GBR investigates Brazil's chemical sector amidst a period of political and economic instability.
Whilst Brazil is the ninth biggest economy in the world, its chemical industry is the eighth biggest and has grown substantially since the turn of the millennium as Brazil’s economy has increased in global stature. “Brazil is a natural destination for the world’s chemical industry because it is rich in oil, gas, minerals and rare earths and has much biodiversity,” remarked Marcos de Marchi, chairman of the board of directors, Abiquim, the national trade association for the chemical industry.
Brazil’s chemical industry has annual net sales from domestic production of US$113.5 billion and is the third largest industrial sector in the economy, representing 10% of overall industrial GDP. It also supports 2 million jobs in terms of the whole chemical value chain and 400,000 direct jobs. The recession has unsurprisingly dented the industry’s performance but it has been recovering since 2016, even as the economy was still in free-fall. Sales from local production fell from US$156.7 billion in 2014 to US$112.4 billion in 2015 but recovered slightly US$113.5 billion in 2016, helped by the fall in the Real which has made local production more competitive. Consequently imports have seen a steady decline from US$46.1 billion in 2014 to US$34.2 billion in 2016, although a drop in domestic demand due to the recession has also played a powerful role.
Strength through nature
The chemical sector in Brazil is unique due to strengths in areas such as renewable chemicals, agrochemicals and cosmetics. Brazil is the second largest producer of ethanol fuels after the United States. As any visitor to Brazil that paid attention will remember, drivers can easily fuel their cars with ethanol at the gas station. “Brazil has such huge potential in biomass and so many cars in Brazil already use bio-ethanol,” commented Maurico Adade, president, Latin America, DSM, the life sciences company and specialty chemical producer.
Since 2010, Brazil’s petrochemical stalwart, Braskem, has been operating a green ethylene plant in Triunfo Petrochemical Complex and it a leader in this field.
Additionally, Brazil has substantial market power in vital chemical application markets. It has an almost 10% share of the global cosmetics market, over 20% share of the agrochemicals market and exploration of oil and gas growth has been expanding fast at a rate of almost 25% in the years 2007-2012. “When you look ahead, there is a great field of opportunities for the industry, in particular in sectors like pulp and paper, agrochemicals and cosmetics. This is why we have chosen to invest in new capacity and application labs,” remarked Adriano Magalhães, managing director of specialty chemical producer Wacker.
Growth estimates for the agricultural sector this year range from 9 to 11%, way ahead of the growth rate for the economy.
Indeed, pulp and paper is another area in which Brazil’s industry is one of the world’s largest, aided by the comparatively inexpensive wood costs and the availability of land and water in a sunny climate. Additionally, the food additives for animals market has been noted for its competitiveness, with the country representing 10% of the global market, reflecting its role as one of the world’s top meat exporters.
Brazil’s reputation for innovation and its link to the specialty chemical industry has also won plaudits. “Compared to other emerging countries, Brazil has a very advanced industry. For example, it is one of the few countries in the world that can produce large aircrafts and remains very receptive to new technologies, even compared to some developed countries,” remarked Eric Schmitt, CEO, Arkema Quimica (Brazil), the Brazilian subsidiary of the global manufacturer in specialty chemicals and advanced materials headquartered in France.
Befitting its size, Brazil’s chemical companies occupy leading positions in South America, with only Mexico and Argentina coming close to their scale. On a net sales basis, industrial chemicals dominate local production, making up for almost 55% of the pie. Fertilizers, which are vital for Brazil’s booming agricultural sector, make up 12.6% of net sales, whilst more specialty chemicals divided across a diverse set of industry applications make up the rest.
Of course, the upstream side of the chemicals market in Brazil would be unfathomable without the presence of Petrobras, 64% owned by the state. Petrobras in turn owns 47% of Braskem, whilst Oderbrecht, the huge Brazilian conglomerate active in the fields of engineering, construction, infrastructure, industry, real estate and energy, owns 50.1%. Braskem is the largest thermoplastic resin producer in the Americas. Further down the supply chain, Brazilian companies also lead; Unigel is Latin America’s leading acrylics and styrenics producer, for example.
Going even further downstream are a plethora of specialty chemical producers catering to a wide variety of industries such as food, pharmaceuticals, agriculture and cosmetics. Notably, most specialty producers are subsidiaries of international giants, such as Eastman, Arkema, Croda, Huntsman, DSM, and Rhodia Solvay. Brazil’s chemical producers are supported by Abiquim which has 191 members representing about 90% of Brazil’s chemicals market. Marchi says of Abiquim’s mission: “Abiquim works to actively promote more competitiveness and sustainable development in the production of chemicals by the industry in Brazil.”
Aiding the growth of the industry is a large number of distributors and logistics providers. Major foreign distributors such as Univar, Brenntag and IMCD have a presence in Brazil, whilst the wider market of literally hundreds of distributors also includes many local players, including family-owned and major companies such as MCassab, as well as quantiQ, Brazil’s largest chemical distributor. Associquim is the national trade body for Brazil’s chemical distributors and protects its 90 members’ interests.
Finally, logistic providers also include a mixture of large multinational players and local actors. BDP International, Den Hartogh, Leschaco and Stolthaven Nielsen are all present in Brazil and their services range from third-part logistics providers to trade line consolidation and storage solutions. Meanwhile, local players such as Ultracargo, a liquid storage company that is part of the Brazilian conglomerate Ultra which also owns chemical intermediaries player Oxiteno, are very much present.
Challenges, Brazil has a few
“The sky is not completely blue: the sector had a trade deficit of US$1.5 billion in 1991 but this has reached US$22 billion in 2016. Indeed, the deficit was US$32 billion before the recession. We will import US$43 billion a year, 35.6% of local demand, but still have 21% of idle capacity,” explained Marchi.
The chemical industry’s trade deficit and idle capacity are caused by competitiveness issues. The relatively expensive costs of oil and gas feedstocks are a major impediment to the industry’s success, but this is not the whole story.
“The essential pre-conditions for a successful industry are competitive raw material and energy. Alongside these are good infrastructure and logistics, R&D investment and labor training. We are not competitive enough because we are not performing well on all these five elements,” continued Marchi.
Infrastructure in particular is a big headache for Brazil’s chemical industry. A lack of berthing capacity at Brazil’s ports means that companies are losing money due to delays. Unigel has lost US$4 million over seven months due to this issue. However, Brazil’s infrastructure issues go beyond this singular issue.
Recognizing Brazil’s large trade deficit in chemicals and the impact this was having on the competitiveness of local industry, the Brazilian Development Bank, BNDES, commissioned a report by consultants Bain & Company in 2014 to identify the sources behind it and to find answers for what could be done to solve it. Beyond fertilizers, which represent a large chunk of Brazil’s chemical imports, Bain identified cosmetics and personal care, agrochemicals, food additives for animals and chemicals for exploration and production as segments that Brazil imported large quantities but where it had the most potential to improve its local production due to its competitiveness in these areas.
Bain recommended allocating part of Brazil’s pre-salt oil and gas reserves to these competitive areas of the chemical industry; improving the regulatory environment; investment in chemicals produced from biomass; funding for infrastructure that benefits the chemical industry; greater focus on R&D looking at technological challenges facing these segments; and simplifying the tax system.
Whilst some progress has been made on improving access to biodiversity through a law passed in 2015 to encourage its exploitation, advancement in other areas has stalled. “The major challenge now is to bring these proposals back into the agenda of the government as they were in 2014 as the focus of the industry, BNDES and the government has been diluted since the economic and political crisis,” commented Rodrigo Mas, partner, Bain & Company and lead author of the report.
If Brazil’s chemical industry is to be one of the world’s leading lights, this focus must return as the economy improves.