New Report Available: Brazil Petrochemicals Report Q3 2013

Brazilian chemicals producers are set for a better business environment in H213 as government measures help stimulate consumption, support industry growth and offset the effects of high operating costs. However, BMI still forecasts an erosion of market share to cheaper imports, particularly from the US due to the strength of the real and the US's lower ethane costs.

The first few months of 2013 saw a modest contraction in the Brazilian chemicals industry's domestic sales and output. The pace of sales has not matched the increase in domestic demand, with apparent consumption in the first four months rising 7.1% year-on-year (y-o-y). As a result, Brazil is growing more reliant on imports and the chemicals balance of trade deficit growing; a trend that was witnessed in 2012.

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The industry's loss of competitiveness was notable in the decline in the rate of chemicals capacity utilisation. Industry leaders are hoping that recently announced stimulus measures, including lower taxes and reductions in energy costs, will allow companies to operate at a higher capacity as well as boosting competitiveness. However, the disadvantages in high feedstock costs and infrastructural bottlenecks will still weigh on industry growth.

Key views in the sector include:

* Government action should help support the sector, although this may be insufficient to offset the effects of the strong real and high naphtha costs. As such, import growth will be sustained to the detriment of market share for local producers. Brazilian polymers output growth is therefore not expected to exceed 2% in 2013, although this is an upward revision from the zero growth we forecast previously and takes into account the improvements in competitiveness and the market environment.
* In terms of the domestic market, BMI sees 4% growth in demand for polyolefins in 2013, which is broadly in line with regional trends and an upward revision from the 3% growth we forecast in the previous quarter. This would represent a recovery from the flat growth in 2012. Key demand drivers will be the construction and automotive sectors.
* Brazil is third in BMI's Americas Petrochemicals Risk/Reward Ratings (RRRs), with a composite score of 68.3 points, unchanged since the previous quarter. While it has a relatively large petrochemicals industry, Brazil's score is weighed down by a higher level of risk than most other countries in the region, with its long-term financial market risk a notable cause for concern, although the situation has improved recently. An improvement in the tax regime and stimulus measures may have helped sales, but this has been outweighed by the strong real coupled with an influx of cheap product from the US. Brazil is 6.5 points ahead of Mexico and 10.5 points behind Canada.

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