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Brazil’s recovery to strengthen in second half
Posted on April 13th, 2017 by Al Greenwood in Chemicals Industry News and Analysis
Executives and managers from several plastic producers expect Brazil’s economy to start a sustained recovery in the second half of the year, ending the nation’s worst recession since the Great Depression.
Brazil suffered two consecutive years of economic contraction exceeding 3% each, while inflation surged to double-digit levels.
The runaway inflation prompted the central bank to raise the key Selic interest rate to 14.25% even as the economy continued to contract.
At the least, the outlook for the country has improved. Economists have steadily lowered their outlook for inflation, from 4.81% at the start of the 2017 to the most recent forecast of 4.10%. That’s below the midpoint of the bank’s target range of 2.5-6.5%.
If inflation continues to fall, then the central bank would have more room to lower interest rates, giving the economy a much needed jolt from looser monetary policy.
Indeed that’s just what’s happening. The Selic rate stands at 12.25%.
Forecasters expect it will fall further to 8.75% by the end of the year. This is a more optimistic outlook from January, when they thought it would fall to 10.25%.
With that, economists expect Brazil to return to growth this year, with GDP growing by 0.47%. While not spectacular, it still marks a recovery from the nation’s deep recession.
Next year, the outlook brightens further, with the economy expected to grow by 2.50%.
“The good news is we have stopped falling,” said Marcelo Correa, LANXESS BU High Performance Materials, head of marketing and sales, Latin America. He made his comments on the sidelines of the Feiplastic conference. “From here, you start going up again,” he said.
The evidence was in the company’s sales numbers. March was very strong for the company.
There were other positive signs.
In February, Brazil exported 66,268 vehicles, according to the trade group Anfavea.
“This is really huge,” Correa said.
Meanwhile, Brazil made 200,385 vehicles in February, up from 144,183 from the same time last year, according to Anfavea.
Automobile sales for March were encouraging, said Marcos Curti, Solvay general manager, performance polyamides, Americas and global commodities, with nearly 200,000 vehicles sold. Curti was quoting statistics from the trade group Fenabrave.
Media reports show that is up from the same time in 2016.
The improvement shows that Brazilian consumers are becoming more confident, Curti said.
BASF also saw demand increase from Brazil’s automobile industry, said Leticia Mendonca, BASF senior manager for marketing and sales for South America, transportation and consumer.
The company’s customers had destocked, so the pick-up was especially pronounced, she said.
Still, a couple of good months does not mark a sustained recovery. Correa said it takes time for lower interest rates to start benefitting the economy.
Because of that lag, Correa expects the recovery to become sustainable in the second half of the year.
Curti stressed that any recovery will be gradual. He referred back to automobile sales. Solvay expects these will reach 2m-2.2m for 2017. Four years ago, the figure was 3.5m.
Plus, other parts of the economy are still lagging. Brazil has a large inventory of houses built in 2014 and 2015, Curti said. The country needs to work down that inventory before house construction returns to more normal levels.
This is important for the chemical industry because house construction consumes a lot of chemicals, such as polyvinyl chloride (PVC), fibres, coatings and insulation. Insulation can be made of polyurethanes and expandable polystyrene (EPS).
House sales also increase demand for furniture and appliances, which also consume a lot of chemicals.
Brazil’s housing market is not the only laggard in the economy.
Unemployment still remains high, said BASF’s Mendonca.
Because BASF makes polyurethanes, it also serves a lot of consumer markets, especially in furniture, appliances and footwear.
Brazil’s appliance industry suffered a lot in 2016 and went through restructuring, she said. It appears that this phase has ended. Meanwhile, furniture has not shown a lot of improvement.
Casual footwear is stable, she said. Safety footwear is improving, albeit slowly. This latter category can be a good proxy for industrial activity, since sales of safety footwear often will increase purchases of safety boots for workers.
Still, Mendonca points to other more pessimistic signs. In addition to unemployment, there has been a lack of new government policies to address economic activity.
In addition, politics remain fraught, she said.
Overall, while the year has started off well, Mendonca said she was still not very confident about the prospects of the economy. With that, BASF’s outlook for Brazil leans on the conservative side.
Given the outlook for Brazil’s economy, the country has few expansion projects.
Braskem, the country’s sole producer of PE and polypropylene (PP), has been distracted with the Lava Jato corruption scandal, said Jorge Buhler-Vidal, director of Polyolefins Consulting.
Late last year, Braskem has agreed to pay fines and indemnities worth $957m under a leniency agreement.
For Brazil, the most likely project is Braskem’s proposal to double the capacity of the Duque de Caxias cracker in Rio de Janeiro state.
The Duque de Caxias cracker uses gas as a feedstock, so Braskem would need to ensure that it has access to raw materials before it can proceed with the project, Buhler-Vidal said.
Companies may also choose to serve the Brazilian market by expanding PE capacity in neighbouring Argentina. Both belong to the Mercosur trading bloc, which facilitates trade among members.
Dow Chemical could build a new ethane cracker at its complex in Bahia Blanca in Argentina. Dow has talked about possible expansion projects in the country, but it still has not announced a decision on the cracker or on any possible downstream units.
However, any new project in Argentina would also need to have a secured supply of feedstock.
If Dow were to proceed with the project, Buhler-Vidal said it could possibly start up in the first part of the next decade.
If Dow rejects the Bahia Blanca project, Buhler-Vidal said a consortium of companies may choose to build it instead.
“The project is still a good project,” he said. “If Dow doesn’t do it, someone else will.”
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