Another future for the chemical industry
After a period of stagnation caused by several factors, the chemical sector – whose nature converges with a multiplicity of industries – reassesses its perspectives by launching, with Deloitte, a study that presents the diagnosis of the situation and a list of proposals for the resumption.December 2018 | February 2019
The chemical sector is one of the most important – and most discrete – sectors of the industry. It is important because it is a link between productive chains from segments such as agriculture, automotive, health and electronics – and it accounts for 10% of the country’s industrial GDP. Discrete because few realize the almost omnipresence of chemical inputs in so many markets. Despite its relevance, the sector is currently experiencing one of the biggest crises in recent decades, culminating in plant closures, investment cuts and job cuts. In order to change this scenario, Deloitte, in partnership with the Brazilian Chemical Industry Association (Abiquim), prepared the report “Another future is possible” , with a diagnosis of the current scenario and the listing of 73 proposals for the resumption of investments and growth.
The decline in expansion of the chemical industry was rapid and occurred after a development spurt. From 2009 to 2011, revenues grew almost 50%, going from US$ 102 billion to US$ 150 billion. The high growth caused optimism in the sector and investments reached US$ 4.8 billion in 2012 – a jump of 85% compared to the previous year. Production, however, did not respond and became stagnant. Result: a decrease in revenue. After a peak of US$ 150 billion in 2011, revenues stabilized until 2014, and declined in 2015 and 2016, closing 2017 at US$ 120 billion. This decline was a result of a combination of factors that undermined the competitiveness of the Brazilian chemical industry. There are five main bottlenecks: a business environment of low competitiveness, high cost of raw materials, high energy prices, inefficient logistics and excessive bureaucracy. Some of these issues are common to other sectors of the Brazilian productive activity.
“Of the issues, the ones that most affect the sector are the purchase of raw materials and energy” says Fernando Figueiredo, president of Abiquim. In both cases, the major obstacle is the difference in price paid by local producers in comparison with their external competitors – historically higher here.
In the case of electricity, for example, the cost was six times higher than in Argentina, according to a recent study by the Federation of Industries of the State of Rio de Janeiro (Firjan) – Brazil appears with the sixth most expensive energy in a ranking with 28 countries. Regarding raw materials, which can represent 80% of the costs of a petrochemical plant, one of the challenges is the lack of long-term contracts for the supply of petrochemical naphtha, a basic input for the industries of the sector – besides the price. “Energy and raw materials are two crucial elements for the sector’s competitiveness” says Fernando Musa, president of Braskem.
“In recent years, we have seen the chemical industry hampered by the lack of logistics infrastructure, high raw material costs, bureaucratization in imports and exports, that is, a very difficult operation in Brazil” says Wellington Bonifácio, Advanced Materials’ director for South America at Huntsman. Reinaldo Kröger, CEO of the Unigel Group, gives a practical example: “About 7% of the revenues of a Brazilian chemical industry goes to freight. Europe spends only 3.5% on this item.” Lucas Freire, president of Elkem, agrees: “It is more expensive to transport a product from the port to our plant in Joinville (SC) than to bring it from China.”
These problems undermined the sector’s competitiveness. Result: the closure of local production lines. Between 1990 and 2011, 289 companies have closed doors or changed their line of business. Without them, 1,710 product lines were discontinued – an average of 78 per year.
The industries that continued operating cut their production. The use of installed capacity has fallen by 14 percentage points in the last ten years – from 87% to 73% since 2007. “The industry needs to expand production and use the current installed capacity” says Marcos De Marchi, chairman of Abiquim’s Board of Directors.
With local production declining, inputs from other countries have increased. Imports have increased and, with that, the sector’s balance of payments deficit has more than doubled, from US$ 15.7 billion in 2009 to US$ 32 billion in 2013.
“It’s getting harder and harder to stay competitive” says Fabian Gil, president of Dow for Latin America. “This is because we have high energy costs and our logistics, besides expensive, is inefficient” he says. “And the business environment makes the cost of operation very high.”
According to Gil, the difference between the cost of energy in Dow’s plants in Brazil and that of other Latin American countries can reach up to 30%. Another source of unnecessary expenditure is the complexity of tax rules. In order not to fail with the tax authorities, Dow maintains a specialized team in Brazil larger than in other units of the region. “The difference is 3 to 1” says Gil. The effect of all these problems is the loss of investments. “Many projects end up going to Europe.”
A new agenda
To change this scenario, a broad reform agenda will need to be pursued across sectors. “The removal of fiscal and logistic barriers, besides the capture of benefits from Chemistry 4.0 and lower prices for both raw materials and energy will give competitiveness to the Brazilian chemical industry” says Ronaldo Fragoso, Deloitte’s partner in the Risk Advisory area, who took part in discussions for the project carried out for Abiquim. “And this will reflect throughout the Brazilian economy” he adds.
According to Deloitte’s projections, which were conducted by economist Giovanni Cordeiro and reproduced in the study for Abiquim, the implementation of the 73 proposals for 2019 could increase the sector’s GDP by US$ 231.2 billion by 2030. Companies’ profits can increase by up to four times. “It is important to highlight that wealth will be distributed among companies, workers and governments” says Giovanni, who points out the prospect of creating 225,000 jobs (see reflections in other areas in the table below). “If nothing is done, we will not attract investments and production will remain stagnant” says De Marchi, from Abiquim. Amid the fiscal crisis experienced by the country, it is necessary to adopt initiatives that do not increase public spending.
The path of recovery
Get to know the six dimensions of the proposals made by Abiquim and included in the study jointly prepared by Deloitte to make the resumption of growth possible for the chemical industry:
Raw materials: to make the sector competitive, achieving similar costs to the global average, reducing costs and increasing the availability of raw materials essential for production;
Logistics: increase efficiency in the transport of inputs, generating higher productivity;
Energy: reduce the cost of energy paid by the industry, which today is higher than the one paid by external competitors;
Innovation and Chemistry 4.0: create favorable conditions for investments and the use of new digital technologies such as the Internet of Things (IoT), advanced robotics and artificial intelligence – so the industry will incorporate better processes and be more prepared for global competition;
Foreign trade: stimulate the competitive insertion of the Brazilian chemical industry into global trade, curbing unfair trade practices;
Regulation: improve the regulatory environment, considering the diversity and complexity of the sector, as well as promoting production efficiency and greater safety for consumers, the environment and companies.
The gains for the Country
Opportunities in the world of Industry 4.0
Despite the challenges, Brazil offers opportunities for the development of the chemical industry. Starting with the size of the economy – the world’s eighth – and the diversification of production. The country has industries from several sectors, not to mention the strength of agribusiness and services – all consumers of chemical inputs.
The pressure of society for environmentally sustainable products opens space for the chemical industry to offer new products. There are multiple opportunities. Chemical products and inputs can be used to reduce food waste and increase productivity in the field by optimizing the use of resources such as land and water. In the automotive industry, the trend toward fuel efficiency requires lighter cars. “The chemical industry today is part of the solution to current and future global challenges” says Manfredo Rübens, President of BASF for South America.
There are even opportunities in the two major bottlenecks affecting the industry, costs of energy and raw materials. Brazil has one of the world’s largest potential sources of renewable energy, such as sugarcane, wind and solar. With investment in technology in these areas, costs may drop – benefiting the entire national productive sector. And the large reserves of oil and gas, especially the pre-salt, can also result in lower costs for inputs, such as petrochemical naphtha. “We have the opportunity to have clean energy and with competitive cost, and the pre-salt that will give access to the petrochemical raw material” says Daniela Manique, president of Solvay for Latin America.
Improving the business environment for the chemical industry is critical if the industry is to capture the global investments generated by the adoption of Industry 4.0, based on new digital technologies such as advanced robotics, nanotechnology, Internet of Things (IoT) and artificial intelligence. Developed and developing countries are creating the conditions for their industries to seize this opportunity for growth. An example of this movement is France, where the share of industry in GDP fell from 16% to 10% in the last 20 years. To reverse this decline, the government has launched the “New Industrial France” program, focusing on the granting of exceptional tax benefits for the development and diffusion of new technologies. Another French program is the “Industry of the Future”, focused on the implementation of digital technologies.
“The chemical industry in the world is already investing in digitization and in Industry 4.0” says Daniela, from Solvay. “We need a reliable and fertile environment so that we can make these investments” says Bonifacio, from Huntsman. Brazil needs to keep up this pace to ensure a return to competitiveness and investments.