Petrochem Producer Braskem Faces Cash Freeze Amid Fissure Damage Probe

Petrochem producer Braskem faces cash freeze amid fissure damage probe

24-Apr-19

A Brazilian court has ordered a "precautionary" freeze on up to Real $100 mln (US$25.45 mln) in petrochemical giant Braskem's financial assets, according to Braskem. The freeze is intended to potentially pay costs associated with fissures and other geological damage to neighborhoods near the company's salt mining operations in the Brazilian state of Alagoas, as reported by spglobal.com

Earlier this month, the company issued a statement to shareholders announcing that a lawsuit filed against Braskem by public prosecutor and public defender offices in the state of Alagoas sought a freeze of Real US$6.7 bln "to guarantee any potential damages owed to the general public affected by the geological phenomenon which occurred in districts near the rock salt extraction area in Maceio." In a second statement issued three days later, Braskem said a civil court in Maceio partially granted the injunction request and ordered a freeze of the smaller amount. The prosecutors' offices appealed that order for the smaller freeze, and last week, Braskem announced that an appellate civil court ordered the company to suspend its April 16 dividend payout of Real $2.7 billion "until the merits of the appeal have been examined."

Braskem also has appealed the freeze, arguing that there is no conclusive study showing evidence that the company is responsible for any fissures, and there are no grounds for freezing cash "which adversely affects its operations in Alagoas," the company said in a statement.
The issue stems from fissures in neighborhoods in Maceio, the city in the Brazilian state of Alagoas, where Braskem has chlor-alkali and polyvinyl chloride plants. The company mines salt in the region used to produce chlorine at the chlor-alkali facility. Chlorine mixed with ethylene makes ethylene dichloride, or EDC, a precursor to PVC. According to Brazil's Geological Survey (CPRM), which is slated to release a report on the damage at the end of April, the Pinheiro neighborhood has historically shown fissures and sinkholes among houses and public roads. Such incidents intensified after heavy rain in the region in February 2018 and an earthquake the next month that registered 2.5 on the Richter scale, the agency said.

"The event produced significant damage, such as fissures, cracks and cracks in buildings, streets and sidewalks in an expressive area of the neighborhood, including the prohibition of several homes," the Geological Survey said in a statement. Braskem, which has conducted salt mining in Alagoas since 1975, ceased operating in Pinheiro and started to monitor issues with buildings in the neighborhood in March 2018. A source familiar with company operations said chlor-alkali and vinyls production "has not been impacted by these tests so far." However, Braskem earlier this month issued a tender for caustic soda -- a by-product of chlorine production -- and EDC. According to multiple market sources, the tender sought two 8,000 dmt cargoes of caustic, a key feedstock for alumina and pulp and paper, and two 10,000 mt cargoes of EDC. The tender sought both products in a package deal for May and June delivery.

The source familiar with company operations said Braskem included caustic soda in the tender in search of an acceptable deal on EDC to supplement its PVC production, not in relation to the fissure issues. Braskem twice declined offers on US-origin EDC tenders in 2018, having deemed prices too high, but prices still remain at their highest level since October 2014. Rather than keep waiting for prices to decline, the company opted to package its EDC tender with caustic soda, given that caustic soda prices have been under pressure amid high inventories and are at their lowest level since September 2016, according to S&P Global Platts data.

"We understand that buying both products would be more attractive for EDC production, and we would get better deals this way," the source said. "We are not interested in buying soda without EDC. In addition, we believe that soda prices are currently at the low end, reducing risks for us." It was unclear whether US producers were able to fulfill one or both shipments, given tight EDC export availability.