14 July 2009 00:00 [Source: ICB]
Improvements in the Brazilian economy could be a springboard for Braskem to develop overseas projects
BRAZILIAN RESINS producer Braskem is monitoring the pick-up in domestic demand as it develops plans to extend its production outside Brazil into Latin America and beyond.
Following the global slump in chemical demand at the end of 2008, demand in Brazil has strengthened in recent months. The Brazilian economy performed better than expected in the first quarter of 2009 and interest rates reached a record low in June. Brazil was one of the last countries to fall into recession, and some analysts believe it could be among the last to grow out of it.
The improvements are providing Braskem with the confidence to forge ahead with its investment plans. The group is planning joint venture (JV) projects in Venezuela, Peru and Bolivia, and is monitoring opportunities in the US. But CEO Bernardo Gradin is cautious about predicting a recovery. Margins remain depressed as a result of the global recession, he says. "Demand is back, but prices are not."
CAUGHT OFF GUARD
Brazil's chemical industry experienced a huge shock at the end of last year, hit by a combination of credit shortages and destocking by customers throughout the value chain, Gradin remarks. At the same time, the sharp decline in raw material prices left resin producers with high-cost inventories.
Brazil has been able to weather the financial storm better than many other regions, thanks to continuing government investment in large-scale infrastructure projects and the ability of its people to progress from the lower to middle classes, he says. In the automotive sector, production declined sharply in November/December last year, but there are already signs of recovery, particularly for those companies targeting the domestic market. "There is some optimism, especially regarding small cars," Gradin notes.
Braskem's sales revenues for the second quarter of 2009 have developed in line with expectations, he says. In the first quarter, revenues fell by 28% to reais (R) 3.15bn ($1.60bn), compared with the same period last year, while earnings before tax, depreciation and amortization (EBITDA) declined by 24% to R458m.
"I think we should remain cautious regarding the second half of the year," says Gradin. Cracker rates have increased, thanks to improved global demand, "but margins are very depressed and we are on thin ice."
Braskem has two cracker sites: Camacari in Brazil's northeastern state of Bahia; and Triunfo in the southern state of Rio Grande do Sul. In Triunfo, the group has strengthened its operations following a series of acquisitions that culminated in the takeover of polyethylene (PE)/ethylene vinyl acetate (EVA) producer Petroquimica Triunfo earlier this year.
Braskem's current expansion plans focus on accessing competitive raw materials in Latin America. But the group has global, as well as regional ambitions. Gradin says the next logical step in the group's internationalization strategy would be to establish a resins production platform in the US. Opportunities for an alliance with a global player could arise during the global economic downturn, he suggests. "It would probably be resins and maybe a cracker," he says, noting that the JV would be more likely to involve existing plants than construction of new capacity. "We think the natural next step would be to have an operation in the US. When, it is too soon to say. There are opportunities during the trough."
In Venezuela, Braskem and state-owned Pequiven intend to build PE and polypropylene (PP) JV complexes. They have created two JVs, Propilsur and Polimerica, to implement the projects in Jose in the eastern state of Anzoategui.
Propilsur will build a 450,000 tonne/year PP unit, which is expected to start up by the end of 2012 and require a $1bn (€715m)investment, according to Roberto Ramos, vice president for international business at Braskem. The timing of the project will depend on the conclusion of the project financing, although the group is confident it can meet this deadline because, it says, the international credit market is improving, and several Brazilian firms have secured funding deals in recent weeks.
Polimerica plans to build a 1.3m tonne/year cracker and a 1.1m tonne/year PE plant. Preliminary costs are estimated at $3.2bn, and start-up is scheduled for the end of 2013, says Ramos.
Braskem is confident that it will be able to maintain its Venezuelan JVs, despite plans by Venezuelan president Hugo Chavez to nationalize the Venezuelan petrochemical sector. The text approved in the second vote on Venezuela's proposed petrochemical law provides the option for both partners to hold 50% of the capital, says Nelson Letaif, Braskem's director of corporate communications. However, Braskem and Pequiven currently each hold 49% stakes in the Propilsur and Polimerica JVs. Letaif says Braskem will not comment on any possible amendments to the shareholder structures until the proposed law has been sanctioned by Venezuela's executive power.
Braskem has further strengthened its ties with Venezuela by offering Pequiven the option to go into a partnership with it in a petrochemical project in Camacari. Discussions are still at an early stage, Gradin stresses.
In Peru, Braskem is studying an ethylene and PE project with Brazilian state-owned energy group Petrobras and Peru's state-owned PetroPeru. The companies have signed an agreement to assess the technical and economic feasibility of establishing the project, which would use ethane-rich natural gas from Peru's Camisea fields as feedstock.
The plant would be located at an undefined location near the coast. Ramos says the production capacities will depend on the amount of feedstock available and the logistics of supplying the ethane portion from the gas fields, which are located far from the coast. "The scenario points to a PE production capacity of between 800,000 and 1.2m tonnes/year," he explains.
Braskem expects the project to start up beyond 2015, depending on the evolution of the Peruvian gas reserves.
Plans for a new gas-based PE project on the Brazil/Bolivia border appear to be back on the table, following some nine years of discussions. The project could come on stream in 2015, depending on the development of a gas separation plant by Bolivia's state-owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB), says Ramos. Braskem could have a 50-60% stake in the project, which has not yet been defined, he adds.
In Brazil, Braskem is building an ethanol-based ethylene and PE complex in Triunfo, expected to be completed in 2011. It is also considering an EVA expansion at the former Petroquimica Triunfo site, various petrochemical investments in Camacari and a polyvinyl chloride (PVC) expansion in Alagaos, northeast Brazil. Board approval for these projects is expected in the third or fourth quarter, depending on how business develops in the second half of the year.
Braskem is also considering investing in Petrobras's Comperj refinery and petrochemical complex, in Rio de Janeiro, state. Gradin says the group has expressed an interest in participating in the project and is waiting for Petrobras's response.
In the meantime, he says Braskem needs to focus on improving its competitive position during the downturn. The company is providing additional services to customers, such as product development, financial services and cost reduction programs, and is optimizing the group structure following the integration of the newly acquired assets in Triunfo.
The economic scenario may be improving in Brazil, but the global downturn will continue to affect its chemical producers, particularly in terms of exports, cautions Gradin. "If the recession is fierce in Europe and the US, developing countries will suffer too," he says. "Even if consumption in India and China and some other countries shows some growth this year, it may not be enough to sustain good margins for the sector as a whole."
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