Latin America Reports

Venezuela Joins Mercosur

By Charles W. Thurston | January 12, 2006

By joining Mercosur, Venezuela has leveraged its investment options.

Venezuela has finally joined the Mercosur trade bloc, leveraging its options for attracting new foreign investment and for increasing international trade, which should affect all segments of the paint and coatings industry favorably. The Mercosur group, which also includes Argentina, Brazil, Chile, Paraguay and Uruguay, has a trade agreement in place with the European Union, but member countries still are negotiating to form the U.S.-proposed Free Trade Area of the Americas (FTAA).

Each of the Mercosur countries reported increased trade among member countries when they joined the bloc, and Venezuela, with a market of 26 million, should be no exception. Bilateral deals between Venezuela and other member countries-like the proposed Venezuela-Brazil gas pipeline-also may move forward more quickly now.

Venezuela has been shunned by some international investors since President Hugo Chavez came into office, because of perceived political instability. But Venezuela now can better utilize its vast oil and gas resources to attract new foreign direct investment in the petrochemical sector, which it has been trying to expand for several years. Venezuela, which is the world's fifth-largest oil exporter, is estimated to have the eighth-largest gas reserves in the world.

Capital investments by the country's largest paint manufacturer, Corimon, have been modest for 2005, according to press reports citing Jos Alberto Oropeza, a company spokesman. Nonetheless, the stock of the company, which is traded on the Caracas exchange, is up to more than seven dollars per share, an increase of approximately 27% for the year, according to JPMorgan. With a market capitalization of $39 million, the company had sales of $112 million and net income of $7 million in the last reported year, according to bank figures.

Corimon's Tiendas Montana home improvement chain is growing rapidly through franchise development. From 82 stores in 2004, the company expects to have authorized 112 by the end of 2005, according to comments by Amparo Illanes, the general director of the subsidiary, at the national franchise trade show, Encuentro de Franquicias 2005. Tiendas Montana is offering its CubreMax brand architectural paints in plastic bags, rather than cans, to cut costs for consumers.

Architectural segment sales in Venezuela also should receive a boost from the expanding national housing plan, aimed at easing the shortage of 1.6 million units. While the government failed to meet its goal of adding 120,000 new housing units this year, the goal for 2006 is even higher, at 200,000 units. That figure may be attainable, however, thanks to an expected Inter-American Development Bank loan for housing, earmarked for 2006.

Automotive paint sales also are expected to rise in Venezuela, both for OEM and after-market niches. New car sales in Venezuela were up 73% to just over 200,000 vehicles during the first 11 months of 2005, compared with the same period in 2004, according to the national automobile industry trade association CAVENEZ.

Industrial paint and coatings, as always, could expand rapidly in Venezuela, both for badly-needed maintenance programs and for new construction. Venezuela's industrial production is expected to increase by 11% in 2005, then slow to 6.4% in 2006, according to the UBS Investment Research's Latin America economic analysis team. Billions of dollars worth of infrastructure projects are underway in Venezuela, but many are hobbled for lack of investment funding.

Venezuela's gross domestic product and per capita income levels are ahead of the Latin American region as a whole. Real GDP growth of 9.1% is expected this year, but could slow to a more sustainable 4.8% in 2006, UBS projects. More importantly, GDP per capita continues its upward march, poised to hit a $4,816 level this year and expected to rise to $5,169 in 2006.