Brazil chems production still impacted by imports despite protectionist measures – Abiquim

SAO PAULO (ICIS)–Brazil’s chemicals production structural woes, such as high production costs, remain while imports continue making their way unabated, despite protectionist measures deployed by the government, according to the director general at producers’ trade group Abiquim.

Andre Passos said chemicals plant capacity utilization remains at lows hovering around 60%, an unsustainable rate for the long term which requires Brazil focuses more on the feedstocks available for  its chemicals industry, and increasing natural gas production remains Brazil’s pending task, said the Abiquim head.

While Brazil’s state-owned energy major has become a key global crude oil producer, successive governments in Latin America’s largest economy have sidelined natural gas production despite the country’s large reserves of it.

As US natural gas production boomed in the 2010s, the petrochemicals industry went through a revival thanks to the abundant and cheap supply of ethane or propane – one of the routes for chemicals production – for decades to come.

As the US’ ethane-based production boomed, production via crude oil’s naphtha route – predominant still in Latin America, as well as Europe and Asia – became less competitive: that is the crossroads the industry must face in coming years.

STILL STRUGGLING, DESPITE STATE HELP
Abiquim successfully lobbied in 2024 for the Brazilian government to increase import tariffs on dozens of chemicals, aiming to slow down the entry of cheaper material from abroad – some of it, dumped by large producers such as China and the US.

Other market players, big importers such as plastics transformers – represented by trade group Abiplast – or importers of industrial chemicals – represented by trade group Associquim – have said the higher import tariffs have been passed onto customers already.

That has been one of the reasons why Brazil’s inflation rates are creeping up, the head of Associquim, Rubens Medrano, said in an interview with ICIS,  but Abiquim’s Passos said this has not been the case, citing an Abiquim-funded study showing his side of the argument.

The cabinet has also implemented or is mulling anti-dumping duties (ADDs) in materials from both the US and China and, on top of that, a tax break for chemicals producers called REIQ was reintroduced by the current administration of Luiz Inacio Lula da Silva.

The government has also taken initial steps to expand the natural gas market, easing regulations and mandating Petrobras to step up its game in the sector. Equally, deals to bring more gas from Bolivia’s dwindling reserves were signed in 2024, and chemicals producers are also putting hopes in Argentina’s Vaca Muerta fields.

Most of these actions would show results in the medium and long terms. In the here and now, none of them have helped ease chemicals producers’ challenging operating conditions, said Passos.

“Nothing has fundamentally changed in our situation in the past few months. The scenario remains the same, perhaps even worsening with [US President Donald] Trump’s trade measures, and we continue suffering with low capacity utilization rates: Brazil’s chemical production has been on a downward trajectory since 2016,” said Passos.

“Up to that point, both chemical production and imports grew in tandem with overall consumption. But a structural shift occurred in 2016: imports continued to increase, capturing more market share, while domestic production began to decline. And so here we are, nine years later, and the clearest indicator is the capacity utilization level of our plants, which has been falling sequentially. From above 80% before 2016, it dropped to 70% and now even below that at around 60%.”

There are two root causes for this downturn, said Passos, one created abroad and over which Brazil cannot do very little part from imposing hefty import tariffs – US and China overproduction which makes imports into Latin America more likely – and the other, equally hard to crack, is Brazil’s lack of natural gas and, more widely, feedstocks for chemicals production.

IT IS (ALMOST) ALL ABOUT GAS
Brazil’s chemical industry’s competitiveness problem is directly linked to feedstock costs: 80% of production costs for fertilizers and 50-60% for polymers come from raw materials, Passos explained, and despite some regulatory changes, gas prices remain stubbornly high, around four or five times higher than in the US.

And the fundamental issue is, of course, price. US gas prices stand at around $3.30/MMBtu. In Brazil, they are around $15/MMBtu.

Passos and Petrobras established a working group in 2023 to study potential chemicals sector-specific programs the energy major could develop, mostly related to natural gas. However, a nearly two-year long silence followed, but Passos said there should be news from Petrobras on this front in a few weeks’ time.

“The gas market in Brazil has seen marginal movement. There’s been the creation of a free gas market, which was important. But what we see is that gas supply in Brazil remains constant [at not high enough levels]. This price level puts Brazilian producers at a significant disadvantage compared to US competitors – and this gap has existed for years and remains painfully constant,” said Passos.

“We’ve presented [to Petrobras] all the information about the chemical industry, consumption profiles, volumes that could be involved in a natural gas contract, etc. Now, we’re waiting for Petrobras’s response regarding the product they will offer to the chemical sector as a bloc – our expectation is that Petrobras will present a proposal as soon as this month.”

However, Passos acknowledged progress has been slow, adding that no measure by itself is to be a miracle for chemicals production in Brazil as the sector carries on its back decades of its global competitiveness being dented, as other countries’ production rose sharply, gaining market share.

Abiquim’s head provided a historical perspective for this. Brazil built its petrochemical industry in earnest from the 1960s on, a model which lasted until the 1980s and based on a partnership between private actors and the Brazilian state through Petrobras.

This “Chinese model,” as he described it, changed in the mid-2000s, when Braskem – of which Petrobras is the second largest shareholder, with nearly 40% ownership – was formed. But Braskem remains, to this day, fundamentally a polymers producer, a sub-sector in which the global overcapacities are hitting especially hard.

“A private company became the majority owner in petrochemical centers and in the manufacture of thermoplastic resins. Petrobras remained a strategic partner, but not the controlling partner. This shift created problems in negotiating raw material prices and availability of ethane and natural gas – there is a dynamic of trying to maximize margins at each stage of the production chain, and this strains the model,” said Passos.

AND THEN IT IS ALSO ABOUT CHINA
China continues to place competitive pressure on Brazil’s chemical industry through what Passos describes as persistent dumping practices, adding that even after import tariffs were hiked, Chinese imports into Brazil have continued as their prices continued to fall, offsetting the higher import tariffs.

“And then, due to the tariff war between the US and China currently brewing, freight rates have also plummeted as the reduction in goods trade between the two countries have made more ships available. So, at least in the short term it looks like there will be greater availability of freight in various routes, so shipping prices may fall further.

“So, Chinese or US product is expected to continue coming into the Brazilian market, deepening the troubling trends: producers int hose countries will now have cheaper freight rates and cheap product to be exported: this remains the big risk for Brazilian producers.”

However, trying to see a silver lining in a rather downbeat assessment, Passos said that, if US-China trade tensions escalate, there could be knock-on effects that benefit certain segments, because China has reduced imports of US ethane and propane, the latter also a natural gas-based feedstock used in the petrochemicals industry.

“If this scenario continues to worsen, there will also be excess ethane and propane in the US market, therefore the price will fall and that could make more feedstock available for us here in Brazil,” he said.

THE NEW HOPE: PRESIQ
In April, Brazil’s parliament passed a bill called Special Program for Sustainability of the Chemical Industry (Presiq in its Portuguese acronym) which resembles the US Inflation Reduction Act (IRA) or the EU’s Green Deal plans announced in or after the pandemic – public support in the billions of dollars for companies to set up greener production facilities.

Faced with the structural challenges explained, Abiquim lobbied for the bill as it sees it an opportunity for Brazilian chemicals production to jump into the greener future – perhaps its last chance to be a global player the sector, he said.

Starting in 2027, after the tax break REIQ expires in 2026, Presiq has budgeted up to nearly reais (R) 4.0 billion/year ($704 million/year) for financial credits, the main target being the acquisition of feedstocks by chemicals producers.

It also contemplates up to R1.0 billion for investment credits, which also applies to fertilizer projects, a sector in which Brazil’s trade deficit has only deepened as the country became one of the world’s breadbaskets – around a quarter of its GDP now comes from the agribusiness.

Within the nearly R4.0 billion Presiq is to offer in credit lines for chemicals producers to purchase natural gas-based feedstocks, the funding will be distributed between the purchase of ethane, propane and butane (R2.0 billion/year), plus another R1.9 billion/year for the acquisition of ethylene, propylene, and butene, among others, according to figures compiled by Brazil’s gas trade group Abegas.

The bill will also offer up to 3% of the value of the investment in expansion of installed capacity, or projects which meet other program guidelines.

“The Brazilian chemical sector is facing a delicate moment, aggravated by the trade war between the US and China. The government’s measures to strengthen the national chemical industry such as tariffs and others have helped to slow down the downward trend chemicals production is suffering, and if these measures hadn’t been taken, more chemicals plants would have had to shut down,” said Passos.

“But Brazil also needed an incentive program mirroring those of our global competitors such as the US or the EU. Of course, China’s incentives go further and are basically subsidies unprofitable plants to keep people employed, but that another matter.

“More in line with the US or the EU, Presiq will help reduce the deficit in the chemical industry, and it could become an important source of revenue. It will also add value to the country through the sustainable use of natural resources. Presiq could be the chemicals industry’s savior,” concluded Passos.

($1 = R5.67)

Front page picture: Chemicals facilities in Brazil
Source: Abiquim

Interview article by Jonathan Lopez