Braskem: Biopolymer Pioneer

The previous post title simply “Bioplastics” on April 6^th promised investment ideas among companies leading the way toward polymers made from renewable sources rather than carbon-intensive petroleum.  An industry research firm, Grandview Research, valued the bioplastics market at $8.3 billion in 2019, or less than 5% of the world market for plastic.  Clearly there is room for expansion.  Indeed, bioplastics are expected to grab significant market share in the next few years, growing at a breathtaking compound annual growth rate of 16%.  

This is not just a matter of consumers’ voracious appetite for all things made from plastic.  A review of forecasts by other industry watchers, suggests the bioplastics share could reach 40% of the global plastics market by 2030.  It is clear that bioplastic developers are expected to eat the lunch of plastic producers using petroleum as feedstock.

The previous post speaks in particular to one of the most common types of plastics  -  high density polyethylene or HDPE.  This plastic is popular for consumer packaging , a demand source that is among the strongest drivers of the plastics market.  Resistance to moisture, easy customization and durability of just a few of the characteristics of HDPE that make it the go-to material for container manufacturers.  Coming up with a bio-HDPE that offers a lower carbon footprint and potentially lower production costs could be a winning business proposition.

Brazil’s Braskem S.A. (BRKM5: SA, BAK:  NYSE) has easy access to sugar cane to produce ethanol and then covert it to ethylene, the required feedstock for polyethylene production.  The company commissioned its first green ethylene plant in 2010.  The plant has an annual production capacity of 200,000 tons of bio-polyethylene.  Braskem has branded its bio-polymer “I’m Green” polyethylene, which is now available in low density polyethylene or LDPE as well as HDPE.

Braskem promotes its I’m Green bio-polymer as environmentally friendly through capture of carbon dioxide by the sugar cane plants that at the beginnings of the feedstock chain.  Brazilian sugar cane ethanol has been found to have a higher energy balance of 17.7 milijoules per liter compared to corn ethanol at 11.2 milijoules per liter.  This energy advantage contributes to a more favorable carbon footprint of 38.5 grams CO2 emissions per millijoule for Brazilian sugar cane ethanol compared to 44.9 grams CO2 emissions per millijoule for corn ethanol.      

Environmentalists have well-founded concerns about the use of sugar cane for bio-polymers.  The switch to renewable feedstock like sugar cane could mean a dramatic shift in land use from forest to cultivated fields with far reaching ramifications for biodiversity, soil quality, water resources, soil decarbonization, and food production.  Braskem at least makes an attempt to address this looming problem with through a set of instructions for sugar cane suppliers called “Responsible Ethanol Sourcing.”  Sugar cane growers are asked to adhere to principles of sustainable cultivation for the sake of protecting biodiversity and the environment.

Buyers of Braskem shares have to swallow some big net losses  -  $6.7 billion in net losses or $3.02 per share on $58.5 billion in total sales in the most recently reported twelve-month period.  Braskem consistently grabs positive cash flows from operations to the wheels of progress moving forward, providing a bit of sugar coating.  In that same twelve months operations captured $6.3 billion in cash flow.  Braskem is not very generous with its cash where shareholders are concerned.  There is no dividend.  Thus, every bit of internally generated cash gets plowed by back into capital investments and repayment of debt.

In March 2021, Braskem was finally able to report good news to shareholders.  The company reported a net profit of $157 million in the quarter ending December 2020, for a dramatic improvement over the breathtaking loss in the same quarter in the previous year.  Overall improved efficiency delivered most of the improvement, but it is also notable that utilization at Braskem’s green ethylene plant increased 9% to 87%.  Green ethylene sales in the quarter reached a record 170 kilotons, an increase of 5% year-over-year. 

The vast majority of Braskem’s revenue and cash flows derived from petroleum-based products.  Anyone taking a long position in the company would have to accept this reality.  Yet, Braskem is among the few that have made an attempt to make the big leap from petrochemicals to biochemicals.  Furthermore, the company’s ten-year track record makes it clear it’s leadership team has tenacity and perseverance, two qualities that could make the difference for an environmental pioneer.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.