, Mexico and Central America.

More specifically with regard to air conditioning, demand has shifted towards the purchase of equipment that offers greater efficiency in terms of tonnes per KW of energy consumption; there was also increased interest in systems that combine controllers, variable frequency drives, free cooling applications and the use of environmentally friendly refrigerants. An important fact found in the market is that in the case of global companies or with some degree of social responsibility, the use of certified energy efficiency systems has been a determining factor.

In that sense, if it comes to talking about demanded solutions, for a company like Johnson Controls these were:

• Environmental conditioning equipment that improves efficiency in part load and that complies with the standards and codes of international agencies such as: EER
• Applications with automation and remote operation through a BAS system and with open protocols
• Heat recovery mode for hot water use
• Equipment with low sound generation.

Perhaps one of the segments of CVAC/R that was most affected by the current situation of the industry is that of refrigerants; at present, the entire planet is focused on the implementation of an environmental policy that allows full compliance with ordinances such as the Montreal and Kyoto protocols.

In this sense, the substitution of CFCs and other ODS (Ozone Depleting Substances) had a significant impact on the destinations of the refrigerant sector in 2008. In this sense, the market (Latin America, according to some opinions, could represent 5% of the world gas market) showed an interesting growth over the last year, with Brazil, Argentina, Colombia and Peru being the best niches for this sector.

Some important trends

However, there are also those who rate that 2008, compared to 2007, was a market of ups and downs, where depressions were mainly seen in the 2nd quarter and the same is expected to happen during the last three months.

This was perhaps because the market is still very weak when it comes to the adoption of regulations and those who do it is because they have an export market (this was the case of countries like Mexico) to which they must respond. One of the evils that has always affected the region cannot be ignored: price; even in many countries, mainly with regard to the replenishment market, it continues to be purchased based on this factor, to the detriment of the quality of the compounds (something that was observed in Brazil and Central America, mainly).

Still, for the moment, Latin America is seen in the global context as a follower of technologies, not as a developer. In this sense, firms such as Dupont (whose sales grew by 15% during this year) believe that there is still an important space to work on improving the market by taking advantage of new technologies in terms of energy efficiency.

But what drove the sector to growth? For some professionals, the demand for air conditioning and refrigeration system solutions was directly related to an improvement in the purchasing power of the Latin American population, since it is no secret that an important market that is opening up for suppliers of these industries is in the residential field. In that sense, the good work that was done in Latin America for poverty reduction may have had its impact on the increase in the purchase of the aforementioned equipment.

In the markets in which there was some attention to these compounds, back in the first half of the year, such a situation seems to be attributed to several aspects, including an increase in production costs; for some companies that have their seat in the United States, the impact of hurricanes in the 2008 season will also have its effect in the last months of the year, to which will be added the new revaluation trend of the dollar.

Another trend to take into account is the exponential growth of air conditioning for cars, which will boost the market for refrigerants in Latin America, which may currently be valued at U$400 million annually.

In search of opportunities³.

The refrigeration sector, mainly the commercial sector, is perhaps one of those that is best taking advantage of the external economic situations of the moment. The increase of free trade on the planet and the scarcity of food (sometimes caused by climatic problems) in some regions of the globe have led to the market for frozen products being experiencing an important boom.

And to confirm the above, it is enough to remember that in an article published by the Chilean newspaper El Mercurio at the end of 2007 it was reported that, as observed by southern industrialists during their participation in the Anuga fair, in Germany, the largest fair of the sector in the world. According to the newspaper, the great global trend in the food sector, as far as European countries are concerned, is in frozen prepared foods, which are easy to prepare.

In this direction, not a few Latino producing companies have invested to improve their refrigeration program in order to occupy an important place in the growing world of frozen foods, a factor that has undoubtedly opened a wide spectrum of possibilities for suppliers of refrigeration systems.

The outlook has been quite positive and for companies such as Heatcraft do Brasil and Deltafrio, which are dedicated to the development of equipment for cooling systems (evaporators and condensers, among others), the increase in their figures for 2008 may be around 20%.

Despite this significant growth, it can still be said that the market is immature and that it is far from taking advantage of all the technology available in advanced markets such as the United States and Europe, which focus heavily on energy efficiency, this mainly due to technical difficulties or high costs.

It is also worth saying that the refrigeration sector is undergoing numerous transformations thanks to the process of replacing refrigerant gases and the same global need for frozen food, which has turned several of our economies into some of the main suppliers of consumer countries. To this must be added the establishment of laws, in countries such as Brazil, that tend to greater care of refrigerated foods; such a situation has become another niche of opportunities for those who offer solutions for cooling.

In summary, there has been a favorable environment in which three factors have converged: product availability, quality and price.

Trending

The strongest trend is leaning towards the above, in relation to the growth of frozen food exports, which has occurred mainly in sectors such as grains, fish and flowers, among others.

Along with the above, it is worth highlighting the increasingly frequent use of alternative materials in the manufacture of refrigeration solutions, such as ammonia, which seeks to reduce the uncertainty that means the use of copper, a material that maintains a high oscillation compared to its international prices. Aluminum has positioned itself as a great alternative for this purpose.

Another important trend is the increasing use of glycol, mainly in markets such as Brazil, Argentina and Colombia. A specific segment to pay attention to: that of supermarkets.

Conclusions

Latin America continues on the path to development in terms of air conditioning and refrigeration. There is significant growth and a favourable inclination towards energy efficiency, but we must not forget one factor that is really important when developing as a market: political stability. What has been happening in countries such as Venezuela and Ecuador, whose governments do not guarantee stability or freedom of enterprise, are negative signals that alienate investors from rarifying the business climate.

At the moment, technological development in our countries remains at very low levels compared to the developed world. The recommendation, for the moment, is to continue working so that the other countries of the region match the productive capacity of nations such as Mexico, Brazil and Argentina, and so that day after day bureaucratic procedures are eliminated in order to favor commercial exchange between the different peoples of the region.

1 . The companies that participated contributing their knowledge for the analysis of the air conditioning and controls segment were Full Gauge (Rodnei Peres, Department of Foreign Trade) and Johnson Controls (Alicia Bandala, systems director for the Building Efficiency Latin America division).
2 . Dupont (Mauricio Xavier, manager for the refrigerants and fluorochemicals business in Latin America) participated in the analysis of the refrigerant segment. Other recognized sources asked for his name to be withheld.
3. Heatcraft do Brasil (Paulo Eduardo de Oliveira, sales and export manager) and Deltafrio (Marcelo Marx, administrative director) participated in the analysis of the refrigeration segment.