The Braziliansit Magazine - Clipping Desk - New Brazilian Player in Petrochemicals

From the heart of its plant here (Camaçari), Braskem, the product of the recent merger of six Brazilian petrochemical companies, certainly looks imposing, with ducts, pipelines, tanks and flares as far as the eye can see.

And by Latin American standards, Braskem is, indeed, huge. It is Brazil’s fifth-largest industrial group, with some 3,000 employees, 13 factories in four states and $3.1 billion in assets. In 2001, combined sales of the six companies that now make up Braskem were $1.8 billion.

But compared with globe-straddling competitors like Dow Chemical or Basell Polyolefins, a 50-50 joint venture of Royal Dutch/Shell and BASF, Braskem is a dwarf. Basell has annual sales of more than $6.5 billion, and Dow, which swallowed Union Carbide in 2001, recorded sales that year of $28 billion.

So when Braskem’s chief executive, José Carlos Grubisich, said that a principal point of the merger was “to create in Brazil, with Brazilian capital, a petrochemical player with real chances of having international ambitions,” what does he mean?

“Of course the big guys like Dow and BASF have business volumes that are far bigger than ours, but we are highly competitive in the region,” Mr. Grubisich said at a recent interview at the plant in Camaçari, an industrial district in the northeastern state of Bahia where the company is based.

“Our priority is to consolidate our regional leadership, and then, in a second phase, take steps toward the internationalization of our business.”

“In Latin America, we have an advantage of scale over the subsidiaries of the big players,” he said. “We are now the region’s undisputed market leader.”

On a divide-and-rule basis, Mr. Grubisich is right, at least for South America, where Braskem vies with Basell for leadership of the polypropylene market, leads Dow in polyethylene sales and splits the PVC market equally with Solvay of Belgium. None of the big multinationals have a presence in all sectors in the region, though they operate in various sectors of the industry around the world.

“The creation of Braskem will change the nature of the petrochemical market in Brazil, if not regionally,” said Ian Dunn, who until recently was Basell’s senior vice president for South America. “Braskem has a structure and a capacity to squeeze the market and the competition in a way we will be very interested in watching.”

For now, Mr. Grubisich, 46, who moved to Braskem from the French chemical group Rhodia, said his top priority was to put into effect 115 projects to cut costs and improve efficiencies among the six merged companies that make up Braskem.

That should save Braskem some $85 million a year, he said, freeing up more of the company’s $400 million cash flow to repay its hefty $2 billion debt, nearly 70 percent of which is dollar-linked.

The merger of companies controlled by the Odebrecht and Mariani families, which now control Braskem signifies a sort of coming of age for Brazil’s outdated petrochemical industry. Until recently, it had sat by as the industry worldwide integrated production from raw materials to more complex plastic resins.

“The petrochemical sector in Brazil is consolidating very late in the day,” said Luis Nassif, a leading business commentator for the daily Folha de São Paulo. “Had this been done during the privatization process in the early 90’s, Braskem could have been a world player by now.”

Mr. Nassif said that without the merger the Brazilian market would have been fragmented and open to “the risk of Dow coming in and taking over the sector.”

“Now, Braskem has gained critical mass,” he said.

Not all analysts agree that Brazil’s petrochemical industry would be so attractive to foreigners.

Luis Paulo Foggetti, an analyst at the São Paulo brokerage firm Fator Doria Atherino, said it would take 5 to 10 years for it to modernize enough to lure foreign capital. For now, he said, the industry was too dependent on supplies from the state oil giant, Petróleo Brasileiro, or Petrobras, and on imported technology, and most companies are still largely family owned.

Brazil’s chemical exports totaled $3.5 billion in 2001, but imports totaled $10.7 billion. The $7.2 billion shortfall was one of the largest sectoral deficits in Brazil’s trade account.

“Had there been no merger, however, it would have meant a further step back,” Mr. Foggetti said. “You might have seen Petrobras having to intervene in all those various companies.”

Generally, investors have yet to be convinced by the merger, which was announced in August. Between then and the end of November, Braskem’s shares, which had already been heading down on expectations of the merger, slid nearly 40 percent in the São Paulo exchange, and they are still down around 20 percent. Its American depository receipts have had an even bumpier ride.

In December, the company announced a $470 million loss for the first three quarters, though that was largely a result of the Brazilian currency’s 40 percent devaluation against the dollar, which affects the company’s debt and its margins.

Mr. Grubisich, however, says he is confident that Braskem will soon impress investors. Unlike the industrialized world, Latin America still has huge growth potential, he said.

Brazilians, for example, use 50 pounds of plastic per capita a year, compared with 176 pounds per capita in Europe.

In 2001, Brazil’s plastics industry had revenue of $9.1 billion, according to the country’s association of plastic producers, off 6 percent from 2000’s numbers in dollar terms, but the group predicts that the current demand of four million tons will almost double by 2008.

But for regional demand for plastics to increase, overall economic growth, which has been held back by recession in Argentina and virtual stagnation in Brazil and Venezuela, must take off again. And the industry itself must try to develop local technology to wean the industry off its dependence on imports as it works to produce more finished products.

“‘Brazil needs to examine the value chain of its plastics industry,” Mr. Grubisich said. “Our clients need to export more. What’s the point of us exporting plastic resin to Asia and then Asian industries producing plastic bags with it to sell back to Brazil?”