Brazil's chemical industry awaits import tax decision, competes with cheap imports

Domestic PVC prices in Brazil have been rising in July and August, while import prices have been falling, as the local market awaits the government's decision in September on a possible increase in the import tax on chemical products requested by the association representing the sector, Abiquim.

This price scenario has intensified in recent months. From July 1 to Aug. 21, PVC CFR Brazil prices, as assessed by Platts, part of S&P Global Commodity Insights, have dropped $90 from $940 per metric ton to $850/t. Meanwhile, domestic Brazilian prices have increased from Real 8,000/t to Real 8,300/t (from $1,400 to $1,524/t, including exchange variation) in the same period, according to sources.

Prices in India, one of the largest global buyers of PVC, decreased $170 from $980/t on July 1 to $810 on Aug. 21. In the US, prices fell from $825/t to $710/t, down $115. In China, prices decreased $55/t in the same period from $795/t to $740/t.

Amid this competition, Brazil's domestic sales of chemical products for industrial use fell 1.83% in the 12 months ended in June 2024, while imports rose 9.5% in the same period, according to Abiquim.

The market expects domestic chemicals prices to rise if the import taxes do rise in September, traders said. However, Abiquim says that the main objective is to improve production.

"It is something that we have heard from producers: improve the price a little and recover the market share that was lost," Abiquim president, André Passos Cordeiro, said in an interview with S&P Global Commodity Insights on Aug. 12. "They are much more concerned with volume."

However, regarding the possible price increases if the tax increase is approved, Cordeiro said "it is clear that [producers] cannot guarantee it ... This is a business and individual decision."

Installed chemical capacity, production fall in H1

Installed capacity for chemicals in Brazil fell to 63% in the first half of 2024 from 64% in the first half of 2023, according to Abiquim data released on Aug. 20. Comparatively, the indicator was 72% in 2022.

The report showed the sector's production fell 1.14% in the first half of 2024 from the same period of 2023 and fell 5.89% in 12 months ended in June 2024.

The association said the decrease in installed capacity and production was due to the domestic market becoming less competitive than the import market, as prices outside Brazil have been falling.

Looking at specific local producers, Braskem announced Aug. 8 that its utilization rate fell to 72% in the first half of 2024 from 75% in the first half of 2023, with a 1% drop in resin sales in Brazil.

"In this scenario, it is important to reinforce the need for a broader industrial policy that seeks to strengthen the chemical, petrochemical and plastics chains in Brazil," Braskem CEO, Roberto Bischoff, said in the company's Aug. 8 earnings call.

Bischoff said it is necessary to "mitigate the effects of greater competitiveness from producers in other countries, especially in this scenario and at this time of significant overcapacity."

Another producer, Unipar, also pointed to the impacts of external competition in its second-quarter 2024 earnings call on Aug. 9. Unipar's margins were 13% in the first half of 2024, down from 30% in the first half of 2023, according to the company's financial report for the first half of the year.

Market awaits decision on tax increase request

In March, Abiquim requested the government increase the import tax on chemical products. The list was revised and the proposal under discussion includes 63 products. A decision is expected to be made in September.

Market participants said this has affected prices in recent months, with buyers postponing imports while waiting for a decision. Sources also expect domestic prices to increase after the decision.

"Everyone is waiting to know what will happen in September," a PVC, propylene and polyethylene trader said on Aug. 22.

However, not all market sources agreed with that sentiment.

"This issue has been under discussion for so long, I think it is more than priced in, let's put it that way," a distributor said.