ITEM 4. INFORMATION ON THE COMPANY

History and Development of the Company

     Braskem S.A. is a sociedade anônima (corporation) organized under the laws of Brazil for the purpose of manufacturing, trading, importing and exporting chemical and petrochemical products and fuels, as well as producing and supplying steam, water, compressed air and electric power to companies operating in the Camaçari Petrochemical Complex in Bahia, Brazil (the “Northeastern Complex”), and the rendering of services to those companies. Braskem is the new corporate name of Copene Petroquímica do Nordeste S.A. (“Copene”). The current organizational structure of the Company is the result of a significant corporate restructurings undertaken in Brazil, integrating six major Brazilian petrochemical companies: Copene; OPP Química; Trikem; Proppet; Nitrocarbono and Polialden.

     Copene was founded in 1972 as Petroquímica do Nordeste Copene Ltda. for the purpose of planning, executing and coordinating the activities of the Northeastern Complex. The construction of the Northeastern Complex formed part of a Brazilian federal government development policy implemented in the early 1970s to diversify the geographical distribution of industrial assets to promote economic growth across different regions in Brazil. At that time, the only petrochemical complex in Brazil was located in the State of São Paulo. On June 18, 1974, Copene was duly incorporated as a sociedade anônima (corporation) under the laws of Brazil and renamed Copene

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Petroquímica do Nordeste S.A. Since 1978, when Copene commenced operations, the Company has grown to become the largest basic petrochemicals company in Brazil and Latin America.

Acquisition of Control by Norquisa

     Prior to August 1995, Petroquisa, the petrochemical affiliate of Petrobras, owned 36.2% of the total capital of Copene, representing 48.2% of the voting capital of Copene. Petrobras historically provided all of the Company’s requirements of naphtha, its principal raw material. In August 1995, as part of the Brazilian government’s privatization program, Petroquisa sold 14.8% of the total capital of Copene, representing 32.8% of its voting capital, through an auction. Nordeste Química S.A. - Norquisa (“Norquisa”), a company owned by petrochemical producers located in the Northeastern Complex, acquired a portion of the shares sold in the auction, and the remainder was acquired by various Brazilian pension funds. Each of the shareholders of Norquisa purchased basic petrochemical products and utilities from Copene under long-term contracts. At the time of this auction, the shareholders of Norquisa were:

	•		Participações Petroquímicas do Nordeste Ltda. (“Petronor”), which held 23.7% of the voting stock of Norquisa. Petronor was a wholly owned subsidiary of Polialden, which was controlled by Conepar - Companhia Nordeste de Participações (“Conepar”).
	•		Pronor Petroquímica S.A. (“Pronor”), which held 16.0% of the voting stock of Norquisa. Pronor is a wholly owned subsidiary of Petroquímica da Bahia S.A. (“PQBA”), a member of a group of companies controlled by the Mariani family (the “Mariani Group”).
	•		Trikem, which held 16.0% of the voting stock of Norquisa. Trikem was controlled at that time by Odebrecht S.A. (“ODB”), the holding company of the Odebrecht Group.
	•		Politeno, which held 12.5% of the voting stock of Norquisa. The principal shareholders of Politeno at that time were Conepar, PSQ Investimentos e Participações Ltda. (“Suzano”), Sumitomo Chemical Company Limited (“Sumitomo Chemical”) and Itochu Corporation (“Itochu”).
	•		EDN - Estireno do Nordeste S.A. (“EDN”), which held 12.5% of the voting stock of Norquisa. EDN is controlled by Dow Chemical.
	•		Oxiteno do Nordeste S.A. (“Oxiteno”), which held 10.4% of the voting stock of Norquisa. Oxiteno is controlled by Ultrapar Participações S.A.
	•		Polipropileno S.A. (“Polipropileno”), which held 8.9% of the voting stock of Norquisa. Polipropileno is controlled by Suzano.

     Following this auction, 58.4% of Copene’s voting capital was owned by Norquisa, 1.7% was owned by Odebrecht Química S.A., a member of the Odebrecht Group (“Odequi”), 15.4% was owned by Petroquisa, 5.8% was owned by Previ – Caixa de Previdência dos Funcionários do Banco do Brasil, the pension fund of Banco do Brasil (“Previ”), 5.7% was owned by Fundação Petrobras de Seguridade Social – Petros, the pension fund of Petrobras (“Petros”), and the remainder was owned by various other Brazilian pension funds and by several private investors.

The Econômico S.A. Empreendimentos Auction

     In 1995, Banco Econômico S.A., a Brazilian financial institution (“Banco Econômico”), collapsed and the Central Bank intervened. At the time of Banco Econômico’s collapse, Banco Econômico owned 56.3% of the capital stock, representing 63.8% of the voting stock, of Conepar. The other shareholders of Conepar were:

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	•		Intercapital Comércio e Participações Ltda. (“Intercapital”), a company controlled by the Odebrecht Group and the Mariani Group, which held 31.9% of the capital stock, representing 36.2% of the voting stock, of Conepar; and
	•		BNDES Participações S.A. – BNDESPAR (“BNDESPAR,” the holding company of the Brazilian National Bank for Economic and Social Development or BNDES), which owned 11.8% of the capital stock of Conepar.

     Conepar, in turn, owned:

	•		less than 1.0% of the voting stock of Norquisa;
	•		35.0% of the voting stock, representing 31.0% of the capital stock, of Politeno, a producer of thermoplastic resins; and
	•		66.7% of the voting stock, representing 42.6% of the capital stock, of Polialden, a producer of thermoplastic resins.

     As part of an effort to restructure and reconsolidate the petrochemical sector in Brazil, the Central Bank, as liquidator of Banco Econômico, conducted an auction (the “Auction”) on July 25, 2001 to sell Econômico S.A. Empreendimentos (“ESAE”), a company formed to hold the capital stock of Conepar that was owned by Banco Econômico. In the Auction, Nova Camaçari Participações S.A. (“Nova Camaçari”), an entity formed by the Odebrecht Group with the specific purpose of participating in the Auction, acquired ESAE.

     Under the terms of the Auction, Nova Camaçari was obligated to comply with the shareholders’ agreement of Conepar and the tag-along rights of Banco Econômico, ESAE, Odequi, Trikem, PQBA, Nitrocarbono, Pronor, Companhia Brasileira de Poliuretanos, Conepar and Intercapital. Members of the Odebrecht Group and of the Mariani Group exercised their tag-along rights with respect to their shares of Intercapital, and BNDESPAR exercised its tag-along rights with respect to its shares of Conepar. As a result, Nova Camaçari acquired all of the capital stock of Intercapital and was obligated to purchase the capital stock of Conepar owned by BNDESPAR. Following these acquisitions, Nova Camaçari owned, directly and indirectly, 100% of Conepar’s voting capital stock.

     In addition, members of the Odebrecht Group and the Mariani Group exercised their tag-along rights with respect to their shares of Proppet, a company that was wholly owned by members of the Odebrecht Group and the Mariani Group. As a result, Nova Camaçari acquired all of the capital stock of Proppet.

     In connection with the Auction, members of the Odebrecht Group acquired the capital stock of Norquisa held by Petronor for R$241.9 million and the capital stock of Norquisa held by Trikem. As a result, the Odebrecht Group owned 39.7% of the voting capital of Norquisa and, together with the Mariani Group, held a combined 55.8% of the voting stock of Norquisa. On July 27, 2001, Odequi and PQBA entered into a shareholders’ agreement with respect to their direct and indirect equity interests in and control of Norquisa and the Company. In addition, on July 3, 2001 and July 20, 2001, Odequi and PQBA entered into memoranda of understanding with respect to the terms of shareholders agreements with Petroquisa, Petros and Previ. See “Item 7. Major Shareholders and Related Party Transactions – Shareholders Agreements.”

     On the same day as the Auction, Copene acquired Nova Camaçari (the “Nova Camaçari Acquisition”). The main objective of the Nova Camaçari Acquisition was to restructure several Brazilian petrochemical companies to create a company with integrated operations, allowing greater operational and fiscal efficiency than was enjoyed by Copene alone. As part of the corporate restructuring process in September 2001:

	•		Nova Camaçari closed the acquisition of the non-voting capital stock of Conepar owned by BNDESPAR;
	•		Nova Camaçari merged with and into Copene;

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	•		Intercapital merged with and into Copene; and
	•		Proppet merged with and into Copene.

     The structure of the Company immediately following these transactions is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity.

(1)		Copene did not control the operating and financial policies of Norcell S.A. (“Norcell”) because of certain covenants contained in a shareholders’ agreement dated April 20, 1989 between Copene and Riocell S.A. (“Riocell”).

The Related Party Mergers

     As part of the Company’s strategy to create a company with integrated operations, on August 16, 2002:

	•		Copene merged with OPP Produtos Petroquímicos S.A. (“OPP Produtos”), the holding company of the Odebrecht Group’s chemical and petrochemical assets (the “OPP Produtos Merger”), and exchanged a portion of its shares in an aggregate amount of U.S.$20.0 million for OPP Produtos’s stock based on a net asset valuation of OPP Produtos (excluding OPP Produtos’s interest in OPP Química and Trikem); and
	•		Copene merged with 52114 Participações S.A. (“52114 Participações”), the holding company of the Mariani Group’s chemical and petrochemical assets (the “52114 Merger” and, together with the OPP Produtos Merger, the “Related Party Mergers”), and exchanged a portion of its shares in an aggregate amount of U.S.$20.9 million for 52114 Participações’s stock based on a net asset valuation of 52114 Participações.

Upon the completion of the Related Party Mergers, the corporate name of Copene was changed to Braskem S.A.

     The principal assets of OPP Produtos were:

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	•		100% of the voting stock, representing 81.2% of the capital stock, of OPP Química, a company engaged in the production of polyethylene and polypropylene.
	•		29.5% of the capital stock and voting stock of Copesul, a company that produces basic petrochemicals for the Southern Complex.

     OPP Produtos owned 64.4% of the voting stock, representing 36.3% of the capital stock, of Trikem, the only vertically integrated manufacturer of PVC in Brazil.

     The Company issued shares representing 43.7% of its capital stock and voting stock to ODB as consideration for the capital stock of OPP Produtos.

     The principal asset of 52114 Participações was 92.3% of the capital stock of Nitrocarbono, a public company engaged in the manufacture of caprolactam, which is used in the production of textile thread (Nylon-6) and ammonium sulfate, which is used as a fertilizer. The Company issued shares representing 3.6% of its capital stock and voting stock to Pronor as consideration for the capital stock of 52114 Participações.

     The structure of the Company as of December 31, 2002 is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity.

(footnotes on following page)

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Recent Developments

     Since December 31, 2002, the Company has completed the following transactions:

	•		In February 2003, as required by the Brazilian Corporate Law as a result of the merger of 52114 Participações into the Company, the Company conducted an exchange offer for the remainder of the voting capital of Nitrocarbono. On February 13, 2003, the Company purchased the tendered shares, and the Company at such time owned approximately 100% of the voting capital stock representing 93.8% of the total capital stock of Nitrocarbono. The Company exchanged 1,612,169 of its class A preferred stock for 2,257,935 common shares of Nitrocarbono.
	•		On March 31, 2003, the Company merged with OPP Química, ESAE and Nitrocarbono. Before these mergers, OPP Química and ESAE were wholly owned subsidiaries of the Company. Before the Company’s merger with OPP Química, Odequi distributed the shares of OPP Química to Braskem. In connection with its merger with Nitrocarbono, the Company issued 67,698 shares of its class A preferred stock to the former shareholders of Nitrocarbono.

     The Company’s structure today is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity. All of these companies are organized under Brazilian law.

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(1)		Represents 84.4% of the voting and total capital stock of Tegal owned by the Braskem and 6.4% of the voting and total capital stock of Tegal owned by Trikem.
(2)		Represents 21.1% of the voting and total capital stock of Cetrel owned by Braskem, 14.5% of the voting and total capital stock of Cetrel owned by Trikem, and 0.5% of the voting and total capital stock of Cetrel owned by Polialden.
(3)		Braskem has no control over the operating and financial policies of Norcell as a result of covenants contained in a shareholders agreement dated April 20, 1989 between Copene and Riocell.
(4)		Represents 23.7% of the voting and total capital stock of Copesul owned by Braskem and 5.8% of the voting and total capital stock of Copesul owned by OPE Investimentos. Odequi owns 89.4% of the capital stock, representing 92.1% of the voting stock, of OPE Investimentos.

Controlling Shareholder

     The Odebrecht Group is a group of companies that was formed by the Odebrecht family in the Northeastern state of Bahia beginning in 1945. As of December 31, 2002, the Odebrecht Group was one of the 10 largest Brazilian private-sector conglomerates in terms of revenue. The main sectors in which the Odebrecht Group participates are:

	•		heavy construction and engineering through Construtora Norberto Odebrecht S.A.;
	•		chemicals and petrochemicals through the Company; and
	•		infrastructure and public services through Odebrecht Serviços de Infraestrutura S.A.

Registered and Principal Executive Officers of the Company

     The Company’s registered office is at Rua Eteno 1561, Camaçari, Bahia 42810-000 and its telephone number at this address is 55-71-632-5200. The Company’s principal executive office is at Av. Nações Unidas, 4777, CEP 05477-000 São Paulo, SP, Brazil, and its telephone number at this address is 55-11-3443-9999.

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Material Subsidiaries and Equity Investees

     As of December 31, 2002, the Company’s significant subsidiaries were Trikem, OPP Química, Polialden and Nitrocarbono. In addition, the Company’s equity investments in Copesul and Politeno have a significant impact on the Company’s Consolidated Financial Statements. Set forth below is a summary of the Company’s equity investments in, and the operations of, these companies.

Trikem

     Trikem is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned directly and indirectly 64.4% of the voting capital stock, and 41.5% of the total capital stock, of Trikem.

     The Company’s Vinyls Unit is comprised of the operations of Trikem. Trikem is the only vertically integrated producer of PVC in Brazil. Its production is integrated through the production of chlorine and other raw materials. Trikem also manufactures and sells caustic soda, EDC and chlorine. Trikem’s activities are conducted at five industrial plants, two located in the Northeastern Complex, one in São Paulo, and one in Maceió and Marechal Deodoro, Alagoas. For details of these operations, see “—Overview of Braskem’s Operations—The Vinyls Unit.”

     The Company, through OPP Química, which merged with and into the Company on March 31, 2003, ODB and BNDESPAR have entered into a shareholders’ agreement in respect of their shares of Trikem. Under the shareholders’ agreement, the Company and ODB have agreed to vote their shares to elect one member of Trikem’s board of directors designated by BNDESPAR. To ensure that BNDESPAR always designates at least one member of Trikem’s board of directors, the Company and ODB agreed to maintain voting control over Trikem (through agreement or otherwise). If, however, the Company and ODB collectively are unable to elect a majority of the board of directors plus one member designated by BNDESPAR, the Company and ODB agree to take all steps in order to appoint a non-voting member of Trikem’s board of directors to represent BNDESPAR. Under the shareholders’ agreement, the Company and ODB also granted tag-along rights to BNDESPAR in the event that they sell their voting control of Trikem to a third party. BNDESPAR also may require the Company and ODB to purchase its Trikem shares if they do not comply with the terms of the shareholders’ agreement and do not cure any such non-compliance within a specified period. The shareholders’ agreement expires on August 24, 2011, or on any earlier date that BNDESPAR ceases to hold more than 10.0% of the Trikem’s capital stock, or more than 5.0% of the capital stock of any successor company.

OPP Química

     OPP Química was a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company indirectly owned 100% of the capital stock of OPP Química. OPP Química was merged into the Company on March 31, 2003.

     Prior to its merger into the Company, the activities of OPP Química included fabricating, processing, enhancing, manufacturing, mixing, importing, exporting, purchasing, distributing and selling plastic resins, as well as raw materials, derivates and related products, and providing technical and administrative consulting services relating to these activities. OPP Química also acted as a holding company for its subsidiaries and its equity investments in associated companies.

     Prior to its merger into the Company on March 31, 2003, OPP Química operated four plants, three located at the Southern Complex and one located in the Northeastern Complex. For details of these operations, see “—Overview of the Company’s Operations—The Polyolefins Unit.”

Polialden

     Polialden is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company indirectly owned 66.6% of the voting capital stock and 42.6% of the total capital stock, of Polialden.

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     Polialden is engaged in manufacturing, processing, selling, importing and exporting high density polyethylene (ultra high molecular weight polyethylene) and other chemical and petrochemical products. Polialden operates an industrial unit in the Northeastern Complex. For details of these operations, see “—Overview of the Company’s Operations—The Polyolefins Unit.”

     The Company’s subsidiary, Conepar has entered into a shareholders’ agreement with Mitsubishi Chemical Industries Limited (“Mitsubishi”) (representing itself and Nissho Iwai Corporation (“Nissho Iwai”)) with respect to its shares of Polialden. Mitsubishi owns 16.6% of the voting stock, representing 6.8% of the capital stock, of Polialden. Under this shareholders’ agreement, each of Conepar and Mitsubishi has agreed with Mitsubishi not to cause Polialden to take certain actions unless the other party agrees, including amending Polialden’s bylaws, dissolving or liquidating Polialden, merging Polialden with another company, redeeming shares of its stock or debt obligations, selling its fixed assets, encumbering its property and engaging in transactions with certain related parties, in some cases subject to exceptions. The shareholders’ agreement provides that Conepar will agree with Mitsubishi with respect to the nomination of Polialden’s board of directors, executive officers and fiscal council. However, as Conepar owns the majority of the voting stock, if it is unable to agree with Mitsubishi, Conepar has the right to appoint the directors and executive officers.

Nitrocarbono

     Nitrocarbono was a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned 92.2% of the capital stock, representing 95.4% of the voting capital stock, of Nitrocarbono. Nitrocarbono was merged into the Company on March 31, 2003.

     Prior to its merger into the Company, Nitrocarbono was engaged in the manufacture, processing, trade, import, export and other activities related to the production and sale of caprolactam, which is used in the production of textile thread (Nylon-6) and ammonium sulfate, which is used as a fertilizer, as well as by-products of caprolactam. Nitrocarbono also acted as a holding company for its equity investments in associated companies.

     Nitrocarbono operated one industrial unit in the Northeastern Complex. For details of these operations, see “—Overview of the Company’s Operations—The Business Development Unit.”

Copesul

     Copesul is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned, directly and indirectly, 29.5% of the voting and total capital stock of Copesul.

     Copesul is engaged in the manufacture, trade, import and export of basic petrochemical products and the production and supply of utilities, such as steam, water, compressed air and electrical energy, and the supply of those utilities to the companies in the Southern Complex, and the provision of services to companies in the Southern Complex. The Company currently purchases ethylene and propylene, the principal raw materials used by the Company’s plants in the Southern Complex, from Copesul.

     The Company has entered into a shareholders’ agreement with Ipiranga Petroquímica S.A. (“Ipiranga”) with respect to the Company’s shares of Copesul. Ipiranga owns 29.4% of the voting and total capital stock of Copesul. Through this shareholders’ agreement, the Company and Ipiranga jointly control Copesul. The Company has a right of first refusal in respect of sales by Ipiranga of any of its shares in Copesul. The Company has agreed to consult with Ipiranga prior to any meeting of the board of directors or shareholders of Copesul and to vote its shares together with Ipiranga with respect to certain matters, including policies relating to the allocation of the excess amounts of raw materials, policies relating to the distribution of profits, the election of members of the board of directors, changes to Copesul’s bylaws, approval of indebtedness in excess of certain limits, sales of assets in excess of certain limits, investments in excess of certain limits and any merger of Copesul with another company. The Company has also agreed that neither it nor Ipiranga will vote to approve any of the above matters unless the Company and Ipiranga vote at least three-quarters of the shares held by them and such action at a meeting of the parties to the shareholders’ agreement, or if no quorum is obtained at such meeting, of three-quarters of the shares present at a second meeting.

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     The shareholders’ agreement provides that the Company will vote with Ipiranga in a manner designed to ensure that both the Company and Ipiranga are able to elect the maximum possible directors of Copesul. This shareholders’ agreement is effective until August 2022. The parties to this shareholders’ agreement have agreed not to enter into shareholders’ agreements with any other shareholders of Copesul.

Politeno

     Politeno is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned 35.0% of the voting capital stock, representing 34.7% of the total capital stock of Politeno.

     Politeno is engaged in the manufacture, processing, direct or indirect trade, consignment, export, import and transportation of polyethylene, principally LDPE, LLDPE and HDPE, and certain byproducts, principally ethylene vinyl acetate. Politeno also acts as a holding company for its subsidiaries and its equity investments in associated companies. Politeno currently purchases ethylene, its principal raw material, from the Company.

     The Company (through Conepar) has entered into a shareholders’ agreement with Suzano, Sumitomo Chemical and Itochu with respect to its shares of Politeno. Suzano owns 35.0% of the voting stock, representing 34.7% of the total capital stock of Politeno, Sumitomo Chemical owns 20.0% of the voting stock, representing 16.8% of the total capital stock of Politeno, and Itochu owns 10.0% of the voting stock, representing 8.4% of the total capital stock of Politeno. The Company has the right to elect two of the seven members of the board of directors of Politeno and, together with Suzano, the right to elect a third member of the board of directors, which right is exercised alternatively by the Company and Suzano ( e.g ., Suzano elects a member of the board of directors for one term and then the company elects a member of the board of directors for the succeeding term). The Company also has the right to elect one of Politeno’s six executive officers.

     The Company has agreed in the Politeno shareholders’ agreement that it will attempt to reach unanimous decisions with respect to certain actions to be taken by the board of directors or shareholders of Politeno, including changes to Politeno’s bylaws, subject to certain exceptions, dissolution or liquidation of Politeno, the merger of Politeno with another company, transactions with affiliates of Politeno in excess of specified amounts or in excess of specified durations, encumbering of assets of Politeno in excess of specified amounts and entering into contracts or indebtedness in excess of certain specified amounts.

     The Company also has interests in other companies in respect of which it has entered into shareholders’ agreements, including Petroflex Indústria e Comércio S.A. (“Petroflex”), Norcell, Borealis-OPP S.A. (“Borealis-OPP”) and Copene Monômeros S.A. (“Copene Monômeros”).

Principal Capital Expenditures

     The Company’s capital expenditures were U.S.$115.5 million in 2002, U.S.$146.3 million in 2001 and U.S.$58.4 million in 2000. The Company’s principal capital expenditure projects during 2000 through 2002 were:

	•		the expansion of the Company’s ethylene production capacity at the Northeastern Complex;
	•		the upgrade in the facilities of the Aratu port terminal and the related pipeline system; and
	•		other operating improvements made in the Company’s Vinyls, Polyolefins and Business Development Units.

     The Company is currently completing the expansion of the ethylene production capacity of its pyrolysis plant that is part of the Olefins Unit 1. Upon completion of this expansion by the end of 2003, this plant’s ethylene production capacity will reach 1,280,000 tons of annual nominal capacity. The total cost of this expansion is estimated at U.S.$67.5 million, of which U.S.$61.0 million was incurred in 2002.

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     In response to the termination of Petrobras’s monopoly over naphtha supply in Brazil, in 2001, the Company invested in the adaptation of the existing maritime pier located at Aratu and the construction of pipelines, storage tanks and other facilities necessary to receive and transport imported naphtha to its basic petrochemicals plants. The total cost of this project was approximately U.S.$37 million.

     Each of the Company’s business units undertakes a regular program of maintenance shutdowns. The pyrolysis plant that is part of the Olefins Unit 1 was shutdown for 92 days in 2002, which shutdown took place for the performance of regular maintenance and expansion of the plant’s ethylene production capacity, which expansion project is expected to be completed by the end of 2003. The pyrolysis plant that is part of Olefins Unit 2 is scheduled to be shutdown for maintenance in November 2003. The Company coordinates the maintenance cycles of its polyolefins plants in the Northeastern Complex with those of its basic petrochemicals plants and of its polyolefins plants in the Southern Complex with those of Copesul. The Company’s PVC, caustic soda, PET and caprolactam plants are shut down for maintenance every two years.

     On December 19, 2000, OPP Petroquímica S.A. (“OPP Petroquímica,” a predecessor of OPP Química) sold 80% of its ownership and voting interest in OPP Polímeros Avançados S.A. (“OPP Polímeros”) to Borealis A/S, a European group, for cash. OPP Polímeros then changed its name to Borealis-OPP. The Company, through OPP Petroquímica, has agreed to continue to supply polypropylene resins to Borealis-OPP for a period of at least 10 years on market terms. Borealis-OPP produces specialized compounds in two production facilities for use in manufacturing applications in the automotive, appliance and injection-molded furniture industries.

Petrochemical Industry Overview

     The petrochemical industry transforms crude oil by-products or natural gas into widely used consumer and industrial goods. The Brazilian petrochemical industry is generally organized into first, second and third generation producers based on the stage of transformation of various raw materials, or feedstocks.

First Generation Producers

     Brazil’s first generation producers, which are referred to as “crackers,” break down or “crack” naphtha, their principal feedstock, into basic petrochemicals. The crackers purchase their naphtha, which is a by-product of the oil refining process, primarily from Petrobras, as well as other refineries located outside of Brazil. The basic petrochemicals produced by the crackers include (1) olefins, primarily ethylene, propylene and butadiene and (2) aromatics, such as benzene, toluene and xylenes. The Company, Copesul, and Petroquímica União (“PQU”), operate Brazil’s three crackers and sell these basic petrochemicals to second generation producers. The basic petrochemicals, which are in the form of either gases or liquids, are transported to the second generation producers’ plants, generally located near the crackers, through pipelines for further processing.

Second Generation Producers

     Second generation producers process the basic petrochemicals purchased from the crackers to produce thermoplastic resins and intermediate petrochemicals. These products include (1) polyethylene, polystyrene and PVC (each produced from ethylene), (2) polypropylene and acrylonitrile (each produced from propylene), (3) caprolactam (produced from benzene) and (4) polybutadiene (produced from butadiene). There are approximately 48 second generation producers operating in Brazil. The intermediate petrochemicals are produced in solid form as plastic pellets or powders and are transported by truck to third generation producers, which generally are not located near the second generation producers. The Company is the only integrated first and second generation petrochemical company in Brazil.

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Third Generation Producers

     Third generation producers, known as transformers, purchase the intermediate petrochemicals from second generation producers and transform them into final products. These final products include plastics (produced from polyethylene, polypropylene and PVC), acrylic fibers (produced from acrylonitrile), nylon (produced from caprolactam), elastomers (produced from butadiene) and disposable containers (produced from polystyrene). Third generation producers produce a variety of consumer and industrial goods, including containers and packaging materials, such as bags, film and bottles, textiles, detergents, paints, automobile parts, toys and consumer electronic goods. There are over 6,000 third generation producers operating in Brazil.

Petrochemical Complexes

     The production of first and second generation petrochemicals in Brazil centers around three major complexes. These are the Northeastern Complex located in Camaçari in the State of Bahia, the São Paulo complex located in Capuava in the State of São Paulo (the “São Paulo Complex”), and the Southern Complex. Each complex has a single first generation producer, also known as the “raw materials center” operated by the Company, PQU and Copesul, respectively, and several second generation producers that purchase feedstock from the raw materials center.

     The Northeastern Complex began operations in 1978. The Northeastern Complex consists of 28 second generation producers situated around the Company, as the raw materials center for this Complex. As of December 31, 2002, the Company had an annual ethylene production capacity of 1,200,000 tons and in 2002 accounted for approximately 42% of Brazil’s installed ethylene production capacity.

     The São Paulo Complex began operations in 1968 and is the oldest petrochemical complex in Brazil. PQU, the operator of its raw materials center, supplies first generation petrochemicals to 11 second generation producers, including the Company. As of December 31, 2002, PQU had an annual ethylene production capacity of 500,000 tons.

     The Southern Complex began operations in 1982. Copesul, the operator of this Complex’s raw materials center, supplies first generation petrochemicals to six second generation producers, including the Company. As of December 31, 2002, Copesul had an annual ethylene production capacity of 1,135,000 tons.

     A fourth petrochemical complex is being constructed in the State of Rio de Janeiro. Rio Polímeros, a Brazilian petrochemical company, will serve as the cracker for the new complex and is constructing a petrochemical plant in Duque de Caxias, Rio de Janeiro, with an annual capacity to produce 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of linear low density polyethylene and high density polyethylene. This plant will use natural gas as a feedstock and has announced that it expects to commence operations in June 2004.

Role of the Brazilian Government

     The current structure of the petrochemical industry reflects the Brazilian government’s plan, developed during the 1970s, to establish a domestic petrochemical industry to serve Brazilian markets. First and second generation producers, such as Braskem, are located within close proximity of each other to allow the common use of facilities, such as utilities, and to facilitate feedstock delivery. Prior to their respective privatization, production capacity expansions at the crackers and the second generation producers were coordinated to ensure that the supply of petrochemicals met demand. During this period, the infrastructure that developed around or near the complexes further fostered the interdependence of first and second generation producers, as limited facilities were constructed to facilitate the transportation and storage of feedstocks for import or export.

     The Brazilian government developed the Brazilian petrochemical industry by promoting the formation of tripartite joint ventures among the Brazilian government, foreign petrochemical companies and private Brazilian investors. Petrobras’s majority-owned subsidiary, Petroquisa, participated in each joint venture as the representative of the Brazilian Government; a foreign petrochemical company provided technology and a Brazilian private sector company provided management.

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     In 1992, the Brazilian government began a privatization program to reduce significantly its interests in, and influence over, the petrochemical industry, particularly with respect to first and second generation producers. This program was designed to increase private investment in the petrochemical industry and to spur its consolidation and rationalization. As a result of privatization auctions, the Brazilian Government’s ownership of the voting stock of Braskem, Copesul and PQU was significantly reduced, and the private ownership of the second generation producers, through the private groups that participate in the voting stock of the crackers, increased. These privatizations also fostered the development of the Company and the vertical integration of its operations.

     The following table sets forth the percentage of the indirect interests held in the crackers’ voting stock before the privatization of each of them and as at December 31, 2002.

Role of Petrobras

     Until recently, Brazil’s Constitution granted the Brazilian government a monopoly, exercised through Petrobras, over the research, exploration, production, refining, importing, and transporting of crude oil and refined petroleum products (excluding petrochemical products) in Brazil. The Brazilian Constitution also provided that by-products of the refining process, such as naphtha, could only be supplied in Brazil by or through Petrobras. Naphtha is the feedstock used in Brazil for the production of basic petrochemicals such as ethylene and propylene. Since 1995, the Brazilian government has taken several measures to deregulate the petrochemical industry in Brazil. With the creation of the Agência Nacional de Petróleo (the National Petroleum Agency, or ANP), in 1997, new rules and regulations have been implemented, aimed at gradually liberalizing Petrobras’s monopoly. Since 2000, several first generation producers, including Braskem, have imported naphtha from trading companies and oil and gas producers abroad.

     Petrobras produced and sold approximately 80% of the naphtha consumed in Brazil in 2002. Braskem and Copesul collectively imported the remaining 20% of naphtha consumed in Brazil in 2002.

Tariffs

     The Company sets prices for ethylene, its principal first generation petrochemical product, using a margin sharing system. Prices paid for imported first generation products are based on international market prices, taking into account transportation and tariff costs. The prices charged by first generation producers are based on similar factors. Tariff rates imposed by the Brazilian Government on petrochemical imports have varied over time. See “—Overview of the Company’s Operations—The Basic Petrochemicals Unit—Sales and Marketing of Basic Petrochemical Products.” The price of ethylene by-products, such as butadiene, is set by reference to several market factors, including the prices paid by second generation producers for imported products.

     Second generation producers, including the Company, generally set prices for their products by reference to several market factors, including the prices paid by third generation producers for imported products. Prices paid for such imports are based in part on transportation and tariff costs. Consequently, the prices charged by the second generation producers are affected by tariff rates imposed by the Brazilian government on petrochemical imports. In the past, the Brazilian government has frequently used import and export tariffs to effect economic policies, with the consequence that tariffs generally, and those imposed on petrochemical products in particular, have varied significantly. In November 1997, for example, the import tariffs for polyethylene, polypropylene and PVC were increased from 14% to 17%, but were subsequently reduced to 15.5% on January 1, 2002. On January 1, 2002, the import tariff for caustic soda was reduced from 10.5% to 9.5%. As of December 31, 2002, the import tariffs for basic petrochemical products ranged between 3.5% and 5.5% (except for caustic soda) and the import tariffs for second generation petrochemical products ranged between 3.5% and 15.5%. Imports and exports within the Mercosul countries have not been subject to tariffs since December 2001.

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     The following table shows the fluctuation of the tariffs on basic petrochemicals and second generation petrochemicals after 1993. The tariff rates shown are those applicable at the end of the respective years.