Brazilian chemical industry braces for fallout from Rio Grande do Sul state floods

The impact of widespread flooding in Brazil's Rio Grande do Sul state throughout May has yet to be felt in the domestic or Latin American chemical markets, but participants are pondering the potential effects of extensive logistics slowdowns and production losses against continued uncompetitive prices and limited demand.

More than 1,400 plastic companies and recyclers are located in the state, which is a major hub for the country's chemical industry. Data from the Brazilian Association of Plastics Industry, or Abiplast, shows the plastic production affected by heavy rains accounts for 40% of Brazil's polyethylene and polypropylene production and 28% of the country's polystyrene production.

Top Brazilian resin producer Braskem shut its petrochemical plants in Triunfo, located in southern Rio Grande do Sul, in early May amid heavy flooding and declared force majeure on May 7. The company said operations were gradually restarted May 20 and should be concluded in 15 days.

The Triunfo petrochemical center holds 30% of Braskem's PE and PP production in Brazil. Total PE production at Braskem's plants corresponds to 1.225 million mt/year, including all of Brazil's green PE production, while its PP production is 740,000 mt/year, Abiplast data shows.

Additionally, PS production at Innova's 175,000 mt/year Triunfo plant was paralyzed in early May, according to a source familiar with company operations.

Prices unaffected

Prices have remained mostly unchanged despite flooding, but participants have seen delays of around 10 to 15 days in deliveries of grades produced at Triunfo, as transit routes from Rio Grande do Sul are nonexistent.

Since the floods at the beginning of May, domestic delivered Brazil prices for all PE grades assessed by Platts, part of S&P Global Commodity Insights, have remained unchanged. Participants had expected prices to fall, but due to the floods, prices for various grades of high density polyethylene and low density polyethylene were stable throughout May.

Platts assessed HDPE film delivered Brazil at Real 10,600/mt on May 22, unchanged from April 30.

Imported product prices for CFR Brazil have been mixed since the beginning of May. At first, market was still seeing prices fall, however most prices rose on May 22, including most PE and PP grade prices.

"I'm not having any supply issue which impacts on prices," a PP importer said. "I believe Braskem will be able to move their production to other places with reduced impact."

Looking forward, participants expect prices to increase in early June.

Abiplast estimates that if the situation is normalized by the end of May, sales will be impacted by Real 680 million ($133 million), with production losses of 3% for PE and PP and 2% for PS until the end of the month.

Among the several plastic converters at Rio Grande do Sul state contacted by Commodity Insights, only one company was flooded and unable to receive or send materials since May 6.

Even though some production was heard halted, converters were still unsure of the financial impacts as of May 29, and said there has been no lack of material. One company estimated immediate impacts might last for two months, with the situation to be normalized in a year.

The Union of Plastic Materials Industries in the State of Rio Grande do Sul, or Sinplast, said it is still evaluating impacts to the region. The group said it is closely following the outage at Braskem's Triunfo complex and concerns over feedstock supplies. It issued a statement "alerting the market about the need to avoid price speculation."

Awaiting impact

Traders said the market is dull as clients await to see how the issue will unfold. Participants said they do not see an immediate impact on domestic prices, but some predict there might be increases in the future. Some traders and their clients have anticipated buying material ahead of a change in prices.

"When the logistics issues are solved, producers will be able to sell their production, but some grades were already missing in the market, and as time goes by, the impact will be higher," a trader said.

Domestic distributors had bearish outlooks, while importers saw less difference in market dynamics, as import prices have remained more competitive than domestic products.

Other local and regional chemical producers said even though impacts had yet to be assessed, the market will face financial challenges throughout the year.

US, Asia oversupplying Latin America

Across the wider Latin American markets, players expected PE and PP prices will not be directly affected by Braskem's Triunfo shutdown. Before the flooding, the region was already coping with weak demand and high inventories, and Braskem material prices were uncompetitive compared to US- or Asia-origin material.

A second trader said Braskem holds approximately 10% of the Colombian market share, exporting around 1,500 mt of PP and 3,000 mt of PE, particularly oriented towards LDPE.

However, sources expected prices in June to be stable to higher due to ongoing freight increases from Asia, as well as a lack of pressure from US-based producers to offload products and rising PGP prices in the US.

Supply chains in the flooded regions have faced significant challenges. The Port of Rio Grande remains operational, but frequent disruptions occur due to high currents in the channel connecting the port to the ocean. Sources said bonded warehouses and terminals were closed as of May 29 due to elevated water levels and flood impacts. Additionally, several roads in the central to east region of the state have suffered severe damage or closures, further straining the state's supply chain, sources said.

A Uruguay-based source reported fewer offers from Brazil in the past weeks as a result, but said plenty of material was coming from overseas.

A source at Chilean polypropylene producer Petroquim said the market has not felt any major changes, as there was "plenty of cheap product available in the market."