When Brazil’s statistics agency IBGE released its GDP results for the second quarter of the year, showing a 9.7% quarterly contraction, reactions were diverse. Pessimists highlighted that Brazil’s economy was basically back to 2009 levels. Optimists pointed out that the economy was already in recovery mode during Q3; Q2 saw the peak of lockdown policies and GDP data recorded severe economic damage across many countries, not just Brazil.
Certainly, the expected ‘V-shaped’ recovery will not be enough to avoid recession in 2020, with economists valuing the expected decline within an approximate range of 5% to 6.5% – this would be the largest contraction for Brazil since records began in 1900, according to Reuters.
There is never a good moment to be struck by a pandemic, but Brazil’s economy was slowly emerging from the 2015-2016 recession, and trying to implement a more competitive business environment through structural reforms. With flat, insufficient growth of 1% annually between 2017 and 2019, 2020 was meant to be the takeoff year for Brazil, yet this will have to wait.
The Issue of Competitiveness
The new market dynamics may offer Brazil’s petrochemical industry some advantages. Rina Quijada, VP business development for Latin America at IHS Markit, pointed out that lower crude oil prices mean naphtha crackers are now more competitive, and 77% of the feed in Brazil is naphtha-based. Nevertheless, overall the Brazilian chemical industry has failed to adapt to global trade trends, as shown by the 50% increase in the chemical industry deficit over the last decade, from US$20.7 billion in 2010 to US$32.1 billion last year, according to Brazil’s Chemical Industry Association, ABIQUIM.
“In the past decades, we have seen a very strong globalization process and today, our production chains are suffering from that,” laments Ciro Marino, CEO of ABIQUIM. “We need to be flexible and have an open economy, but the truth is that Brazil is not ready to compete. The country needs to address some issues internally that create high costs.”
What are these internal issues? According to Marcos de Marchi, CEO of Elekeiroz and ABIQUIM’s chairman, the three main issues are access to feedstock, electricity rates and logistics. Speaking of the latter, he said: “We need to open up the cabotage market to foreign vessels. Today, to bring a product from Bahia to Sao Paulo, we need to use trucks at a cost of US$100 per tonne (US$/mt), when it could cost 20 or 30 US$/mt if the cabotage segment was open to competition.”
De Marchi added that Brazil currently has the world’s most expensive gas: “We have started 2020 paying between US$10 and US$12 per million BTU, which is absurd, when you consider than in Argentina they are closing down wells because they cannot sell the gas in the market at a price of between US$2 and US$3 per million BTU.”
To address this situation, the government is moving forward with its Novo Mercado de Gás project, a package to liberalize the gas market and push Petrobras out of midstream and downstream activities. The initiative is already undergoing the approval process at Congress.
Industry leaders surveyed saluted the move as a very positive change: “Opening the market to international investors will provide an expansion of the gas distribution network. Also, we will be able to import LNG, and this will be the end of Petrobras’ monopoly – as a result of which gas prices will go down,” said Marino of ABIQUIM.
Roberto Santos, CEO of large petrochemical producer Unigel, agrees: “This government had the right concept in mind when it decided to open the market. Now, we can choose who we buy from in terms of feedstock and this is changing the landscape.”
Counting on Agro
A sector that has not stopped growing during of the pandemic is agriculture. Latin America, and Brazil in particular, offers outstanding conditions to supply the rest of the world with food. “The agriculture industry in Brazil is very strong and is probably the number one sector if you look at the industrial GDP of the country,” said Santos of Unigel. “The production of every single commodity, like soy, corn, sugar, cotton or coffee, increases every year.”
This trend has not gone unnoticed by the chemicals industry as it opens up opportunities in the fertilizers and crop protection businesses. Unigel, for example, is investing in urea production as the country currently relies heavily on imports.
Further down the value chain, given Brazil’s great biodiversity, the country is the perfect testing ground for agricultural solutions. According to Manfredo Rübens, president South America at BASF, the company’s Agricultural Solutions division represents 45% of the overall South American business portfolio. In Brazil in particular, BASF’s research centers are major drivers of innovation for the agribusiness segment globally. “We are bringing 28 new solutions to the market in South America for very specific crops. Once a solution has been tested in Brazil, for instance, we are able to look at its applicability to other markets such as Ukraine.”
Encouragement also stems from Brazil’s efforts to tap into its pre-salt hydrocarbon resources at more competitive production costs than initially expected, opening great opportunities for the industry if the right framework is in place. As the largest economy in Latin America and a huge market of over 200 million people, the country’s chemical industry will always have a key role to play, as long as both the administration and the different companies do their part to be more competitive. In the words of João Parolin, CEO of Oxiteno: “We will come out of this pandemic stronger, because digitalization has accelerated a lot and this is a big leap in productivity for all companies.”
Image courtesy of Matheus Seiji Goto.
