Brazilian group sees 2021 windfall from U.S. plastic resin sales

Braskem, which had 64% of the Brazilian petrochemical market in the third quarter 2021, an ethylene/polyethylene plant in Mexico and assets acquired over the last decade that make it North America’s biggest polypropylene producer, saw in July-Sept. 2021 its biggest windfall from U.S. plastic resin spreads.

Braskem's PP plant in Texas. Image courtesy of Braskem

Latin America’s biggest petrochemical company said that for its U.S. and Europe segment, recurring operating result was of $519 million (R$2,714 million), 5% higher than second quarter 2021, mainly due to the increase of PP (polypropylene) spreads in U.S., representing 34% of the company’s consolidated recurring operating result, Braskem said on Nov. 9 in a third quarter earnings release.  

The on-year increase in the region’s recurrent operating result was nearly fourfold also largely due to the North American polypropylene spreads, it added.

Braskem owns in total 40 industrial units, 29 of those in Brazil. In the U.S. it owns five plants all for polypropylene, the most common plastic found in automotive, also in multiple items as diverse as medical masks, carpets, and fruit/vegetable mesh bags..

Braskem bought in 2010 Sunoco’s polypropylene business for $350 million. At the time, it had 950,000 tons/year capacity in three plants (Texas, Pennsylvania and West Virginia) that then accounted for 13% of total U.S. polypropylene capacity.

Braskem paid Dow Chemical $323 million in 2011 for two plants in Texas. That raised Braskem’s PP capacity in the region by 50%. Then in September 2020 the company started a 450,000 tonnes/year polypropylene plant in Texas after investing $750 million in the construction.

Braskem bought in 2011 from Dow two plants in Germany, along with the U.S. acquisition, the company reported in Sept. 2011. It has in Europe total 550,000 tonnes/year of polypropylene capacity, according to information from ChemCologne.

Healthy demand, limited supply

“US PP spread increased compared to 2Q21 (+9%). The PP price in the U.S. increased, mainly due to: the continued healthy demand, reflecting the continuous expansion in the country's manufacturing sector; and the limited supply due to several unscheduled shutdowns,” it said.

The price of propylene, the monomer polymerized into PP, increased “mainly due to the unscheduled maintenance shutdowns” of some PDHs (propane dehydrogenators) and impacts on output caused by hurricanes Ida and Nicholas in September, it added.

The U.S. polypropylene to propylene spread increased by 121% in the third quarter from a year earlier due to high demand and amid global supply and shipping constraints, Braskem said.

U.S. PP demand rose 2% in the third quarter from April-June “reflecting higher demand from the rigid packaging and film segments,” Braskem said. The 12% on-year increase also reflects post-Covid recovery in industrial activity, it added.

The average U.S. PP plants utilization rate fell four percentage points from the previous quarter, and five percentage points from the third quarter of 2020, “due to small unscheduled shutdowns at PP plants in the period but it remained above the industry average,” Braskem said.

The U.S. PP sales volume fell from April-June by 2% due to decreased product availability. Volumes increased 9% compared with the third quarter of last year because of the ramping up of the new Texas polypropylene plant that started operations in September 2020.

U.S. PP prices and spreads

U.S. polypropylene prices averaged $3,226/tonne in the third quarter and compared with $2,770/tonne in April-June and with $1,407/tonne in July-September of last year.

The U.S. polypropylene spread in the third quarter of 2021 was $1,411/tonne and compared with $1,293/tonne in April-June and with just $639/tonne in the third quarter of last year.   

The petrochemical plants in Brazil operated at a capacity utilization rate of 79%, an increase from the second quarter, mainly due to completion of maintenance shutdown at the ABC complex in Sao Paulo.

U.S. PP plants operated at  94%, “down from the previous quarter, due to various small interruptions caused by reliability issues at the PP plants in the period,” Braskem said in page 16 of the release.

U.S. performance to remain strong

Rosana Avolio, Braskem’s investor relations director, said during the company’s third quarter earnings discussion that Braskem’s U.S. sales performance was “442,000 tons, represents a drop of only 2% as compared to the previous quarter.”

She expected a continued strong performance of its U.S. polypropylene business, she said, according to a transcript of the Nov. 12 third quarter earnings discussion call by Motley Fool.

“As for polypropylene spreads, according to external consultants, the U.S. should remain the most profitable region, which spreads remaining above the recent historical average,” she said.

Profitability metrics above U.S. peers

“Brakem is a global company with characteristics, which are similar to those of its peers in the U.S., such as well diversified feedstock profile, leadership position in the markets where it operates, among others,” Avolio said.

“In 2021, Braskem delivered profitability and credit metrics above those posted by their average peers in the U.S.,” she said.

“In the year-to-date up to September Braskem recurring operating margin and the net margin of the company were both higher than the average of its U.S. peers,” Avolio said.

U.S. PP margin projections

In the U.S., “the expectation is for PP sales volume to remain in line, despite lower production in the period, given the scheduled maintenance shutdown at one of the country's plants,” Braskem said in the earnings release.

“Based on forecasts by international external consultants, PP-Propylene spreads in the U.S. should remain above the recent historical average (2016-20), but at levels below those of the third quarter, mainly due to the expectation of an increase in PP supply due to the restarting of operations at producers after natural events,” the release added.

The increase in margins for plastic resins in the year ended September 2021, largely attributed to supply chain disruptions caused by reasons including weather events, has resulted in record earnings for producers. There has been a call for more transparency in plastics pricing for 2020-2021.

Braskem's biggest owners are Novonor, formerly Odebrecht, and the Brazilian state-owned oil company Petrobras. Both had apparently expressed at some point around 2020 plans to sell part or all of their equity in Braskem.

Brazil will hold presidential elections on Oct. 2022. In early polls Luiz Inacio Lula da Silva (Brazil president during 2003-2010), a former union leader, is ahead of current Brazilian President Jair Bolsonaro (since Jan 1. 2019), a former army captain and often described by media as conservative. 

A market source had described in an early October interview the PP U.S. market as unpredictable following an unprecedented surge in polypropylene prices, and margins, during the year ended in Sept. 2021.

By Renzo Pipoli