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January 08, 2016 01:00 AM

Braskem ends supply uncertainty in Brazil with new naptha contract

Anna Flávia Rochas
Correspondent
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    Mounting uncertainty within Brazil's plastics industry over long-term resin supply came to an end Dec. 23, when the market's biggest supplier, Braskem SA, reached a deal with Brazil's state-owned oil company Petrobras for a new naphtha contract, following three years of negotiations and deadline extensions.

    With a new contract secured, many in the plastics sector now expect an increase in resin prices in the coming months, posing an extra challenge for an industry already facing a prolonged recession in Brazil's economy.

    According to the new contract, Petrobras will sell 7 million tons a year of naphtha to Braskem for the next five years, at 102.1 percent of the international Amsterdam-Rotterdam-Antwerp reference price. Braskem was pushing for a flexible formula, which would allow prices between 100-105 percent of the ARA benchmark at current market conditions, the company said.

    “Although the new contract doesn't fully reflect the necessary conditions to ensure competitiveness of the chemical and petrochemical industry, Braskem considers its signature is required in order to reduce the serious uncertainties in the sector, preventing the shutdown of petrochemical plants and considering the difficult time for the Brazilian industry and economy,” Braskem said in a statement announcing the deal.

    Braskem had secured naphtha supply for the past three years through five short-term extensions to the previous contract, as it repeatedly failed to reach an agreement on price with Petrobras for a new long-term deal.

    Braskem and Petrobras can request commercial renegotiation of the new contract by 2018, if market conditions change.

    Braskem declined to say if resin prices will immediately increase, saying its “resin pricing policy in Brazil follows the behavior of international prices and fluctuating exchange rate.”

    Edilson Deitos, president for the plastics industry trade association in Brazil's southernmost state of Rio Grande do Sul (Sinplast), told Plastics News Jan. 6 that Braskem had not announced resin price increases, but he expects them in the future.

    Deitos said Brazil's plastics processors are temporarily being lifted by the devaluation of Brazil's currency against the dollar, which has reduced imports of plastic products. Brazil's currency depreciated by nearly 50 percent against the dollar in 2015.

    “This retraction in imports is already visible in all sectors,” he said, adding that he expects a 3 percent increase in production by Brazilian processors in 2016.

    But the depreciation of the Brazilian currency also increases the price of raw materials, and domestic demand for plastic products is still slow, according to Luiz Oliveira, president for the plastics industry trade association in Brazil's northeastern state of Bahia (Sindiplasba).

    “The outlook for 2016 is not encouraging, there is no indication that the domestic consumption can improve,” he said. “The year began with uncertainties in the political field, in addition to the economic crisis.”

    In the short-term, no drastic changes in price related to Braskem's new naphtha contract are expected by Solange Stumpf, director of Brazilian consulting firm Maxiquim, which specializes in the petrochemical sector.

    “The impact is positive, having achieved a long-term contract,” she said. “Naphtha prices are falling abroad, and the naphtha price trend in Brazil in the short term is to fall.”

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