Squeezed by natural gas and naphtha costs that are roughly 25 percent higher than those in Asia and the U.S., Brazil's chemical and petrochemical industry is shelving roughly $8 billion in expansion projects this year until 2014 or beyond.
The cost of natural gas is five times more expensive in Brazil than in the U.S., where it costs $3 per million Btu, according to the Brazilian Chemical Industry Association (Abiquim). The prospect of cheap shale gas development in North America has chilled Brazilian investment, driving the country's trade deficit in chemicals to $28 billion in 2012, up from a deficit of $7.9 billion in 2005.
High production costs are forcing Brazilian companies to divest assets this year, close facilities and postpone investments. The country's largest petrochemical expansion project, the Petrochemical Complex of Rio de Janeiro (Comperj), has had investment decisions bumped to 2014 by Braskem SA.
Petróleo Brasileiro SA (Petrobras), its partner in the Comperj project, saw its president, Graça Foster, note earlier this year she's concerned with the competitive effect American natural gas will have on the petrochemical industry.
Braskem, the largest petrochemical company in the Americas, hasn't decided whether to contribute to Comperj, for which construction is estimated at 5 billion Brazilian reais ($2.3 billion). Comperj is expected to include production units for polypropylene with annual capacity of almost 2 billion pounds, polyethylene with 2.1 billion pounds, styrene at 881 million pounds and butadiene at 340 million pounds, as well as benzene and second-generation products and resins from Braskem's portfolio.
The complex includes construction of two refineries, already underway.
"Braskem wants to balance our raw material sources, which today is about 80 percent naptha and 20 percent natural gas," Luciano Guidolin, executive vice president for polyolefins and renewables, said in an interview at Feiplastic, held May 20-24 in São Paulo.
"With our projects in Mexico and Comperj, we could have a 50-50 split on raw materials eventually across the company. Raw materials are of the highest importance when considering a new location. With Comperj, the [oil exploration off Brazil's coast] offers great raw material potential."
Despite a potential boom in cheap fossil fuels off the Brazilian coast, Braskem is believed to be waiting for the federal government to guarantee a reduced price for natural gas before it commits to Comperj. The company is expected to play ball since tax cuts were recently made to help the petrochemical industry, but Braskem could focus its investment where raw materials are cheapest, as with its $3.2 billion investment in an ethylene plant in Mexico, due to begin operating 2015.
Abiquim estimated in 2010 that annual demand in Brazil for chemicals and petrochemicals would grow from $145 billion that year to $260 billion in 2020, necessitating $167 billion in investments for domestic production over the decade. Now more than three years in, investments in the domestic chemical industry have been between $4 billion and $5 billion per year, far short of the $16 billion to $17 billion per year Abiquim believes necessary.
The world's largest chemical companies are shifting their focus toward shale gas reserves in the U.S. An industrywide shift of polyolefins production could occur favoring North America, further stressing the plastics industry in Latin American nations where protectionist import tariffs exist for raw materials, said Maurizio Butti, chief operating officer of Songwon Industrial Co.
New "green" plastics projects in Brazil, for which sugarcane ethanol is the main feedstock, have also been delayed. Braskem, which operates a bio-based PE plant in Brazil's Rio Grande do Sul state, put on hold plans for a new green PP plant that was in development, and a new green PE plant under study.
"We will continue searching for the right conditions for these [bio-based] projects, but for now Braskem has prioritized other plans in Brazil and Mexico," Guidolin said.
Dow Chemical Co. and Japanese partner Mitsui & Co. Ltd. halted progress on their green plastics refinery in Minas Gerais state. Projected at a cost of $1.5 billion, the complex's first phase was complete, which included cultivation of almost 50,000 acres of sugarcane as ethanol feedstock. The second phase, which involved opening the refinery, is on hold due to construction costs.
Brazil's Unigel SA, which has 15 plants in Brazil and Mexico, said in the first quarter that it might sell some of its assets that produce specialty chemicals, fertilizers, plastics and packaging. The company has closed one of its polystyrene plants in São Paulo state, but the facility might be reopened this year to produce ABS resin.
Grupo Peixoto de Castro, of Rio de Janeiro, may stop its methanol production, while Belgium's Solvay SA has put up for sale its PVC factories in Brazil and Argentina.