Challenges temper growth in Brazil

There’s no doubt that Brazil’s plastics market continues to grow — but market veterans say there’s work to be done before pouring a good, strong caipirinha to celebrate.
“There’s no problem with finding growth,” plastics executive Jose Ricardo Roriz said at Brasilplast 2011, held 9-13 May in São Paulo. “That’s expected to continue during the next year. The problem is competitiveness, because our cost to produce is high.”

Moving forward, an abundance of small companies will be a key issue for the Brazilian industry to face. “We have close to 12,000 processors, but 90% of them have less than 100 employees,” Roriz added. “We haven’t seen consolidation yet, and a lot of these companies need to improve their overall business.”

Roriz has a valuable vantage point as president of both Abiplast — Brazil’s main plastics trade association — and Vitopel, which ranks as one of Brazil’s largest makers of biaxially oriented PP film, with annual sales of more than $400m (€272.9m). Vitopel is based in Argentina, but operates two of its three film plants in Brazil.

Roriz’s expectation of future growth was evident by the crowds at Brasilplast, which drew roughly 65,000 attendees and more than 1,300 exhibitors. At the event, Abiplast provided updated statistics that showed the number of processors operating in Brazil shot up almost 30% in the 2005-09 period and now totals almost 11,500.

Brazilian plastics processors rang up sales of $18bn (€12.3bn) in 2010, but the market still had a $1.5bn (€1bn) trade deficit in finished plastic products. The number of employees working for Brazilian plastics processors also rocketed up almost 40% during 2005-09 and now is near 350,000.

This trend is in line with recent Brazilian economic growth that’s averaged 5-6% in recent years and is expected to clock in at 4.5% in 2011. Brazil — the world’s fifth-largest country with more than 190 million residents —– now boasts a gross domestic product of $2.1 trillion (€1.4 trillion). That number accounts for almost half of the GDP of the entire Latin American region, well ahead of Mexico at 25%.

The plastics growth trend has been boosted by growth in Brazil’s middle class, which totaled 102 million in 2010 — more than 60% larger than that group was in 2005. This growing middle class is spending more on many plastic items, including durable goods. And there’s still room for growth, as Brazil’s per-capita consumption of polyethylene, polypropylene and PVC in 2008 was less than 51 pounds — far below the US average of 167 pounds and the European average of 150 pounds.

Brazil — and Latin America in general — also is benefiting from a solid political climate, according to Rina Quijada, owner of IntelliChem, a Houston-based consulting firm with a focus on Latin America. “Most of the region is politically stable, unlike in prior years,” she said.

Resin consumption

Growth also has led to greater resin consumption. Brazilian PE demand topped 5.5 billion pounds last year, with PP demand exceeding 3.3 billion pounds and polystyrene demand coming close to 900 million pounds. PE accounted for almost 40% of the nation’s overall resin demand, with PP having a 25% share, according to Abiplast. Brazil’s total resin consumption grew more than% in 2005-10, and consumption of PE alone is expected to average almost 7% growth between 2010 and 2015.

For plastic end markets in Brazil, food led the way in 2010 at almost 26%, with construction and non-food packaging each at just under 15%. Among processing methods, extrusion generated 57% of all processing activity, with injection molding a distant second at 19%.

Geographically, Brazilian plastics processing is heavily balanced toward the southeastern portion of the country, which includes São Paulo. Some 85% of Brazil’s processors are located there. The region also accounts for 80% of the country’s resin consumption, Abiplast said.

But the Brazilian plastics sector is not without its challenges. One market watcher estimated that as many as 5,000 of the nation’s plastics processing firms — more than 40% — don’t produce high-quality end products. But since the market is still growing so quickly, it’s hard to control the flood of companies entering the market. And meaningful consolidation appears to be several years away.

“There are some good processors [in Brazil], but there’s a lot of work to do,” said Otavio Carvalho, director of the Maxiquim consulting firm in Porto Alegre. “It would be easy to increase overall production by 10%. They don’t realize how productive they could be with new machinery or even with the machinery they already have.”

Roriz agreed that productivity is an issue facing the Brazilian market. “We’re trying to increase productivity to compete with imports,” he said. “We can’t afford to lose focus.”

High resin prices also are a challenge for Brazil’s plastic processors such as Winning Pack, a 14-employee blow moulder in São Paulo. Commercial director Marco Souza cited Braskem’s domination of Brazil’s PE and PP markets as a reason Brazil has prices that are higher than those of imported resin.

In Braskem’s defense, consultant Carvalho said that the firm was content to proceed with a strong competitor in Quattor Petroquimica, but Quattor’s financial problems led it to be acquired by São Paulo-based Braskem last year. Overall, Braskem’s actions with Quattor and in consolidating the Brazilian resin market seem to be working out so far, he added.

“What Braskem has done [with Quattor] had to happen for the good of the industry,” Carvalho said. “All of the companies that went into Braskem were small and non-integrated, so that was a problem. Now they’re going to have dedicated plants for each grade.”

Winning Pack makes a variety of bottles for the chemical, agricultural and food markets. Sousa added that finding financing for growth isn’t difficult in the current Brazilian market, thanks mainly to BNDES, the country’s national development bank.

Tax crackdown

One factor that may increase Brazil’s rate of processor consolidation, according to Carvalho, is a crackdown on taxes which may cause numerous processors to lose their “informal” status. Currently, “informals” pay only 40-50% of taxes paid by fully recognized companies. Tighter enforcement is in the works, which could have a big impact, Carvalho said.

“More enforcement will take companies out as they’re required to pay taxes,” he explained. “They won’t be able to afford everything.”