Higher import tariffs one leg of wider plan to save Brazil’s besieged chemicals producers – Abiquim

SAO PAULO (ICIS)–Proposals to sharply increase chemicals import tariffs are only one of the three aspects Brazil’s chemicals producers have proposed to the government to save their “besieged” operations, according to the CEO at trade group Abiquim.

Andre Passos added that the industry has also proposed to the government a structural plan to reduce natural gas prices in Brazil as well as a US-style, IRA-type stimulus plan for the chemicals chain, completing a plan to help chemicals producers which remain, he said, operating at historically low rates.

Abundant and low-priced chemicals imports have been making their way to Brazil for several months, with domestic producers facing stiff competition and losing market share. China has been the main country of origin, but Passos said also pointed to the US, Russia, or Saudi Arabia.

In May, chemicals producers – via Abiquim but also as individual companies – proposed increasing tariffs in more than 100 chemicals, most of them from 12.6% to 20%, in a public consultation held by the Brazil’s government body the Chamber of Foreign Commerce (Camex). A decision is expected in August as the latest.

Abiquim represents only chemicals producers, but not distributors; Brazil’s polymers major Braskem, which is 36.1% owned by the state-owned energy major Petrobras, has a commanding voice in the trade group.

Other trade groups in the chemicals chain, such as Abiplast, representing plastics transformers, do not support higher tariffs as most of their members import product to meet their demand.

Soon after Abiquim met with Brazil’s President Luiz Inacio Lula da Silva in May, as part of their lobbying to prop up chemicals producers’ operations, Abiplast and several other trade groups also demanded a meeting with Lula to lobby for their case of not raising import tariffs.

NOT ONLY TARIFFS
Passos was keen to stress that higher tariffs were only one part of producers’ proposals to the government and emphasized the measure has been proposed to be in place for one year.

In May, a source in Brazil’s chemicals said to ICIS that simply proposing higher tariffs, without addressing other productivity and global competitiveness issues in an industry mostly based in commodity chemicals production, was the result of “business mediocrity”. Passos was not having it.

“What is a showing of mediocrity is not to understand this [higher import tariffs] is a proposal to be in place for only one year, in the face of a situation where chemicals producers are operating at rates of 62-64% and where the survival of several chemicals chains is being jeopardized,” he said.

“What we have presented to the government is the need to undertake action on three main fronts: in the short term, import tariffs, but in the medium and long term we also need a structural plan to address natural gas prices, which are seven times higher in Brazil than in some other jurisdictions, as well as a stimulus plan covering the whole chemicals production chain.”

Brazil’s natural gas prices have hovered around $14/MMBtu during the past months. That compares to a price of around $2.5/MMBtu at times in the US, although this week prices surpassed the $3/MMBtu mark in that country.

The chemicals industry can use natural gas-based ethane as one of its building blocks, which has allowed the US’ chemicals industry to thrive after the shale gas boom. In Brazil, most steam crackers run on crude oil-based naphtha.

According to Passos, with the adequate regulatory framework and a helping hand from Petrobras, prices could come down considerably in Brazil. To that aim, the energy major and Abiquim signed a memorandum of understanding (MoU) earlier in 2024 to explore potential agreements on natural gas supply to chemicals.

Abiquim says the sector is Brazil’s largest consumer of natural gas, coping 25-30% of supply, and therefore government-controlled Petrobras could do more to help. Petrobras has always focused on crude oil production, with most of the natural gas extracted in its operations reinjected back into the system.

Passos said Abiquim and Petrobras should be announcing concrete action on natural gas in coming weeks.

Moreover, Petrobras said in May it was to restart construction work on its gas processing unit in Itaborai, called Gaslub and also known as Rota 3. The project’s construction, started in the early 2010s, fell victim to the wide-ranging corruption scandal Lava Jato in which Petrobras was a central part.

“Currently, Brazil’s crude oil sector is well regulated and is one of the country’s success stories. We need the same for natural gas. When Gaslub is started up, 18 million of cubic meters (cbm)/year will come into the market. We are forecasting there could be gas oversupply within two years, although this of course depends on other variables as well,” said Pasos.

“Barring disruption to supply from Bolivia, or a potential severe drought which would lower hydraulic electricity production [having to use natural gas to produce it], we are forecasting that with the adequate regulatory framework and Gaslub functioning, natural gas prices could come down considerably in the medium-term.”

Passos was keen to stress how Braskem’s steam cracker in Rio de Janeiro’s Duque de Caxias facilities, which runs on natural gas-based feedstocks, is operating, exceptionally, at an approximately 85% operating rate. This shows, he went on to say, how even with high prices more supply of natural gas is indispensable for chemicals producers to increase their competitiveness.

He also said the fiscal burden chemicals procures in Brazil endure stands at 43%, versus 20% in the US, according to Abiquim’s estimations. Work there, he said, could also be done.

STIMULUS 
Passos said the government must contemplate a plan for the chemicals industry following the example of the US’ Inflation Reduction Act (IRA), which has propelled large investments in green energy projects, propping up the chemicals industry along the way.

He conceded the US’ resources are larger than Brazil’s but said that the government has already showed it can design plans to prop up specific economic sectors, and mentioned the example of the Mover program for the automotive industry.

Earlier this week, Brazil’s Congress finally approved the plan, proposed in December. In the best Brazilian style, members of parliament (MPs) introduced amendments which graphically are known as “jabuti” (turtle): amendments to a bill which are little related to the spirit of the bill itself. In Brazil’s strong balance of powers, MPs can greatly delay the passing of bills, like Mover.

“We have presented to the government the need for an IRA-like, Mover-style plan for the chemicals industry, for all elements in the production chain: basic chemicals as well as chemicals of first, second, and third generation,” said Passos.

“Brazil has been able to destine Brazilian reais (R) 19.3 billion [$3.6 billion] for automotive – it can do the same for the important chemicals industry, which creates so many jobs in the country.”

Finally, Passos said that before the severe floods affecting Rio Grande do Sul in May – which brought havoc to one of Brazil’s most industrialized states – demand and manufacturing activity was healthier than in 2023, overall, although that improvement had not benefitted any of Abiquim’s members: higher demand for chemicals was being met by imports, he said.

On Monday (17 June), the second part of this interview will be published, with Passos’ views on Brazil’s response to the floods. Passos is a gaucho himself – as people from Rio Grande do Sul are called – and said the authorities’ response to the disaster had been decent, adding he had been humbled by the response of civic society across Brazil.

($1 = R5.36)

Front page picture: Braskem’s Duque de Caxias facilities in Rio de Janeiro
Source: Braskem

Interview article by Jonathan Lopez

($1 = R5.36)