By: Frank Esposito
September 6, 2013
Materials and energy giants Braskem SA of Brazil and Reliance Industries Ltd. of India are holding their own, in spite of economic turmoil in their respective countries.
I've visited both countries on behalf of Plastics News — India in 2006 and Brazil in 2011. Based on what I saw during those visits, I would have thought both economies would be more developed by now. So although it's good to see two companies so important to their native economies hanging in there, it's a bit worrisome that those economies remain unsteady.
São Paulo-based Braskem is more visible in North America through its position as one of the region's largest polypropylene suppliers. The firm attained this position by purchasing the PP business of Sunoco Inc. and Dow Chemical Co. in 2010-11.
Mumbai-based Reliance long has been rumored to be a buyer in North America — and the firm came close to buying polyolefins giant LyondellBasell Industries in 2010 — but as of now has no major North American presence.
Braskem posted sales of almost $4 billion in the second quarter of 2013, an increase of 6 percent vs. the first quarter of the year. The firm's pretax profit grew 12 percent to $462 million in the same comparison.
Braskem reported Aug. 8 that operating rates at its petrochemical complexes reached 94 percent in the second quarter, up four percentage points vs. the first quarter. The firm's second-quarter resin production also grew 19 percent in the same comparison, reaching almost 2.1 billion pounds.
This growth played out against a backdrop of a plunge in value for the Brazilian real. The currency was at 2-to-1 vs. the dollar in April, but recently had fallen to more than 2.4-to-1 — its lowest level since 2008. Brazil's Bovespa stock index also has lost 15 percent of its value since January. Braskem shares have fared better on the New York Stock Exchange in 2013, up almost 12 percent through late August.
Brazil's economic growth is expected to be only 2½ percent this year, well below the rates seen in recent years. As a result, Brazil's central bank said in August that it would inject $60 billion into the economy, in the form of currency swaps and loans, over a period of several weeks in an attempt to halt the slide the value of its currency.
I recently exchanged emails with PN's Brazil-based correspondent Bob Moser on these topics. He said residents have been feeling the effects of inflation for the past six to eight months.
"We've seen our cost of daily food staples rise, items produced both domestically and those with imported ingredients," Moser added. That, to me, sounds like Brazilians might have less to spend on non-necessary items, such as electronics equipment, and might be less willing to make larger purchases such as appliances. Both of those moves would affect plastics consumption.
As if that weren't enough, Brazil also is contending with social unrest surrounding the Confederations Cup soccer tournament held at numerous sites there earlier this year. Residents tangled with police while protesting inadequate living conditions, even as Brazil spends large amounts in preparation for the 2014 World Cup soccer tournament and the 2016 Summer Olympic Games.
These issues weren't addressed by Braskem officials in an Aug. 8 news release that focused on the firm's growth. CEO Carlos Fadigas did, however, ask that Brazil's congress approve a presidential decree reducing taxes on raw materials.
Fadigas said in the news release that the reduction is needed to allow Braskem to compete with U.S. petrochemical producers who are benefiting from the competitive advantage provided by shale gas.
When I returned from Brazil in 2011, I wrote that the country's plastics market seemed similar to what I had heard about the U.S. market of the 1980s, with many basic applications moving into plastic for the first time, allowing for annual demand growth of at least 5 percent.
I suggested that Brazil's plastic market should "enjoy the here and now … [because] the road might not be this smooth in the future." Here in 2013, I hope Brazil's plastics firms can delay that moment for a few more years at least.
Reliance — which has major oil, gas and retail holdings, as well as plastics and petrochemicals — has seen similar conditions in India. The country's rupee currency has hit record lows vs. the dollar and currently is at levels of almost 70-to-1. India's Mumbai Sensex stock index also lost 11 percent of its value between late July and late August. Reliance's own per-share stock price was near 810 rupees recently — almost 15 percent lower than its 52-week high.
The Reserve Bank of India announced in late August that it would inject more than $1 billion into financial markets in an attempt to improve the nation's financials.
For Reliance, the first quarter of its fiscal 2014 — the three months ended July 19 — saw sales fall almost 5 percent to $15.3 billion vs. the same quarter in fiscal 2013. The firm's petrochemicals sales fared better, falling only 1 percent in the same comparison. The unit's pretax profit also was basically flat.
Nationwide, India's plastic demand was fairly robust in the first quarter, with domestic demand for polypropylene resin growing 14 percent, polyethylene demand up 8 percent and PVC demand surging 29 percent. In a news release, Chairman and Managing Director Mukesh Ambani said robust growth in petrochemical- product demand "augurs well for our biggest-ever expansion program."
But, with inflation starting to take its toll in India as it has in Brazil, can this growth continue?
In a recent email, PN's India-based correspondent Satnam Singh said imported goods already are becoming more expensive there.
The increased expense has led General Motors' Indian division to lower prices on some vehicles and prompted automaker Maruti Suzuki to slow production. As in Brazil, those actions don't sound like a recipe for continued increases in Indian plastics consumption.
Tightly contested political elections in India also could lead to gridlock, which could worsen the situation, Singh said. India's ruling party has proposed increased spending on food for the poor, but without indicating how it would fund such action.
"As per poll predictions, India is heading for a hung parliament, which means no free hand for the next government to take steps to make the economic correction," Singh added.
"All of this would adversely affect [gross domestic product] growth."
New York Times columnist Paul Krugman tackled the economic problems of Brazil, Russia, India and China — the so-called BRIC countries that have led emerging markets in recent years — in an Aug. 23 column. He described the current challenge as "a variant on the same old story."
"Investors loved these economies … and have now turned on the objects of their former affection," he wrote.
Krugman stopped short of saying that the BRIC turmoil was a threat to the world economy, claiming instead that the bigger threat is the possibility of those nations' central banks overreacting and raising interest rates — which would make the situation worse.
Upon my return from India in 2006, I wrote that "it's going to be difficult not to make money in plastics in India for at least the next decade."
For the sake of all involved, I hope the recent economic speed bumps hit by India and Brazil both are smoothed out in the near future.