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Petchem expansion needs stable raw material prices

Bnamericas
The strategy of Brazil's federal energy company Petrobras (NYSE: PBR) for the petrochemicals sector will only succeed in helping the sector double capacity by 2012 if it implements a stable raw material price policy, the president of the São Paulo plastic resin makers association (Siresp), José Coelho, told BNamericas. "The studies point to a demand growth which will need the industry to double its current capacity by 2012, requiring an investment between US$8bn and US$10bn," he said. "Petrobras' decision to invest in the sector is legitimate as it is the main raw materials supplier, but it will have to solve a conflict of interests arising from such a position," he added. Petrobras announced plans to invest US$1.1bn in the petrochemicals sector by 2010 as part of its seven-year strategic plan. The company has identified five projects to develop through partnerships with local companies, which will anchor the industry's expansion in coming years. Brazil's petrochemicals industry currently produces 4.5 million tonnes a year of the whole range of petrochemicals products. Although this is above current consumption levels, allowing companies to export, the buffer will not last long, as the country is expected to enter economic recovery. A GDP growth over 3% will make plastic resin sales grow 7% in 2004, Coelho said. The industry is now working at almost 90% of full capacity, which will soon be reached, industry leaders have said. However, the sector is far from satisfied with the optimistic economic outlook because it is caught between rising raw material prices, high taxes and financing costs. The Brazilian industry uses naphtha, a distillate of crude oil, and although 35-40% of the raw material used by the industry is imported, Petrobras controls the prices. "Brazilian naphtha prices are adjusted monthly and now they have reached 14 year highs," Coelho said. "If we don't pass these prices on to clients, we have to stop production." Companies are buying naphtha at about US$380/tonne, up about 35% from the average price in 2003, while domestic gasoline prices have been stable for the last few months. Behind the increase in naphtha prices are surging oil prices, which have reached a three-year high, and higher demand from the petrochemicals sector. The automotive and agribusiness sectors are driving naphtha prices by demanding more plastics, and now the electronic and household goods makers and packaging industries are spurring demand for plastic resins, Coelho said. The petrochemicals industry should benefit from new projects expected to start commercial operations by 2009. In 2005, Rio Polimeros should start producing 520,000 tonnes a year (t/y) of ethylene, 75,000t/y of propylene and 540t/y of polyethylene. There are also plans for a 300,000t/y polypropylene plant in São Paulo state, scheduled to start operations after 2008, and a propane, butane and ethane plant on the Bolivia-Brazil border. In addition, there are plans for smaller projects, such as increasing PVC production by 90,000t/y and building a new phenol production unit and an acrylic acid plant. However, the recovery may run out of steam since these announced projects are not enough to guarantee future supply beyond 2009. Besides the lack of stable raw material pricing policies, the petrochemicals industry also faces high taxes and financing costs, Coelho said. "We need to have access to capital at costs similar to competing countries," he said. In Europe and the US, long-term investment plans tap financing at annual rates of around 2%, while in Brazil companies have access to rates of over 10% a year, he added.

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