While the Brazilian plastics sector boasts great growth prospects behind the country's anticipated oil reserves and burgeoning middle class, local producers have been losing the battle for their home market recently to cheaper imports.
National plastics production in Brazil fell 2 percent in 2011 compared with the year prior, with drops in laminates and packaging being most pronounced, according to the Brazilian Plastics Industry Association, or Abiplast, in São Paulo. Brazilians' plastics consumption rose 13 percent last year to $31 billion, signaling a growing market domestic producers don't seem to be capitalizing on.
Indeed, plastic product imports to Brazil rose 20 percent in 2011, while exports of Brazilian-made plastic goods rose just 2 percent.
“Brazilian producers are losing our market to imported goods,” said José Ricardo Roriz Coelho, Abiplast president, at IHS Inc.'s Latin American Petrochemicals & Polymers Conference, held May 10 in São Paulo. “Our deficit in the commercial trade balance doubled between 2008 and 2011 as well, raising concerns about the weak performance of our exports.”
Brazilian companies blame their trade challenge on a variety of government-induced burdens.
Brazil's corporate tax is among the world's highest, at 33.6 percent. Competitors in India pay 10.3 percent, in Colombia 13 percent, Mexico 16.7 percent and China 18.4 percent.
Brazil has some of the highest interest rates in the world. Labor costs are also among the world's highest when adjusted for currency strength, and account for 8 percent of a product's final price, 23 percent higher than the global average for processors' staff costs.
Brazilian plastics processors face the second-highest energy costs in the world, after Italy, even though Brazilian energy is considered remarkably clean and is cheaply produced from mostly renewable sources such as hydropower and sugarcane. Brazil has an energy makeup similar to Canada, but Brazilian energy costs the end user 182 percent more, primarily due to taxes.
Brazil's retrograde transportation system is also considered the third-most-costly in Latin America, behind only Argentina and Peru. Logistical costs in Brazil are estimated to absorb 20 percent of gross domestic product potential, and 71/2 percent of a company's net income.
Because of those costs, and an overvalued currency last year that peaked in strength against the dollar — even with an import tariff of 16 percent applied to imported plastics — imports were still on par or more competitive than domestic plastics, Roriz Coelho said. Producers are thankful for a currency weakening in recent months; in mid-May it fell to $1 to 2 Brazilian reais for the first time since July 2009.
If there's any market that could overcome those challenges, it's arguably Brazil. The population is experiencing a near-decade-long pattern of steady middle-class growth that's concentrated in ages 15-40, the ideal subset of consumers to drive new consumption habits in areas like processed and packaged foods.
With the potential boom in domestic oil and gas production, raw material costs for plastics producers could drop considerably in the next decade. And a prolonged wave of private and public infrastructure projects has commenced to ready Brazil as host of the 2014 World Cup for soccer, and 2016 Summer Olympics.
Brazil's deep south and southeast regions are home to the majority of its estimated 11,524 plastics processors. The most recent expansion of the industry has been in the central-west region, around growing agribusiness.
Complaints about taxes and exchange rates run on an endless loop in Brazil, but plastics firms that want to grow must be more developmentally aggressive, Roriz Coelho said. Investment in new equipment by Brazilian processors dropped 4.7 percent in 2011 from the year prior, to $2.44 billion, and research and development was cut back 38 percent last year, to $64.65 million, according to Abiplast data.
“We're not incorporating the technology necessary to help Brazil produce the same quality of [plastics] here as our competitors abroad,” said Roriz Coelho, who also is a director of film producer Vitopel SA of Olivos, Argentina.
IHS is based in Englewood, Colo.