Brazil
An industry punching below its weight
In raw terms, Brazil has everything that the chemical industry could wish for: a large economy, powered by a proportionally large population and land area, as well as plenty of natural resources, of both the dirty and clean kind. The world’s 11th biggest economy, seventh biggest population, and fifth biggest land area has groomed a suitably top-ranking industry, the sixth biggest globally, with net sales of US$142 billion in 2022. But the sheer size of the Brazilian chemical industry belies stagnant production volumes and underwhelming investments in the past 20 years; investments trended downward to a mere US$600 million in 2021 from a peak of US$4.8 billion in 2012, according to ABIQUIM (Associação Brasileira da Indústria Química).
The one figure that has been going resolutely up in the past 20 years is the industry’s current trade deficit, climbing from US$10.1 billion (2002) to US$56 billion (2022). Brazil is both the largest exporter and importer of petrochemicals in the region. So why does the country revert to imports instead of local production, allowing producers from the US and other parts of the world to cut deeper into the market share? High costs of feedstocks, energy, logistics, and taxation help explain the trend. Principally, the price of natural gas has been the bane of the local industry. At around US$14 per million btu, the cost of natural gas is among the highest in the world.
Even though Brazil has increased its gas production threefold in the last 15 years, only about half of the gross production is commercialized, mostly due to a lack of available infrastructure, informs S&P Global. The chemical industry is the largest industrial gas consumer in Brazil, but with the industry stagnating, gas demand has also stagnated, disincentivizing further developments. It is due to this mutually-reinforcing, double investment apathy that the Brazilian industry is vulnerable not only to the high costs of natural gas, but also to import-dependencies on natural-gas derived raw materials like methanol and urea. Since Brazil is one of the largest agricultural producers globally, with a ravenous appetite for fertilizers (made from urea), the country has become the second largest importer of urea globally. Between 80% and 90% of Brazil’s nitrogen-based fertilizers are currently imported.
However, the development of three pre-salt discoveries by Equinor at the BM-C-33 project in the Campos basin in Rio de Janeiro state could finally give the long-awaited boost in the fertilizer sector. This year, energy giant Equinor, together with Repsol Sinopec Brasil and state-owned petroleum company Petrobras, announced a final investment decision for US$9 billion to develop the project, while the two main gas operators in the country held tenders to develop a pipeline to bring the gas onshore, close to the Port of Açu. Joao Braz, chief commercial officer and head of commercialization at Port of Açu, the country’s second largest port by cargo volume, sees the development as a game-changer: “Once in operation, 16 million m3 of gas/day will reach the Cabiúnas shore close to our port. The GASINF and GASOG pipelines will be a game-changer, giving us access to a much more competitive gas price expected around US$5-8 versus the current US$17-18 per million btu, and triggering the opportunity for heavy industrial development in the port area,” he said.
The port is planning to start with an ammonia and urea plant with a capacity of 1.38 million t/y of urea, and eventually integrate the ammonia and urea plant within a green hydrogen cluster developed within the port area: “Leveraging the gas pipeline, but also the connection to the Southeast and Center, which are regions focused on agriculture and therefore big consumers of fertilizers, we will start with an ammonia and urea plant based on natural gas (at the first phase), and then move to green hydrogen production (at a second phase),” said Braz.
Today, the largest ammonia producer in the country is Unigel, which also has its eyes on the production of green fertilizers and has kick-started the construction of the first industrial-scale green hydrogen and green ammonia production plant in Brazil, due to begin production in 2024. “We are very proud to be investing in low-carbon energy, but also in global food security by producing fertilizers. Brazil can currently feed one billion people, and by strengthening our investments we will be able to feed even more,” said Marina Mattar, director of corporate affairs at Unigel.
“Inflation in Brazil has come under control, but interest rates remain obstinately high, dampening the investment mood. On top of this, investors are more conservative during election periods, which has led to a slower-than-expected first half in the Brazilian economy. Nevertheless, we see improvement.”
Jan Krueder, CEO, Química Anastacio
Promising reforms
Brazil is regarded as an agriculture powerhouse, as one of the world’s largest producers of sugar, coffee, soybeans, maize, beef, chicken, pork, corn, and cotton. In fact, the food and beverage sector brings the highest value to GDP, together with the petroleum and chemical sectors, and it has been almost singlehandedly driving the country’s economy, especially since the pandemic, when Brazil’s GDP turned negative. The agrobusiness has been Brazil’s growth engine, outperforming all other sectors. This year, harvests are expected to yield 15% higher production, notes Euromoney, and the agribusiness is expected to record the best results since 1989, based on projections from the Ministry of Agriculture.
Soybeans alone account for a fifth of Brazil’s growth this year, wrote Reuters. Running with the windfall performance of the crop sector, Brazil’s Ministry of Finance revised Brazil’s GDP growth projection from 2.5% to 3.2% in September. So far this year, Brazil’s economic performance beat expectations, and economic indicators significantly improved. Annual inflation dropped significantly since last year, from a height of 12% in April 2022 to 3.9% today, after the Central Bank rigorously maintained interest rates at 13.75%, recently cut to 13.25%. Rating agency Fitch upgraded Brazil’s long-term foreign-currency debt for the first time since 2018. Investors have started to look with different eyes at Brazil – last year, the country became the fifth largest recipient of FDI globally, according to Reuters.
The government of newly sworn-in president Luiz Ignacio Lula da Silva is gaining more credit from global observers, not least for its, so-far, successful reformist zeal. Reforms in taxation, gas, and fertilizers bring encouraging signs for the Brazilian petrochemical industry. Expected to be approved this year, a tax reform that will merge five different taxes into two (one federal and one local) should bring much respite to the industry, which has been drowning in a hotch potch of tax regulations: according to Deloitte, Brazilian companies take 1,958 hours to comply with Brazilian tax, more than 10 times compared to the average in OECD countries. Locals call this the “Brazilian cost”. “Regulatory changes consistently test us in taxation, the tax regime changing every 10 to 12 years. The ‘Brazilian cost,’ as we call it, is challenging for us locals brought up here, let alone for foreigners. Businesses need a big tax team and incur high costs to navigate these regulations,” commented Francisco Fortunato, CEO of OCQ Group, a large Brazilian private producer and distributor of petrochemicals.
But the most important reform impacting the petrochemical sector is the “Novo Mercado do Gás” (New Gas Market), which is promising to finally liberalize the energy sector, triggering the end of Petrobras’ monopoly in natural gas production, transportation, and distribution. By allowing the entry of other players, Brazil hopes to increase the competitiveness of its gas market. Free-markets like the US have over 6,000 independent small players, according to ABIQUIM, which estimates the high gas price reduces the investment rate in the country by 1.4%.
A third key reform, most closely tied to the chemical industry, is the “National Fertilizer Plan,” a program aimed at reducing the country’s dependency on imports from the current 85% to 45% by 2050.
Brazil currently imports 96% of its nitrogen (entirely from Russia), 55% of phosphorous, and 97% of potassium, according to the US International Trade Administration. 100% of Brazil’s ammonium nitrate imports also come from Russia. Meanwhile, Brazil has only one domestic producer of ammonium sulfate. Among its pillars, the new policy includes the modernization and expansion of existing fertilizer plants, new investments in RD&I as well as logistics infrastructure, but also improving the fiscal conditions to make domestic production more attractive (and more competitive): “Changes in the Brazilian tax regime are also incentivizing the domestic production of fertilizers beginning 2024/25. Currently, imports of fertilizers are tax-free, while local producers and distributors pay taxes. This means local production is penalized,” said Joao Braz, chief commercial officer and head of commercialization, at Port of Açu.
I started this article talking about Brazil’s size. It is appropriate to conclude by saying that the petrochemical industry in the country has been able to leverage this size and develop scale, not only in agrochemicals, and not only within Brazil’s territory. The chemical industry is immersed in every sector, many of which are leading in the world: Brazil has the fifth largest beauty and personal care markets in the world; one of the biggest pulp and paper export markets; a giant home care industry; a booming food ingredients market; and a growing mining and energy sector. This has allowed local players to derive scale and expand globally. Braskem is the best example, as the biggest resin producer in the Americas. Recent acquisitions in the country, including of Oxiteno by Indorama Ventures, and Elekeiroz by Oswaldo Cruz Química Group, suggest the industry will continue to seek out scale – which makes it more resilient in a high-cost environment like Brazil.