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Will tax breaks bring only short-lived benefits to Brazil?

By: Bob Moser
PLASTICS NEWS CORRESPONDENT

July 2, 2013

Tax incentives for local chemical and petrochemical industries should improve plastics producers' ability to invest this year and next, but further cost-cutting methods should be sought for machine makers, and Brazil's import tariffs on foreign raw materials should be reconsidered, industry sources said during the Feiplastic trade show.

The Brazilian federal government expanded tax credits in late April for purchases of petrochemical raw materials such as naphtha, ethane, propane, butane and first-generation products like ethylene, propylene, butene, butadiene, ortho xylene, benzene, toluene, paraxylene and isoprene.

The tax savings should prompt local chemical and petrochemical companies to increase their use of spare operating capacity this year. Braskem SA officials said the incentives will improve the industry's competitiveness by boosting utilization rates, and should strengthen its own capacity to invest, though the company didn't detail any possible new projects or contributions.

Braskem should benefit the most of any Brazilian resins producer this year from the tax incentives. Analysts with JP Morgan wrote in late April that the incentives would help Braskem achieve a higher operating margin this year, with earnings before interest, taxes, depreciation and amortization estimated at 4.45 billion Brazilian reais ($2.1 billion) for this year, up 13 percent from their previous forecast for the company, and at 4.97 billion reais in 2014, up 21 percent from a prior projection.

Brazil needs to consider more incentives to improve its global competitiveness, and further tax cuts for industrial raw materials could be a start, Luciano Coutinho, president of Brazil's National Economic and Social Development Bank (BNDES), said during Feiplastic, held May 20-24 in São Paulo.

Low-interest lines of credit and tax cuts on raw materials like steel and plastics for Brazil's machinery sector have been proposed by the Brazilian Association of Machinery and Equipment (Abimaq). Lowering manufacturers' costs for steel alone, which represents about 30 percent of a Brazilian machine's final cost, could help make domestic producers more competitive.

Following the plastics trade show, Coutinho and BNDES announced June 3 the bank will prioritize loans for new machinery and equipment purchases through the rest of this year for a variety of industries.

While tax cuts on chemicals will help local producers and processors compete, industry must press the government to reconsider its import tariffs on foreign raw materials, which will continue to stress the entire domestic production chain, according to Sergio Correa, president of Belsul, a Brazilian raw materials import-export consultancy specializing in plastics.

"This tax relief doesn't help enough to compensate for the tariffs on raw materials we have to import here," Correa said. "Our global competitiveness across the industry is poor at this time. Brazil's petrochemical industry is capable of competing worldwide, but this closed market vision is not good for us now, or in the future."