Potential of Brazilian plastic industry for investment

Assignment 02 ECON 5100

Kamran I Syed- 211279403

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Report Objective
The main objective of the report is to assuage the potential for investment in the plastics industry in Brazil by GE. To get a better understanding, the report has been broken down into four parts 1. Evaluation of the Brazilian plastic industry, market structure and demand 2. GE and Brazil 3. The current health of the Brazilian economy measured by the major macro economic factors 4. Strengths and Weaknesses

Brazilian plastic industry

The Brazilian plastics industry comprises resin manufacturers, machine manufacturers, additives suppliers, tool makers and more than 11,000 converters and plastics recyclers. The major Brazilian resin manufacturers supply a wide profile of grades of plastics resins, such as Polyethylene (LLDPE and HDPE), EVA, Polypropylene, PP compounds, PVC (flexible, rigid and compounds), Polystyrene, PET, SAN, ABS, Polycarbonate and others. Additives, master batches and other basic chemicals are also provided by a number of other raw material suppliers. The industry offers a broad range of products for the automotive, electrical, electronics, IT, packaging, medical, household appliances, agricultural and construction industries. Having a strong manufacturing base with more than 11,000 companies, the Brazilian conversion industry operates with a variety of production processes, such as injection moulding, extrusion, blow moulding, thermoforming and others. The plastics recycling industry has also become relevant in the last decades. Market Structure - Brazil has 3 large petrochemical complexes, as well as one gas-chemical complex. Most of Brazils resin industry has been consolidated into 1 large national group: Braskem. Other Brazilian resin manufacturers are Unigel and Innova (Petrobras). Dow, SABIC, Basf, Solvay, Rhodia and other multinational resin producers also have a presence in the market. Brazilian Plastics Conversion Industry comprises approximately 11.000 converters. Demand - According to most analysis, Brazil's plastics industry is growing by leaps and bounds. Boosted by a growing middle class, which totalled 102 million in 2010, up by a whopping 60% since 2005, this group is spending more on consumer plastics items than ever before. This increase in sales including durable goods such as kitchen appliances and automobiles catapulted Brazil to become the seventh largest plastics consumer in the world. The country continues to experience a growth in demand for plastic products which stems from several sectors of the economy. Just after the food industry, the building sector stands out as the largest plastic consuming segment in Brazil. Foodstuffs and home maintenance products are the top expenses of lower income classes which are benefiting from the government-funded income transfer program. Jos Ricardo Roriz Coelho, President of Abiplast, believes the country will run a plastics deficit for at least another five years. To continue growth, Mr Coelho noted that the industry will have to undergo major changes, such as investing much more in innovation where companies like GE can play a major role with their long history in innovation. Currently, Brazil is importing higher-cost goods while exporting low-cost products.

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GE and Brazil
Brazil and GE are far from strangers: the company opened its first Brazil plant around 90 years ago. Since then, GE has focused on growing its business and its expansion will culminate in a new Global Research Center, set to open in 2013 in Rio De Janeiro. GE in Brazil has partnered with key customers including Petrobras, Vale, MRS Logstica, Federal University in Rio, and local governments to research and develop products and solutions that will fill specific bottlenecks in Brazils infrastructure, enabling the country to sustain its prosperous economy by attending its infrastructure needs. Brazil is in a unique position for GE for several reasons: 1) the stability of its economy; 2) the maturity of GEs operations there currently the most important in revenues among all other operations in Latin America; and 3) Brazils position on the world stage. Brazil will host the 2014 FIFA World Cup and the 2016 Olympic Games worldwide events that create many infrastructure opportunities, which will allow GE to invest more in local R&D.

Major Macro Economic Factors

Inflation Rate - The inflation rate in Brazil was last reported at 6.97 percent in October of 2011. From 1980 until 2010, the average inflation rate in Brazil was 445.98 percent reaching an historical high of 6821.31 percent in April of 1990 and a record low of 1.65 percent in December of 1998. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. Consumer price index (2005 = 100) - The Consumer price index (2005 = 100) in Brazil was reported at 114.09 in 2008, according to the World Bank. Consumer price index reflects changes in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. Unemployment Rate - The unemployment rate in Brazil was last reported at 5.8 percent in October of 2011. From 2001 until 2010, Brazil's Unemployment Rate averaged 9.95 percent reaching an historical high of 13.10 percent in August of 2003 and a record low of 6.80 percent in December of 2008. The labour force is defined as the number of people employed plus the number unemployed but seeking work. The no labour force includes those who are not looking for work, those who are institutionalised and those serving in the military. Interest Rate - The benchmark interest rate in Brazil was last reported at 11.5 percent. In Brazil, interest rate decisions are taken by The Central Bank of Brazil's Monetary Policy Committee (COPOM). The official interest rate is the Special System of Clearance and Custody rate (SELIC) which is the overnight lending rate. From 1999 until 2010, Brazil's average interest rate was 17.22 percent reaching an historical high of 45.00 percent in March of 1999 and a record low of 8.75 percent in July of 2009. Real Interest Rate - The Real interest rate (%) in Brazil was reported at 39.08 in 2008, according to the World Bank. Real interest rate is the lending interest rate adjusted for inflation as measured by the GDP deflator. USDBRL - Brazilian Real Exchange rate - The Brazilian Real exchange rate depreciated 2.80 percent against the US Dollar during the last 12 months. Historically, from 1992 until 2011 the USDBRL exchange averaged 1.78 reaching an Kamran I Syed- 211279403 Page 3

historical high of 3.95 in October of 2002 and a record low of 0.00 in January of 1992. The Brazilian Real spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the BRL. While the Brazilian Real spot exchange rate is quoted and exchanged in the same day, the Brazilian Real forward rate is quoted today but for delivery and payment on a specific future date. Balance of Trade- Brazil reported a trade surplus equivalent to 2355 Million USD in October of 2011. Brazil has an export-oriented economy. The main exports are transport equipment, iron ore, industrial raw materials, soybeans, footwear, coffee, autos, automotive parts, machinery. Brazil imports machinery, electrical and transport equipment, chemical products, automotive part and electronics. The primary trading partners of Brazil are The United States, European Union and Argentina. Government Budget - Brazil reported a government budget surplus equivalent to 2.20 percent of the Gross Domestic Product (GDP) in 2010. Government Budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). A budget deficit occurs when a government spends more money than it takes in. GDP Annual Growth Rate - The Gross Domestic Product (GDP) in Brazil expanded 3.1 percent in the second quarter of 2011 over the same quarter, previous year. Unlike the commonly used quarterly GDP growth rate the annual GDP growth rate takes into account a full year of economic activity, thus avoiding the need to make any type of seasonal adjustment. Historically, from 1991 until 2011, Brazil's average annual GDP Growth was 3.26 percent reaching an historical high of 10.10 percent in March of 1995 and a record low of -3.15 percent in March of 1992. Population - The total population in Brazil was last reported at 190.7 million people in 2010 from 72.7 million in 1960, changing 162 percent during the last 50 years. Brazil has 2.76 percent of the worlds total population which means that one person in every 36 people on the planet is a resident of Brazil. GDP per capita; PPP (US dollar) -The GDP per capita; PPP (US dollar) in Brazil was last reported at 11127.06 in 2010, according to a World Bank report released in 2011, which was around 3500 at the beginning of the 80s The GDP per capita; PPP (US dollar) in Brazil was reported at 10304.34 in 2008, according to the World Bank. GDP per capita based on purchasing power parity (PPP). PPP GDP is gross domestic product converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GDP as the U.S. dollar has in the United States. Money and quasi money (M2) as % of GDP - The Money and quasi money (M2) as % of GDP in Brazil was reported at 61.48 in 2008, according to the World Bank. Money and quasi money comprise the sum of currency outside banks, demand deposits other than those of the central government, and the time, savings, and foreign currency deposits of resident sectors other than the central government. This definition of money supply is frequently called M2; it corresponds to lines 34 and 35 in the International Monetary Fund's (IMF) International Financial Statistics (IFS). Total Reserves(% of total external debt) - The Total reserves (% of total external debt) in Brazil was reported at 75.81 in 2008, according to the World Bank which was at 20% in 1976. International reserves to total external debt stocks. Kamran I Syed- 211279403 Page 4

Foreign direct investment; net inflows in reporting economy (DRS; US dollar) - The Foreign direct investment; net inflows in reporting economy (DRS; US dollar) in Brazil was reported at 45058156303.77 in 2008, according to the World Bank. Foreign direct investment (net) shows the net change in foreign investment in the reporting country. Foreign direct investment is defined as investment that is made to acquire a lasting management interest (usually of 10 percent of voting stock) in an enterprise operating in a country other than that of the investor (defined according to residency). It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. Stock Market- Brazils main stock market index, the BOVESPA, rallied 14167 points or 19.98 percent during the last 12 months. Current Account- Brazil reported a current account deficit equivalent to 6800 Million USD in November of 2011. Brazil has an export-oriented economy. The main exports are transport equipment, iron ore, industrial raw materials, soybeans, footwear, coffee, autos, automotive parts, machinery. Brazil imports machinery, electrical and transport equipment, chemical products, automotive part and electronics. Imports- Brazil imports were worth 21.2 Billion USD in November of 2011 which were 11.5 billion USD in April 2011. Brazil imports machinery, electrical and transport equipment, chemical products, automotive part and electronics. Brazils main import partners are European Union, United States, China and Argentina Government Debt to GDP - The Government Debt in Brazil was last reported at 72.3 percent of the countrys GDP. From 2000 until 2010, Brazil's average Government Debt to GDP was 65.94 percent reaching an historical high of 72.30 percent in December of 2010 and a record low of 60.70 percent in December of 2007. Generally, Government debt as a percent of GDP is used by investors to measure a countrys ability to make future payments on its debt, thus affecting the countrys borrowing costs and government bond yields.

Strengths
One of the major discussions in the economic debates is the relationship between the GDP growth rate and unemployment. Brazils GDP growth has been phenomenal, especially in the last decade and to add to this growth, unemployment has also fallen. This proves that growth rate has lead to an increase in the employment opportunities. On the other hand, the increase in the supply of money has not lead into inflation growth. People have more money to spend and the banks have more money to lend, which is good for any business. Also, there doesnt seem to be a trade off between economic growth and inflation. Inflation has actually come down from the highs of 1990 to a relatively low level with the rise in the growth. Although CPI has gone up since 2005, but only marginally. Brazils benchmark interest rate is now 11.5, instead of the average 17.5 that it experienced during most of the 90s, which leads to banks keeping less in reserves and lending out more. Brazils government also has a positive budget surplus and a surplus trade of balance. This will allow the government to spend on projects ( social, infrastructure etc) and not increase taxes as they are collecting enough money. The exchange rate against the US dollar has remained relatively stable since 1992 when the rate was 0.0 against the dollar. It should not be out of place to mention that the foreign direct Kamran I Syed- 211279403 Page 5

investments have gone up considerably, and the stock market has risen by almost 20% in the last 12 months, which are a sign of the confidence, investors have in Brazils economy. Some of the other strengths that surely deserve a mention are increasing consumer and business confidence and decreasing costs of business start up procedures. Further, MERCOSUR a common market pact between five countries (Brazil, Argentina, Paraguay, Uruguay and Venezuela) in South America provides access to the markets of other countries for the Brazilian companies. Taking into account, that the other countries do not have a vibrant plastic manufacturing base, opens up the opportunities for exports for the Brazilian companies.

Weaknesses
Brazil has a large and widening current account deficit which is generally accompanied by an inflow of foreign capital, largely procured through the financial system. Thus a close relationship exists between a current account deficit and credit growth. An excessive deficit may also be an indicator of a currency crisis which can harm the liquidity of financial institutions, especially when funded to a large extent with short-term credit. Also, Brazils government debt as a percent of GDP is also rising which could be a problem as its used by investors to measure a countrys ability to make future payments on its debt, thus affecting the countrys borrowing costs and government bond yields. Further Brazils imports have also risen dramatically in the past years, leading fears of a widening balance of trade. All these factors are important but all of these can be related to the current growth pattern of the Brazilian economy.

Conclusion
To conclude, the important steps taken by the Brazilian government since the 1990s toward fiscal sustainability, as well as measures taken to liberalize and open the economy, have significantly boosted the countrys competitiveness fundamentals, providing a better environment for private-sector development. With increased economic stability provided by the Plano Real, Brazilian and multinational businesses have invested heavily in new equipment and technology, a large proportion of which has been purchased from U.S. firms. Brazil is one of the fastest-growing major economies in the world with an average annual GDP growth rate of over 5 percent. The potential for further growth and the stability of the government and the economy, coupled with the demand for plastics has led me to conclude that GE should invest in Brazil in the plastics industry. It should also invest in R&D for bio plastics, given the huge natural resources in Brazil and its future potential. This ties in very well with GEs current strategy, since they plan to open a global research centre in Rio De Janeiro in 2013.

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