Commentary: Bayer pins hopes on argo

24 March 2014 00:00 Source:ICIS Chemical Business

According to Rubens Medrano, president of the Brazilian Association of Chemical Distributors (Associquim), “we all must change. Those that do not will disappear or become insignificant in the global context”. Those were his closing comments at the 7th Brazilian Congress of Chemicals and Petrochemicals Distributors (EBDQUIM) in Sao Paulo.

After years of high GDP growth in the 2004-2008, and a strong recovery in 2010 from the global economic crisis of 2009, Brazil, this pillar of the roaring BRIC countries (others being Russia, India and China) has seen a profound slowdown in its economy. Opportunities have slipped away with deeply flawed government policies.

Brazil’s economy is caught in a “low growth trap” as investment in critical infrastructure such as power generation and refineries has been insufficient to generate sustainable future growth, noted one prominent economist at the meeting.

Rubens Medrano EBDQUIM

EBDQUIM

Rubens Medrano addresses delegates at EBDQUIM

“If we don’t invest more, we cannot grow later – this is the low growth trap,” said Jose Roberto Mendonca de Barros, economist at Brazil-based consultancy 
MB Associados.

The economist expects Brazil’s GDP to grow only 1.6% in 2014, following a 2.3% gain in 2013. Capital investment in 2014 is expected at 18.4% of GDP – a relatively low level versus other emerging market countries. This compares to capital investment of 49% in China, and 36% in India, according to the latest 2012 statistics from the World Bank. In Latin America, Mexico and Colombia both weigh in at 23%.

Capital investment in Brazil’s chemical industry has “continued to lose momentum”, said Weber Porto, regional president for South America at Evonik. “Today it is much harder to get the approval for investment in Brazil.”

Policy missteps have come at a high cost for Brazil’s growth prospects. The government has not fostered an environment conducive to private sector investment in energy and power generation.

“The quality of energy is very poor – we call this watered down energy. For the chemical sector, any disruption has a huge negative impact,” said Mendonca. “Brazil has huge costs for energy and this will continue to rise.”

A severe drought in the southeast portion of the country has exacerbated the situation, as reservoir levels have plunged, curtailing hydroelectric power generation. Electricity costs have spiked to hit the regulatory cap of Brazilian reais (R) 822/MWh ($353/MWh) – well over three times the level in the US.

The power crisis prompted the government to launch a R21bn ($9bn) cash injection package for electric utilities in March – up from the R9bn budgeted. Utilities are exposed to spikes in spot power rates, which cannot be passed along to consumers because of price caps.

“Price controls are inefficient. It may be good for the consumer in the short term but this creates a long-term problem. The subsidy costs are huge,” said Mendonca, referring to both power and fuel in Brazil. “If you increase fuel prices, you can increase investment on a solid foundation – not depending on government transfers. Venezuela has [ultra-cheap] gasoline but they cannot do anything [for investment]. With price controls, it is easy to go in, but hard to get out.”

US shale gas presents another challenge to Brazil. “Shale gas is so deadly a competitive threat – not because it is cheaper, but because it is cheaper where things are simpler,” said Mendonca.

“If I was playing roulette and had to bet on one spot for growth, no doubt it would be the US, said Evonik’s Porto. “Shale gas and the low cost of feedstock and energy is not a short-term phenomenon. Many companies that intended to invest in emerging countries will redirect investment to the US.”

The only way out of Brazil’s “low growth trap” is government proposals to support huge new private investment in infrastructure, said Mendonca.

Mexico, Latin America’s second largest economy after Brazil, is embarking on groundbreaking reforms in its energy, refining and petrochemical sectors to attract private and foreign investment.

The one silver lining for Brazil: “Things only change when times are bad,” Mendoca said. Elections are coming up in October.