SÃO PAULO — Challenges lie ahead for Brazil's plastics and petrochemicals sectors, as high costs for labor, taxes, logistics and energy make up a loathed "Brazil Cost" that won't go away, according to analysts at IHS Inc.'s Latin American Petrochemicals & Polymers Conference.
The price of Brazilian-made processed plastic goods is now 29 percent higher than those of developed markets, 35 percent higher than from emerging markets and 34 percent higher than in China, due primarily to the "Brazil Cost" cocktail of input expenses. Imports have risen an average of 9 percent per year since 2003, and now make up 22 percent of processed plastics consumption in Brazil.
That lack of competitiveness for Brazil starts at its basic feedstock, most of which today is naphtha-based and imported, said Rina Quijada, senior director of Latin America for IHS. Higher gasoline demand in Brazil is also taking naphtha away from the petrochemical sector.
"With today's energy revolution in North America, light feedstocks like ethane and propane are much more efficient in making ethylenes and propylenes," she said. "So when Brazil looks at its productive environment, it sees high taxation, the lack of competitive feedstocks and a very weak local currency against the U.S. dollar. That weak currency makes naphtha feedstock more expensive."
Weak Real, silver lining
The Brazilian real has devalued about 13 percent against the dollar in the past three months, from a steady US$1=BRL2 ratio that held for most of 2012 and through early May, to a low of BRL2.43 in mid-August before settling at BRL2.29 as of Sept. 11. IHS projects the real to stabilize around BRL2.40 between now and 2017.
As Brazil's currency depreciates it has a positive impact on the country's finished product producers. Products that travel well, like film from China, were previously competing in Brazil against local producers with the help of a weak U.S. dollar. Now that the dollar has strengthened, Brazil's local finished product producers may find a bit more oxygen to survive, Quijada said.
"If the Real weakens further, plastics converters in Brazil will have a better chance to recover domestic market share, but not to compete internationally," she said. "There's a lot of room for growth within Brazil for many end-use applications in agribusiness, automotive, mining and more. If you can produce in Brazil under more competitive circumstances, you have a chance for growth."
Massive growth potential still exists for Brazilian plastics consumption over the next decade. Per capita consumption is currently at 35 kg, compared to 105 kg per capita in the United States and Canada.
Income growth and consumption rates by Brazil's lower middle class group, known as Class C, have grown in recent years at double the rate of more wealthy classes. Infrastructure expansion for the upcoming 2014 FIFA World Cup and 2016 Summer Olympics in Brazil should boost economic growth above what's being seen now, Quijada said.
Brazil's chemical industry, the world's sixth largest with 2012 net revenue of US$153 billion, is pushing the federal government for business-friendly policy changes to help it — and plastics producers as a result — reclaim a greater portion of domestic demand.
The Brazilian Chemical Industry Association (Abiquim) is lobbying for simplifying and lowering taxes on imported raw materials. It also is calling for investment incentives to help expand domestic production, and a federal policy by the end of this year on the use of natural gas as a raw material.
"One positive aspect I see in Brazil is that the industry is going to the government with a program, and the government is listening and trying to adjust," Quijada said. "Of course it's a huge adjustment and takes time, but they are talking, and I don't see that in other countries. I think the combination is right in Brazil. It's not an easy equation to solve, but they are looking for solutions."
The Latin American Petrochemicals & Polymers Conference was held Sept. 4-5 in São Paulo.