Brazil


Chemical demand increases while political tensions heighten

Image courtesy of Braskem

On September 7th 2021, Brazil’s independence day, a pro-government crowed marched on Congress in support of President Bolsonaro, an increasingly divisive figure whose approval ratings have slumped to an all-time low. Many Brazilians blame the government for its haphazard handling of the pandemic and poor stewardship of the Amazon, and the fires of discontent have been stoked by rhetoric such as Bolsonaro’s statement to Evangelical leaders in August: "I have three alternatives for my future: being arrested, killed or victory."

Brazil’s right-wing populist leader is currently trailing its former left-wing President, Luiz Inácio Lula da Silva, in the polls, and considering the public sentiment towards both candidates – arguably the two most polarizing figures of modern Brazilian history – the 2022 general election promises to be a turbulent affair.

In spite of these political headwinds, Brazil’s chemical industry has performed well throughout the pandemic, experiencing an 11% increase in chemical demand in 2020, and a 9% increase in the first half of 2021, according to Ciro Marino, CEO of the Brazilian Chemical Industry Association (ABIQUIM). Furthermore, from the 50 interviews conducted for this report, it is clear that Latin America’s biggest economy holds the continents’ highest untapped potential for chemical producers and distributors.

Although Brazil’s chemical demand statistics are impressive, particularly in the context of the pandemic, Marino suggested there is plenty of room for improvement. “The main issue is competitiveness,” he said, noting that domestic chemical production grew by only 2.2% in 2020 and 3% in 2021 (as of July), while demand increased by double digits in the same period. “Imports are winning, and today account for 47% of chemical products in the country,” added Marino, giving the example of Brazil’s world-renowned agroindustry, which still imports 90% of its fertilizers.

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“The recent regulatory and legislative changes to Brazil’s gas market will allow more companies to enter the market and compete for customers and services, which will transform the industry by improving price competitiveness and transparency.”

José Firmo, CEO, Porto do Açu

Marino believes that more should be done to stimulate domestic supply chains and the Brazilian authorities should consider the chemical sector as part of the country’s infrastructure, given its significance as the country’s third biggest sector from a GDP perspective.

Indeed, Brazilian producers with installed capacity and available sources of domestic feedstock have flourished as the cost of importing competing products from abroad has gone through the roof. “Until 2020 we had been facing some serious competition from Asia. Then the pandemic started, and the situation has really moved the pieces on the chess board,” remarked Fabiano Bianchi, executive director of Petrom Petroquímica Mogi das Cruzes S.A. (Petrom).

Petrom is the largest producer of phthalic anhydride in Latin America, a chemical widely used as an intermediary for plasticizers, polyesters resins, alkyd resins and polyester polyols for polyurethanes. “Covid-19 has really underlined the importance of all companies prioritizing working with local suppliers, chemicals included, due the risk of broken logistic options worldwide which remain under pressure,” stated Bianchi, reflecting that while globalization has its benefits, it has also led to companies becoming oblivious of the importance of having strong local feedstock suppliers and sustainable regional value chains. Bianchi added that Petrom’s reliable source of feedstock from Braskem meant it could deliver orders in full and on time throughout the pandemic, strengthening its position in the Latam market and allowing for continuous growth.

International players have also been adding capacity in Brazil to meet increasing demand. Arkema, the French specialty chemicals corporation, now has over 600 employees, seven production sites, three laboratories, 11 distribution centers and three commercial subsidiaries in Brazil. Eric Schmitt, CEO of Arkema Brazil, explained how M&A activity has helped the company evolve in the region and enter new markets: “In 2019, the company announced the purchase of ArrMaz, a global manufacturer of special surfactants, which has locations in Minas Gerais and Rio de Janeiro. This helped us enter Brazil’s large agribusiness, where there is great demand for additives for fertilizers,” related Schmitt, adding that the 2021 acquisition of Poliplás by Arkema’s subsidiary Bostik (previously acquired in 2015) has strengthened the company’s position in the hybrid adhesives and sealants market.

João Parolin, CEO of Oxiteno, also highlighted Brazil’s agribusiness as an area of great potential due to its connection to megatrends such as the rise in food consumption as the world population increase and the move towards biofuels such as ethanol aligned with the energy transition. “Brazil is privileged as it still has a great amount of land available for agricultural development without having to touch the rainforest,” he said, observing that an increased demand for crop solutions, home care and personal care products throughout the pandemic, as well as a rebound in the brake fluids, paints and coatings markets, contributed to Oxiteno announcing record results in Q2 2021.

Brazil’s ‘New Gas Market’ Opens Up

In March 2021, Brazil’s lower house approved a new regulatory framework for its natural gas sector, as the so-called ‘New Gas Market’ became a reality. The legislation aims to break the monopoly of Petrobras, opening up avenues for private investment in a country that consumes more gas than any other in Latin America. Potential business opportunities are not the only benefit, as increased competition is expected to rebuild production chains and create a new distribution network which should lower the cost of natural gas for Brazilians, who currently pay over 300% more than customers in the US, according to ABIQUIM’s Ciro Marino.

“For the market to truly consolidate and stabilize to reap its reward, it will be approximately two to three years before we see significant benefits,” commented Elder Martini, CEO of Brazilian chemical producer, Elekeiroz, noting that in the meantime, Brazilian companies will continue to pay more for raw materials than their competitors in the US and Europe.

One of the main advantages the new gas market should bring for chemical producers is a greater availability of feedstock, an issue that continues to hinder the Latin American chemical industry. “The imbalance between supply and demand for raw materials, in addition to logistical issues globally, is an issue for Latin American producers that has no short-term solution. To navigate this challenge we are trying to focus on alternative products that are not dependent on imports,” revealed Martini.

An example of the positive impact of private investment is evident when examining the case of Porto do Açu, the industrial port complex in Rio de Janeiro state that began operations in 2014. In contrast to many ports in the region, which have suffered in 2021 due to lack of space, freight availability and old infrastructure, Porto do Açu recently announced record results from its T-Mult multi-cargo terminal, moving more cargo in the first six months of 2021 than in the whole of 2019.

José Firmo, Porto do Açu’s CEO, suggested that Brazil’s new gas market will transform industry by improving price competitiveness and transparency, and outlined the Port’s plans to prepare for this change: “Porto do Açu has connected itself to the gas grid and expanded its logistics and storage capabilities. The second phase of changes we are implementing includes inserting mixers for fertilizers, which will lower costs, followed by the production of fertilizers using gas.”

These investments are being made by Gás Natural Açu (GNA), a joint venture between Prumo (Porto do Açu’s parent company), SPIC, BP and Siemens, which is building Latin America’s largest natural gas-fired thermal power compound at the Açu Complex. “The GNA I plant is at the end of commissioning, with GNA II to follow in 2023,” revealed Firmo, noting that even after all the infrastructure has been developed, only 25% of the Açu area will have been used: “There is plenty of room to industrialize the complex moving forward.”