Brazil's petrochemical industry faces prolonged downturn Moody's warns structural challenges threaten industry outlook

Moody's analysis reveals deep industry problems

moody's Credit Rating Analyst A stern warning was issued to the Brazilian petrochemical industry, predicting that the industry will experience a long-term weak performance. If the government does not act decisively, profitability will be severely affected.

Carolina Chimenti, Moody's chief analyst for Brazil's chemical sector, with special emphasis on brasco(Latin America's largest petrochemical producer) has a grim outlook. The company faces a combination of margin compression and limited free cash flow generation against a backdrop of deteriorating market conditions.

A prolonged downward cycle beyond the historical norm

"We are experiencing an exceptionally severe downward cycle that is expected to last longer than any previous cycle," Chimenti explained. "In the absence of government support and taking into account Alagoas compensation payments, profit margins will be severely compressed and positive free cash flow will not be achieved. "

alagoas state debt compensation for geological damage stemming from Brasco's salt mining in northern Alagoas. However, analysts note that even if these compensation payouts are excluded, cash flow from potential cost-cutting measures is still limited.

Structural weaknesses plague Brazil's petrochemical industry

raw material cost challenges

compared with American competitors, Brazilian petrochemical companies face fundamental structural disadvantage especially in terms of raw material costs:

• brazilian producers mainly dependent naphtha production route
• american Competitors benefit from low-cost ethane derived from shale gas
• brazil's geographical proximity to the United States is a competitive disadvantage.

Capital investment restrictions

during the industry downturn, the shift ethane cracking feedstock the production of petrochemicals requires significant capital investment. Current financial constraints prevent Brazilian companies from implementing the necessary transformation.

Blasco and Idesa's ethane cracking project in Mexico although it has been put into operation, it still faces continuous challenges. The tight financing environment makes it difficult for Brazilian petrochemical companies to obtain low-cost financial support.

Ongoing negotiations and policy development

natural Gas Supply Negotiations

brasco and Petrobras negotiations on gas supply arrangements have been going on for months and discussions are continuing.

Presiq legislation under consideration

brazil's parliament is considering measures that include tax breaks for chemical companies. Presiq legislation. If the policy is implemented, it is expected to bring Brasco 4-$0.5 billion profit growth.

Long-term strategic outlook

investment needs to enhance competitiveness

despite possible short-term policy support, Brazilian petrochemical companies still need to pursue long-term competitiveness through:

• ethane Transition Investment(e. g. expanding operations in Mexico)
• reduced dependence on government
• improve operational efficiency

industry transformation is imperative

the industry needs a fundamental restructuring to address:

• raw material cost disadvantage
• capital allocation efficiency
• competitive positioning with North American producers

market Impact and Investment Considerations

this extended downward cycle poses significant challenges for the following groups:

• brazilian Petrochemical Stocks equity investor
• valuation of industry debt instruments credit market
• trade-off of intervention strategies policy makers

the structural challenges of the industry show that recovery will require both government support and significant private sector investment in modernization.