Braskem prepares for expected growth in demand in Brazil

Brazilian petrochemicals firm Braskem is laying the groundwork to begin significant investments to meet expected growth in demand in Brazil, Braskem president Jose Carlos Grubisch told investors. The company is working to lower its overall debt level and extend its debt maturity profile so as to prepare for accessing more capital, through a combination of debt and equity, within the next two or three years, he said.
Braskem was created six months ago from the merger of petrochemicals assets owned by the Odebrecht and Mariani groups. According to preliminary results for year-end 2002, the company cut net debt to $ 1.77 bn at end-2002, down $ 443 mm from $ 2.22 bn end-2001, Grubisch said. The debt reduction was achieved primarily through strong cash flow in 2002, better cash flow management and savings from the synergies following the creation of Braskem, Grubisch said.

Braskem plans to sell a number of assets that are not related to its core business of thermoplastics to raise "several hundreds of millions of dollars " that would be used to pay down debts, Grubisch said. An investment bank has been hired to deal with the sales, he said, without providing specific details.
On the operating side, the expected synergies from the creation of Braskem are already having a positive effect on the balance sheet, Braskem CFO Paul Altit said. Between the creation of Braskem in August 2002 and the end of the third quarter, savings had reached 56 mm reais, and this figure rose significantly by the end of the fourth quarter, he said. The full savings from synergies of $ 330 mm will only become effective once the company completes the restructuring process, expected sometime in 2004, he added.

The company took another step along this road, announcing the tender offer for the 4.52 % of ordinary shares in Nitrocarbono that it does not already own, Grubisch said. Braskem is offering to exchange 258 of its own ordinary shares and 456 preferential shares for every lot of 1,000 Nitrocarbono shares. Once this tender is completed, Braskem will proceed with the acquisition of Nitrocarbono preferential shares, and will then proceed with delisting and absorbing the second-generation petrochemicals company.
Legal and tax details are being finalized to allow Braskem to absorb OPP Petroquimica, an asset 100 % owned by Odebrecht and added to the Braskem structure. This should be completed by the end of 1Q03, he added. Finally, Braskem is examining the method for proceeding with tenders for outstanding shares in two other assets that are already included under the Braskem umbrella -- Trikem and Polialden, Grubisch said.

Braskem bases its expectations of future market growth based on its specialty in producing three types of thermoplastics, polypropylene, polyethylene and polyvinyl chloride (PVC). Demand for these thermoplastics has grown at a compound annual rate of 7.7 % over the last 12 years, 3.7 times the average growth of the Brazilian economy over the same period, he said.
Coupled with the low consumption per capita of thermoplastics in Brazil compared to more developed parts of the world, Braskem is confident it will have to add significant new capacity over the next few years, he said, without providing any specific figures. This year, the company is investing about 300 mm reais, primarily to expand capacity and improve operating efficiencies, he said. Should market conditions deteriorate, this figure could be lowered to between 200-220 mm reais without affecting operations, he added. "These investments are primarily to increase capacity, cutting out bottlenecks with small investments that improve productivity, reduce costs and improve efficiency," he said.

This investment does not include the significant overhaul of the ethylene trains conducted through 2001 and 2002 and which should be completed by September 2003, boosting production by 100,000 tpy to 1.28 mm tpy, Grubisch said. The company will soon restart talks with Petrobras to discuss the commercial terms under which it buys naphtha from Petrobras, Grubisch said. Braskem buys around 70 % of its 4.4 mm tpy of naphtha from Petrobras under long-term contracts that specify volumes through 2007 or 2008, he said. But commercial terms are reviewed regularly, and the latest contract expires in April.
Petrobras has been flexible in recent months due to the extreme market conditions, where credit lines have all but dried up, Grubisch continued. Braskem has maintained purchases of the remaining 30 % of imported product, he said, meeting the 30-60 day payments through the use of cash flow as credit lines were stopped, Grubisch said. Those lines are starting to reopen, which means Braskem will once again be able to finance payments with credit lines of 180-360 days, he said.