UPDATE 1-Shale boom in U.S. weighs on Brazil petrochemical firms -Odebrecht

Mon Feb 3, 2014 1:21pm EST

(Rewrites with Odebrecht's comments on U.S. shale gas boom impact on Brazil's petrochemical sector)

By Silvio Cascione

SAO PAULO Feb 3 (Reuters) - A drop in natural gas prices caused by a shale gas boom in the United States is hurting Brazilian petrochemical company profits by reducing pricing power and making them less competitive, the head of the construction and industrial conglomerate Grupo Odebrecht SA said on Monday.

Braskem SA - in which Odebrecht has a majority stake - and its partner, Brazil's state-controlled oil producer Petróleo Brasileiro SA are discussing a cut in the domestic natural gas price to bring Braskem's costs more in line with those in the United States, Odebrecht Chief Executive Officer Marcelo Odebrecht said at a Credit Suisse Group event.

Braskem is Latin America's No. 1 petrochemical company. Petrobras, as Petróleo is commonly known, is the principal source of domestic and imported natural gas in Brazil.

Petrochemical producers around the globe are contending with increasingly competitive U.S. rivals, who have seen the cost of gas plunge as output of gas from unconventional shale reservoirs grows. Those lower costs have boosted U.S. exports and driven down prices worldwide.

Petrobras charged local distributors $8.22 per million British Thermal Units (MBTU) of domestic natural gas in the third quarter. The benchmark U.S. Henry Hub price in the quarter was $3.55 MBTU, 43 percent less than in Brazil. While prices have risen to about $4.91 MBTU in the U.S., they are still 40 percent below Brazilian levels.

Prices helped cause Brazilian exports of styrene, polystyrene and ethylene fall 7.6 percent in 2013 while imports jumped 21 percent. Cheaper Brazilian natural gas would make it easier for Braskem and other producers to cut their prices, helping maintain export levels and make their products more competitive at home.

"If the industrial sector in Brazil as a whole is suffering with tax and other issues, petrochemical companies are suffering even more with this price situation," Odebrecht said.

Shares of Braskem have shed 6.5 percent in the past three months, as prices of domestic naphtha, another petrochemical feedstock, jumped and the company failed to increase prices to the same extent. While a decline in Brazil's currency has made imported petrochemical goods more expensive in the domestic market, that situation might not last for long.

Braskem fell 0.4 percent to 18.20 reais in afternoon trading in the São Paulo Stock Exchange. The stock is up 23 percent over the past 12 months.

Odebrecht, which also has stakes in ethanol producers, said an eventual increase in gasoline prices will not help resolve problems in the biofuels sector. Margins in the ethanol business have declined in recent years, partly because of government policies preventing Petrobras from raising the cost of gasoline in the domestic market.

Ethanol producers could recover some ground if Brazil's government reintroduces the so-called Cide tax on gasoline, Odebrecht said. The tax was scrapped in 2012.

State development bank BNDES needs to scale back subsidized lending and focus more on mitigating project risk as a way to leverage more investments in much-needed roads, ports and airports, the executive said. He said projects need a constant flow of bank loans and despite the emergence of a market for local infrastructure notes, they will never replace the need for credit. (Reporting by Silvio Cascione; Writing by Guillermo Parra-Bernal; Additional reporting by Jeb Blount in Rio de Janeiro; Editing by Grant McCool)