Brazilian chemical industry outlook

Brazilian chemical industry outlook

9:38 AM, 18th April 2017
Brazilian chemical industry outlook
Industrial Chemicals, is the largest contributing segment which has been a stable contributor to the overall industry. (File Photo)

State of the industry:

Growth in the Brazilian Chemical sector, which has been strong in the last decade has been impacted by the slowdown in the economy, political challenges. There has been a consistent decline in the growth of the chemical sector which was once anticipated to grow close to double digits. Irrespective of this, the industry size is still large enough, with a strong outlook in the long term (10 years horizon). This sector today accounts for around 2.5 percent of the GDP, the fourth largest contributor of the industrial economy, is an important part of the overall Brazilian future growth story.

We estimate the current market size (2016) to be valued at $122.5 billion, which is a decline of 2 percent as compared to the previous year. What this also means is in the global market ranking, Brazil drops to rank 8, just below India. 

The chemical industry contributors:

Industrial Chemicals, is the largest contributing segment which has been a stable contributor to the overall industry. This includes petrochemicals, resins, fertilisers, chlor alkali, elastomers, intermediaries etc.

Future outlook & opportunity:

1. Growing demand in the long term

Based on Feedback Consulting’s growth model and the long-term outlook for the Brazilian economy, the market size is estimated to reach $250 to 260 billion by 2025. 

The long-term growth is likely to be driven by 3 segments -  Pharmaceuticals, Agro Chemicals & Fertilizers, which are anticipated to grow at twice the rate of the normal industry growth. Industrial Chemicals is anticipated to growth at around the overall industry average.

This is reinstated by the fact that there was an estimated FDI inflow of about $2.5 billion (2016) in the chemicals accounting for about 4 percent of the overall FDI inflow ($50 billion). 

In the near term, Brazil’s industry is anticipated to bounce back by 2018, in line with the GDP growth projections (as per Brazil’s Central Bank data).

2. Import substitution with local manufacturing          

Today, 30 percent of the market is addressed by imports, with a trade deficit of $26.4 billion in 2015. In the last 5 years, we have seen this to be the highest in 2014 at $31.7 billion. This throws up an important case to really dive deep in to analyse and spot specific investment opportunities in the Brazilian Market.

90 percent of the imports in 2015, falling into 5 key industry sub-segments (in the descending order of value contribution):

  • Pharmaceuticals
  • Inorganics
  • Organics
  • Resins and Elastomers
  • Pesticides

It can be a good opportunity for Indian and Global Chemical Companies to start with leveraging the imports opportunity and subsequently consider direct entry either through local manufacturing (green field) or through acquisitions.  In all, we see an investment potential of approx. $30 to 40 billion in the next 10 years to meet the sector growth projections, exports opportunity & imports substitution (to maintain imports at 20 percent of the total market by 2025).

The challenges

Like any other growth market, Brazil’s chemical sector comes with its own set of challenges. We see the following as the major ones:

A. Short Term uncertainty in the economic outlook, current political scenario

B. Underdeveloped infrastructure, high energy prices, shortages of raw materials at competitive prices, taxes, interest rates, and exchange rates fluctuations

C. Product Registration across multiple stakeholders at a municipal, state and federal level depending on the product category

D. Mercosur Agreement: Competition from member countries like Argentina, Paraguay and Uruguay who have a free trade or low tax agreement.

Authors: Deepak H, Head, Emerging Sectors & Off the Shelf (OTS) and Rupesh G, Senior Consultant, OTS from Feedback Consulting.

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