Robust demand props Brazil’s petrochemicals production, uncertainties abound

An upturn in domestic and external demand has lifted Brazilian petrochemicals production, but uncertainties remain and investors are delaying capacity additions as per a report by Companiesandmarkets.com. Q1-09 was highly challenging for Brazilian petrochemicals producers with destocking throughout the production chain and the downward adjustment of polymer prices in line with international trends. Capacity utilisation rates at Braskem were reduced to 55% in December 2008 to reduce the high level of inventories that had built up due to poor international demand. However, Braskem claimed that by end- Q1-09 demand had picked up sufficiently to return to near full capacity; throughout Q2-09, it was running at around 95% capacity. This was far better than the 65% average capacity utilisation rate previously anticipated in the quarterly report. There was a divergence in demand trends from end-users, with fertilisers suffering due to a lack of credit availability to the agricultural sector. Poor automotive export performance has also dampened demand for petrochemicals. However, packaging and household goods production have strengthened as consumer demand has picked up. Nevertheless, uncertainties remain and margins will be placed under pressure by increased global capacities, with the start-up of new plants in the Middle East and Asia. It is believed that market volatility will continue to plague Brazilian producers throughout 2009 due to the contraction cycle in the economy. This could prompt consolidation within the industry and resulting improvements in competitiveness. Much depends on the recovery in Asian markets, notably China, and if demand growth is not sustained, prices will fall. A government stimulus plan aimed at the automotive, construction and consumer goods industries should mitigate the effects of an external market downturn. President Luiz Inácio Lula da Silva (Lula)’s recently announced Growth Acceleration Programme, known as PAC, which was launched in Q109 intends to ensure that no existing projects will suffer as a result of deteriorating macroeconomic conditions. This will involve boosting infrastructural development. Other factors that will boost the Brazilian petrochemicals industry are the decline in US supply and the depreciation of the Brazilian real, which has bolstered competitiveness. These have helped reduce the proportion of imports on the domestic market. An uncertain environment means that producers are reviewing planned capacity additions. In an announcement in February, Dow Chemical has pushed back by one year its planned US$1bln PE plant based on sugarcane-derived ethanol, with capacity of 350,000 tpa of LLDPE, to 2012. This is in line with the belief that construction projects that have yet to begin, or are just starting, may be delayed by 12-18 months, and as such does not change our forecasts.