Brazil’s chemicals, wider industry starts 2024 on persistent poor demand

SAO PAULO (ICIS)–Brazil’s manufacturing fell further back into contraction in December, although confidence about the months ahead remained helping job creation.

The beleaguered chemicals sector, however, remained in the doldrums, with the latest official statistics showing falls in output in November despite an overall increase in industrial output of 0.5%, month on month.

Chemical producer prices were also down in November, year on year, by nearly 20%.

Chemicals trade group Abiquim – which represents just producers – has kept a pessimistic, almost-apocalyptic tone, pleading for “emergency” measures as domestic producers remain besieged by more competitive imports.

NO CHRISTMAS CHEER
The much-followed manufacturing PMI index disappointed in December as it went deeper into contraction territory and well below the 50.0 points mark that would mark expansion, according to S&P Global.

While agriculture and services propped up Brazil’s GDP growth in 2023, expected to stand at around 3%, industry remained the outlier as consumers shied away from big-ticket purchases for which they had to pay high interest rates if purchased on credit.

In 2023, manufacturing only stood at expansion during one month, August, and only just.

Brazil manufacturing, 2023	December	November	October	September	August	July	June	May	April	March	February	January
PMI index	48.4	49.4	48.6	49.0	50.1	47.8	46.6	47.1	44.3	47.0	49.2	47.5
Source: S&P Global

It may have been the Christmas cheer, or the Brazilian relentless optimism, but manufactures surveyed for the December PMI remained upbeat about the months ahead and hired more workers for higher expected output.

However, they were optimistic in most 2023 surveys, and stubborn reality has kept manufacturing in contraction most of the year.

The PMI index is compiled from surveys among manufactures, and they remained optimistic in December despite the rather bleak overall picture.

“In addition to domestic challenges, firms found it difficult to secure new work from abroad. Their inability to price competitively in external markets meant that new export orders decreased for the twenty-second month running in December,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

“Besides the challenging operating environment, firms faced surging cost pressures at the of the year whilst clients asked for price discounts. A sliver of reassurance in the latest PMI results was the rise in business confidence, as more companies expected better times ahead in 2024, and the subsequent uptick in job creation.”

Perhaps, one reason for their optimism is interest rates. The Banco Central de Brasil (BCB) kept for most of 2023 deaf ears to the demands from manufactures and the government alike to lower interest rates, but the central bank finally changed course in August as inflation has considerably come down from the peaks.

Brazil inflation	Nov	Oct	Sept	Aug	July	June	May	April	March
Annual rate (change in %)	4.68	4.82	5.19	4.61	3.99	3.16	3.94	4.18	4.65

From its rigid policy up to August, the open bar thereafter: the BCB lowered interest rates three more times, each time by half percentage point. With the Selic, the main benchmark, now down to 11.75% from 13.75%, manufacturers could be hopeful consumers feel more confident.

PRODUCERS GET NO RESPITE
Pressure on Brazilian chemicals producers increased throughout 2023, with the latest figures for the trade balance up to November showing an accumulated deficit of $43.3bn, according to Abiquim’s last 2023 trade bulletin published at the end of December.

Cheap and abundant material not needed in Asia is finding in Latin American ports a perfect destination, and most producers do not expect any meaningful recovery in 2024.

While distributors may have a very different opinion about imports which, in theory, would widen the options they can choose from in their purchases, the truth is that if the wider manufacturing sectors are depressed, their business will not be buoyant either.

Brazil’s new cabinet, one year into office now, has been much more receptive to Abiquim’s demands, because it is worried about manufacturing employment.

Vice-president Geraldo Alckmin attended the trade group’s annual conference in December and promised chemical producers more measures to help its competitiveness, after two import tariff hikes already in 2023 and the reintroduction of a tax break for the sector.

So far, however, these measures have proved to be a drop in the ocean considering the ‘tsunami’ of material being exported to Brazil.

The statistics office IBGE said earlier in January that November’s industrial output had risen by 0.5%, month on month, and 1.3% year on year.

But chemicals output fell in November by 3.2%, year on year, and many petrochemicals-intensive sectors also posted considerable falls in output. In January-November 2023, chemicals output was 5.7% lower than in the same period of 2022.

The decent 0.5% increase in overall industrial output in November came mostly from semi- and non-durable goods as well as intermediate goods, but output of durable goods – which are the most petrochemicals-intensive – fell a hefty 8.6%, said IBGE.

The statistics office also confirmed that chemicals producers’ prices continued to post some of the largest falls up to November, down 16.3% year on year.

Overall, producer prices fell by 0.43% in November month on month, and by 4.89% in the January-November 2023 period, year on year.

ECONOMISTS EXPECT GROWTH TO HALVE
In its first Relatorio de Mercado of 2024, the weekly survey compiled by the central bank among economists showed they expect GDP growth to nearly halve in 2024, which would not bode well for a recovery in manufacturing.

It is also certain that for most of 2023, the survey showed expectations for GDP growth of around 1.5%, and they did not change their forecast until it was evident growth had been much better: in their view, GDP is expected to have close 2023 with growth of 2.92%.

Economists’ projections tend to be on the downside, and the Relatorio de Mercado projections have proved to be wrong before.

From 2.92% growth in 2023, they now expect GDP to expand by 1.59% in 2024.

There is more consensus in the performance of the currency, with the Brazilian real (R) exchange rate against the dollar expected at $1:R5.00.

Inflation is also expected to remain contained at 3.90% by the close of the year.

BRAZIL: NEVER DULL
As 2023 proved time and time again, one year is a long time in economics and politics alike.

The year started with riots in Brasilia as Luiz Inacio Lula da Silva returned to the highest office, an event which made many in Brazil remember the worst years of coups and lack of freedoms. But 2023’s Brazil proved more resilient and unified than many expected.

In economics, initial weariness about Lula’s centre-left government intentions to expand public services and potentially raising taxes to pay for it, gave way to the reality of a government in a minority in Congress who must agree most measures with smaller, less left-leaning parties.

In 2023, it was also notable how wrong most forecasts about GDP were. In January, most public and private bodies were expecting growth at around 1%, but growth ended up nearly tripling that.

Manufacturing has truly been the ‘sick man’ of the economy in 2023, and chemicals one of its sickest patients.

With growth expected to slow down, it remains to be seen whether Lula’s promise to increase manufacturing employment achieves any traction.

Focus article by Jonathan Lopez