Reliance on Pemex leads to credit downgrade for Braskem Idesa

Mexican petrochemicals firm Braskem Idesa has had its credit rating downgraded further into junk territory, mostly due to its ties to Pemex.  

The inability of Pemex to supply Braskem Idesa with sufficient ethane has meant the company’s petrochemical operations at its Etileno XXI plant in Veracruz state are operating well below capacity. 

“Pemex's lack of investments has resulted in a decline in the production, including ethane and natural gas,” Fitch Ratings said in its downgrade notice on April 22.

“Braskem Idesa and Pemex's ethane contract considers 66,000b/d of supply of ethane, which the company has not been able to deliver: it is currently able to only provide about 49,000b/d,” Fitch said.  

Fitch cut Braskem Idesa’s local currency issuer default rating to ‘BB-' from ‘BB’. It also revised the company’s outlook from stable to negative.  

Fitch explained that the outlook on Braskem Idesa’s credit rating “could be revised to stable if, during the next 12-18 months, Pemex's supply [of] ethane remains consistently above 74%.”

This, Fitch said, would allow utilization rates at Braskem Idesa’s plant “to remain above 86% and to maintain healthy profitability and operating cash flow levels.”

BRASKEM IDESA’S PLAN FOR EXPANDING IMPORTS FROM US

As Mexico’s polyethylene market came under pressure in 2019, due both to lower fuel supplies from Pemex and shrinking industrial demand amid an economic slowdown, Braskem Idesa quickly worked out what Fitch referred to as a “fast-track operation to import ethane” from the US. 

Source: BNamericas project database

The US$4mn capex project, which resulted in the first fuel imports to Mexico in February, initially enabled Braskem Idesa to import 12,800b/d of ethane. 

Fitch forecasts that ethane imports may “reach up to 16,000b/d by 2022,” amounting to 24% of the company’s total needs.

Operationally, Fitch sees the company as healthy in many respects, with high margins compared to Latin American petrochemical peers Alpek and Orbia Advance. 

However, the company is currently snared by insufficient supplies from Pemex. And, as Fitch noted, “Braskem Idesa has a higher exposure to supply/contract risks compared to its peers.”

CONTRACT UNDER POLITICAL PRESSURE

Soon after Braskem Idesa began importing ethane, Mexican President Andrés Manuel López Obrador (AMLO) implied that the company, which is a spinoff of Brazilian conglomerate Odebrecht, had won its 20-year contract with Pemex by illicit means. 

Braskem Idesa responded that the company obtained its Pemex contract through “an international and transparent auction held by the Mexican government.”

The spat stirred rumors that AMLO could try and nix the agreement with Pemex, going against his longstanding pledge that all contracts will be honored. Braskem Idesa’s were bonds sold over the following days, among other signs of growing anxiety. 

Even under the currently depressed COVID-19 environment, Fitch indicates that, based on the success of the company’s US ethane imports, it could raise the utilization rate at Etileno XXI to “around 91% by 2021.” 

But, Braskem Idesa operates from “a weaker position” than other petrochemical firms, Fitch noted, due in part to its “exposure to a single asset and product [lack of] geographic diversification.”

Photo credit: Braskem Idesa