Brazil’s chemicals producers’ margins to rise on higher tariffs but prices remain low – Fitch

SAO PAULO (ICIS)–The likely increase in Brazil’s import tariffs for dozens of chemicals will start improving beleaguered domestic producers’ poor margins even though petrochemicals prices remain low, according to an analyst at US credit rating Fitch.

Marcelo Pappiani, credit analyst for Brazilian chemicals producers, added that imports into Brazil and the wider Latin America remain high and are likely to continue that way as China and the US work through their overcapacities.

Despite that, prices have stabilized, albeit at low levels, and “the worst of this downturn” seems to have subsided, said Pappiani.

The two largest chemicals producers in Brazil, polymers major Braskem and chlor-alkali and polyvinyl chloride (PVC) producer Unipar, are covered by Fitch. The two companies have posted several quarters of poor financial results on the back of low prices and competition from overseas producers.

TARIFFS UP
Brazil’s chemicals producers – represented by trade group Abiquim, in which Braskem has a commanding voice – were hoping the Brazilian cabinet would increase import tariffs on dozens of chemicals in September.

However, there have been contradictory reports on this, with some expecting the hike to be approved as soon as Wednesday (18 September), while other reports citing government sources have said the decision would be pushed back to December.

The increases would follow a public consultation earlier this year in which Abiquim as well as individual companies proposed increasing tariffs in more than 100 products, most of them from 12.6% to 20%.

Braskem is, at the same time, partly owned by the country’s state-owned energy major Petrobras, so the Abiquim/Braskem lobbying tandem tends to find open ears in the corridors of power in Brasilia under the current government, which has committed to expand the industrial sector.

Pressure not to increase import tariffs has also been strong from other sectors, not least plastic transformers represented by Abiplast, but the producers’ proposals are expected to have won the day.

“Petrochemicals prices in Brazil and the wider Latin America seem to have reached the bottom and we are seeing slightly less pressure on companies, despite of course still imports coming into the region in big numbers, from China, the wider Asia and the US,” said Pappiani.

“Companies have lobbied the government strongly for an increase in import tariffs as well as other measures to prop up the chemicals industry. Import tariffs seem set to increase and that should soon make Brazilian producers more competitive.”

Pappiani is in no doubt higher import tariffs in several chemicals – when around half of the Brazilian industry’s demand is covered imports – are likely to translate into higher prices for consumers, precisely the reasoning used by those who oppose the hike.

“President Lula has said he wants to foster the chemicals sector and has met on several occasions with CEOs from the industry as well Abiquim,” said Pappiani.

“But, of course, consumers will end up paying for higher import tariffs – this happens in all economic sectors, not just petrochemicals, of course.”

COMPETITIVENESS THROUGH TARIFFS
As well as higher prices for consumers, those opposing the hike in import tariffs argue that Brazilian petrochemicals producers should speed up their modernization and diversification, so they are not as dependent on government policy for their profitability.

Pappiani said Braskem is a well-managed company with international assets which would make it a profitable enterprise even without government measures which prop up its competitiveness in its domestic market.

However, critics of protectionist measures continue their campaign against the increase in import tariffs, although according to most analysts the dice has been cast.

On Tuesday, the president of Abiplast published a charged article in Brazil’s daily Estadao in which he wondered if Braskem would always need state indirect help to keep afloat, even if its second largest shareholder is Petrobras, which in theory should make accessing cheaper raw materials easier.

“Why are foreign suppliers of petrochemical products able to be more competitive in their exports to Brazil, even bearing the costs of transportation, logistics and exposure to exchange rate variations? Over the past 40 years, we have exported many of these products to China; if the Chinese (and other countries) become competitive by importing Brazilian oil, why can’t Brazilian [petrochemicals] producers become competitive?” said Jose Ricardo Roriz Coelho.

“The exaggerated protection of the few petrochemical companies in Brazil results in them directing investments to countries where they face greater competition in order not to lose market share. Europe, which is not competitive due to its lack of raw materials for petrochemicals, has chosen to add value further down the production chain by importing resins from countries that are more efficient in production.

“Structural problems, such as insufficient supply of inputs, cannot be solved with short-term remedies. The debate on new tariffs and the production chain is crucial,” concluded Roriz.

Indeed, the prospect of high import tariffs being approved as soon as this week has already propped up Braskem’s market capitalization in the past few weeks.

On 13 September, for instance, the company’s stock rose by nearly 8% as investors expect an imminent decision on the increase in import tariffs, according to a report by InfoMoney.

The increase in import tariffs could automatically translate into higher earnings before interest, taxes, depreciation, and amortization (EBITDA) for Braskem, to the tune of $300 million/year, according to some analysts. Under current business conditions, that would be roughly the same EBITDA amount the producer posted in the second quarter of this year.

“In our view, this additional tariff would help contain Braskem’s cash burn in recent quarters. The company would then be better positioned to capture a future cycle of increases in petrochemical spreads,” said analysts at XP cited by InfoMoney.

Front page picture: Facilities operated by Brazilian polymers major Braskem in the state of Sao Paulo
Source: Braskem

Interview article by Jonathan Lopez