Commentary: A new dawn for Brazil

01 November 2010 00:00  [Source: ICB]

As the elections draw towards their conclusion, the country's new leader faces the challenge of sustaining the country's economic good fortunes and benign business environment

Most politicians would give their right arms to achieve the kind of popularity ratings enjoyed by Brazil's outgoing president, Luiz Inacio Lula da Silva, who enjoys an approval rate of around 80% of the country's population. The incumbent faces a tough job in sustaining the success story Brazil has become, and in maintaining the business-friendly conditions that have allowed the chemical industry there to prosper.

During his tenure, he created a benign economic climate in which business and the economy could develop. The early concerns of many in the chemical industry that he would pursue a strong and restrictive leftist agenda proved largely unfounded.

In fact, he has managed an economy that allowed all sectors of society to prosper. According to the Institute of Applied Economic Research, only 23% of Brazilians were living below the poverty line in 2008, compared with 34% in 2002 when Lula came to power. Another study suggests that around 29m people entered Brazil's middle class between 2003 and 2009 with monthly incomes of between reais 1,126 and 4,854 ($658-$2,836).

As with all developing countries, rising prosperity has allowed Brazilians to start buying consumer goods, to purchase more automobiles and eat more packaged foods. All this has, of course, been great news for the country's chemical sector as well as for companies exporting to Brazil.

Over the past few years, demand for polymers such as polypropylene (PP) and polyethylene (PE) has grown by around 8-9.5%/year. But with construction for big sporting events such as the soccer World Cup (2014) and Olympic Games (2016) in sight, this is predicted to increase to 12-13%/year.

Another big factor driving growth in demand for polymers should be the move by oil and chemical group, Petrobras, to boost deepwater oil exploration. Flush with cash from its $72bn (€52bn) stock-market offering, the company is planning to finance $224bn in exploration projects. Demand will come from the provision of infrastructure. Lula described the country's vast offshore oil fields as a "gift from God".

With growth rates this spectacular, domestic players have been swift to implement new projects. Whether they will provide sufficient capacity to avoid increased imports remains to be seen. Brazil consumed around 5.3m tonnes of thermoplastics in 2009, while its current production capacity is slated at 7.1m tonnes/year.

The Petrobras Comperj project, due on stream in 2013 will be located in Rio de Janeiro. Output is expected to include 850,000 tonnes/year of polypropylene (PP), 800,000 tonnes/year of PE, 500,000 tonnes/year of styrene, 600,000 tonnes/year of ethylene glycol (EG), 500,000 tonnes/year of purified terephthalic acid (PTA) and 600,000 tonnes/year of polyethylene terephthalate (PET).

The country's chemical sector is also benefiting from its suitability for renewable-feedstock chemical manufacture. A warm and wet climate plus abundant cultivatable land helped Brazil become an early adopter of biofuels for transport.

Now Braskem has inaugurated the world's first commercial-scale ethanol-to-PE plant. Production from the 200,000 tonne/year plant at the Triunfo Petrochemical Complex in Rio Grande do Sul is targeted on the US, Europe and Asia, where premiums of more than 60% are achievable for renewable-based plastics.

Brazil's ethanol producers have enjoyed an amazing 2010, with high ethanol and sugar prices fueling good profitability. Dry weather reduced crop yields, pushing prices up to 30-year highs. These good fortunes have helped the sector recover from the 2008 financial crisis that pushed many producers of ethanol into bankruptcy.

And global energy companies also see the potential of the Brazil ethanol sector. Anglo-Dutch major Shell entered a $12bn joint venture with Brazil's Cosan earlier this year. With a strong currency and high interest rates to contend with, making the rest of the decade as successful as the last is going to be a big challenge.

Do you agree? Email: Will Beacham or go to the commentary blog

By: Will Beacham
+44 20 8652 3214

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