Despite a rebound agrichemicals remains susceptible to sudden changes of exogenous factors like climate, market prices and exchange rate fluctuations.
- A modest rebound after severe deterioration
- Many businesses remain highly leveraged
- Payments take up to120 days
In line with the recovery of the Brazilian economy, (GDP is expected to grow 0.5% in 2017 and 2.0% in 2018 after contracting 3.6% in 2016) the chemicals sector is forecast to grow by about 1.5% in 2017 and 2018. After a severe slump, the Brazilian agrichemicals segment currently benefits from a rebound in commodity prices and a good harvest. Both chemicals and pharmaceuticals businesses are able to improve their results and margins again, as interest rates started to decrease again since the end of 2016.
The level of competition in both chemicals and pharmaceuticals sectors is high and a concentration process is ongoing - in particular among medium-sized and large players. In the agrichemicals segment vertical integration processes are underway, with international raw material producers entering the market by buying fertilizer blenders in order to secure their distribution channels.
Apart from a few large players, most Brazilian chemicals and pharmaceuticals businesses are highly leveraged, which is also the result of previous expansion activities before the recession started in late 2014. Banks have been selectively supportive to the sector, helping in particular to stabilise those players that, while showing a fragile financial structure, still have cash flow capabilities.
Payments take up to 120 days in the chemicals sector and average 90 days in the pharmaceuticals sector. Payment behaviour in the agrichemical segment depends heavily on the position of a company within the value chain and external factors, such as the harvest cycle, commodity price development and exchange rate volatility. In the pharmaceuticals sector payment behaviour is influenced by consumer spending capacity and public sector spending behaviour.
Over the past two years payment experience has been rather bad and insolvencies increased in the agrichemicals sector, as this segment suffered from the sharp commodity price decrease since 2014 and a severe drought in 2015-2016, coupled with strong exchange rate fluctuations that increased raw materials costs.
However, the situation has improved since the beginning of 2017 with a decrease in non-payment notifications and insolvencies as agrichemicals benefits from the on-going economic rebound, coupled with a stronger currency and recovered commodity prices.
In the pharmaceuticals segment, businesses that are serving the public sector and retailers have been suffering payment delays in 2016. The current economic rebound, together with a gradual reduction of unemployment should help to avoid further insolvency increases, especially in the pharmaceuticals retail subsector.
Despite the on-going rebound in the chemicals and pharmaceuticals sectors, our underwriting stance remains neutral or even restrictive for the time being. The pharmaceuticals sector remains affected by the high unemployment rate and cuts in public health funding, both at federal and local state level. The agrichemicals sector remains susceptible to sudden changes of important exogenous factors like climate, market prices and exchange rate fluctuations. Despite the on-going deleveraging process, many businesses still face high debt levels, while interests rates remain high at double-digit rates, despite recent decreases. The level of bank support for single businesses is one of the main criteria in our underwriting assessment.
For the Brazilian petrochemicals subsector our underwriting stance is restrictive, as the current oil price level is still far below break-even for pre-salt oil extraction, which is only profitable at an oil price above USD 70 per barrel.