ITEM 4. INFORMATION ON THE COMPANY

We are the largest producer of petrochemical resins in the Americas and the eighth largest producer of petrochemical resins in the world, based on annual production capacity at December 31, 2009, and we are the only producer of ethylene, polyethylene and polypropylene in Brazil. We produce a diversified portfolio of petrochemical products in our 29 plants in Brazil and the United States, and have a strategic focus on polyethylene, polypropylene and PVC. We are also the third largest Brazilian-owned private sector industrial company, based on net sales revenue in 2008. We recorded net sales revenue of R$15,248.3 million and net income of R$ 767.8 million during the year ended December 31, 2009.

Our business operations are organized into three production business units and one distribution business unit, which correspond to our principal production processes, products and services. Our business units are as follows:

·          Basic Petrochemicals, which accounted for R$11,144.2 million, or 54.5%, of the net sales revenue of all segments, including net sales to our other business units, and had an operating margin of 9.6% in 2009;

·          Polyolefins , which accounted for R$7,216.9 million, or 35.3%, of the net sales revenue of all segments and had an operating margin of 2.3% in 2009 ;

·          Vinyls , which accounted for R$1,536.4 million, or 7.5%, of the net sales revenue of all segments and had a negative operating margin of 7.0% in 2009 ; and

·          Chemical Distribution, which accounted for R$548.9 million, or 2.7%, of the net sales revenue of all segments and had an operating margin of 3.6% in 2009 .

We believe the integration of the operations of the companies that formed our company has produced, and will continue to produce, significant synergies and cost savings from reductions in taxes, procurement and logistics expenses, production expenses, general and administrative expenses and other operating expenses.

Our registered office is at Rua Eteno, 1561, Camaçari, Bahia, CEP 42810-000, Brazil, and our telephone number at this address is 55-71-3413-2102. Our principal executive office is at Avenida das Nações Unidas, 8501, São Paulo, SP, CEP 05425-070, Brazil, and our telephone number at this address is 55-11-3576-9000.

Strategy of Our Company

Our vision is to strengthen our position as a world-class petrochemical company with the goal of becoming one of the five largest petrochemical companies in the world in terms of enterprise value.

The key elements of our strategy include:

·          Expansion in Selected International Markets . As part of the continuous evaluation of our business and plans, we regularly consider a range of strategic options and transactions. From time to time, we consider a variety of potential strategic transactions to expand our presence in the global petrochemicals market. We plan to expand the production capacity of our business units during the next several years through the acquisition of petrochemical producers outside Brazil that currently compete with us or produce complementary products, and by constructing new facilities outside Brazil with access to competitive raw material sources independently or in conjunction with third parties. In addition to our acquisition of Braskem Americas:

Ø        In April 2010, we formed BraskemIdesa S.A.P.I, or BI, a joint venture with Grupo Idesa, S.A. de C.V., one of Mexico’s leading petrochemical groups, or Idesa, for the development, construction and operation of an olefins complex to be located in the Coatzacoalcos Petrochemical Complex in the Mexican state of Veracruz. This company will use ethane extracted from natural gas as its raw material, with an annual ethylene production capacity of 1.0 million tons, and three polyethylene plants with a combined annual production capacity of 1.0 million tons of HDPE, low density polyethylene, or LDPE, and linear low density polyethylene, or LLDPE;

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Ø         In November 2008 we formed Polipropileno del Sur, S.A., or Propilsur, a joint venture with Petroquímica de Venezuela, S.A., or Pequiven, for the development, construction and operation of a polypropylene plant ;

Ø         In November 2008 we formed Polietilenos de America, S.A., or Polimerica, a joint venture with Pequiven, for the development, construction and operation of the Jose Olefins Project, an olefins complex that, if completed as currently contemplated, will include an ethylene cracker that will use ethane extracted from natural gas as its raw material, with an annual production capacity of 1.3 million tons, and three polyethylene plants with a combined annual production capacity of 1.1 million tons of HDPE, LDPE and LLDPE; and

Ø         We have entered into a memorandum of understanding with Petróleos Del Perú – Petroperú S.A., or Petroperú, and Petrobras to evaluate the technical and economic feasibility of the construction of a new petrochemical complex in Peru that would use ethane as its feedstock to produce polyethylene.

We believe that additional capacity purchased by our company or developed by our company together with joint venture partners will enable us to maintain and expand our leadership position in Latin America and support our expansion into strategic export markets.

·          Reinforcement of Our Leading Position in Latin America . We are the leading petrochemical company in Latin America, based on annual production capacity at December 31, 2009. Following the completion of the Quattor Acquisition, we are the only producer of ethylene, polyethylene and polypropylene in Brazil. We are seeking to reinforce our leading position in the Latin American petrochemical market, with a focus on polyethylene, polypropylene and PVC. In addition, we continuously seek to improve our production processes in order to achieve lower production costs and greater operational efficiency. We recognize the cyclical nature of the markets for our petrochemical products and believe that, by focusing on relationships with our customers, we can foster customer loyalty even during periods of lower demand. Our growth strategy is centered on increasing customers’ consumption of our products, and enabling them to substitute non-plastic materials with thermoplastics. We also continue to seek to expand our exports to other countries in Latin America and to protect our market share in Brazil.

·          Acquisition of Feedstocks at Competitive Prices . As a result of the integration of our facilities and large production scale, we believe that we are a low-cost producer of second generation petrochemicals. We are seeking to continue to diversify our feedstock purchases to obtain more competitive prices and as part of this effort, began to import lower-cost naphtha in 2002, and during the past several years have imported between 30% and 40% of our feedstock requirements, primarily from North Africa. We are seeking to continue to reduce our operating costs through negotiations of feedstock purchases at competitive prices. For example, in 2009 we renegotiated our naphtha supply agreements with Petrobras, we are acquiring naphtha under a short-term supply arrangement with Petróleos de Venezuela, S.A., or PDVSA, and we are negotiating a long-term naphtha supply agreement with Pemex.

In addition, we are seeking to diversify the raw materials that we use for our production processes. As a result of the Quattor Acquisition, we will acquire RioPol, which uses ethane and propane as its principal feedstocks, and Quattor Química, which has begun using ethane and propane as feedstocks for a portion of its production. BI, our joint venture in Mexico, has entered into a long-term supply contract to purchase ethane from Pemex Gas y Petroquímica Básica, or Pemex Gas, a state-owned Mexican company, under competitive commercial conditions. We expect that Propilsur, Polimerica and our project in Peru will use low cost ethane in their production processes.

·          Diversification of Our Products and Business . We are pursuing business opportunities by developing new and specialized products and technologies, including the following:

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Ø         We are developing manufacturing process to produce “green” polymers made out of renewable raw materials in an effort to become a leader in the production of environmentally sustainable resins, such as (1) the processes that will be used in our 100% “green” polyethylene plant that is expected to commence operation in the second half of 2010, and (2) a process to produce “green” polypropylene, which we have been able to produce on a small scale in our research facilities and expect to develop on a commercial scale in partnership with Novozymes, a world leader in the production of industrial enzymes;

Ø         We are continuing to develop a specialized production process for LLDPE and LDPE that permits us to produce thermoplastics with distinctive characteristics for the flexible packaging industry, including greater resistance to impact and punctures, improved polish and greater transparency; and

Ø        We are investing in the manufacturing of performance products that have higher added value that allow us to enter new markets, such as new applications for ultra high molecular weight polyethylene, or UHMWP, and other products, including Utech fibers that we expect to market for applications in the manufacture of armor and the anchoring of offshore oil platforms.

·          Differentiation of Our Business . We recognize the cyclical nature of the markets for our petrochemical products and believe that, by focusing on relationships with our customers, we can foster customer loyalty even during periods of lower demand. Our growth strategy is centered on increasing customers’ consumption of our products, and enabling them to substitute non-plastic materials with thermoplastics. We are seeking to establish close, long-term relationships with our customers and are committed to providing technological support and solutions to our customers through our two research centers, including a research center in Pittsburgh, Pennsylvania which we acquired as part of the Sunoco Chemicals Acquisition, which develop processes, products and applications for the petrochemical sector and which, at December 31, 2009, had approximately 280 employees. We are seeking to continue to serve as partners with our customers in developing new products and applications and, consequently, new business opportunities for them. We offer our customers more flexible delivery options and credit terms unlike importers, which typically offer deliveries only through port facilities financed through letters of credit.

History and Development of Our Company

We were founded in 1972 as Petroquímica do Nordeste Copene Ltda. to plan, execute and coordinate the activities of the Northeastern Complex. The construction of the Northeastern Complex formed part of a development policy of the Brazilian government implemented in the early 1970’s to diversify the geographical distribution of industrial assets and to promote economic growth across different regions of Brazil. On June 18, 1974, we were incorporated as a corporation under the laws of Brazil (with Brazilian company registry No. 29300006939) and were renamed Copene Petroquímica do Nordeste S.A.

Prior to August 1995, Petroquisa owned 36.2% of our total share capital, representing 48.2% of our voting share capital. At that time, Nordeste Química S.A., or Norquisa, owned 17.3% of our total share capital, representing 47.6% of our voting share capital, and the remainder of our share capital was owned by various Brazilian private sector groups, pension funds, banks and our employees.

Privatization of Our Company

In August 1995, as part of the Brazilian government’s privatization program, Petroquisa sold 14.8% of our total share capital, representing 32.8% of our voting share capital, through an auction. Norquisa acquired 5.5% of our total share capital, representing 10.8% of our voting share capital, in this auction, and the remaining shares were acquired by various Brazilian pension funds. At the time of this auction, Norquisa was controlled by several second generation producers in the Northeastern Complex. As a result of this auction, Norquisa became our controlling shareholder.

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Consolidation of Petrochemical Assets

In 2001, the Odebrecht Group and a group of companies controlled by the Mariani family, or the Mariani Group, acquired control of Norquisa through purchases of shares of Norquisa and the contribution to our company of:

·          66.7% of the voting share capital of Polialden Petroquímica S.A., or Polialden;

·          35.0% of the voting share capital of Politeno Indústria e Comércio S.A., or Politeno; and

·          Proppet S.A., or Proppet, which was merged into our company in 2001.

In 2002, we acquired from the Odebrecht Group and the Mariani Group in exchange for shares representing 47.3% of our voting and total share capital:

·          OPP Química S.A., or OPP Química, which in turn owned 41.6% of the total share capital of Trikem S.A., or Trikem, representing 64.4% of its voting share capital;

·          29.5% of the total share capital and voting share capital of Copesul; and

·          92.3% of the total share capital of Nitrocarbono S.A., or Nitrocarbono, representing 95.5% of its voting share capital.

Upon completing these transactions, we changed our corporate name to Braskem S.A.

Consolidation of Minority Interests

Between 2003 and 2007, we purchased the minority interests of Nitrocarbono, OPP Química, Polialden, Trikem and Politeno, and merged these companies into Braskem through the following transactions:

·          In 2003, (1) we conducted a public exchange offer for the outstanding common shares of Nitrocarbono not owned by our company and, following the completion of this exchange offer, we merged with Nitrocarbono, (2) we merged with OPP Química, (3) we acquired the outstanding common shares of Polialden not owned by our company, and (4) we acquired substantially all of the outstanding common shares of Trikem not owned by our company, and conducted a public exchange offer for the remaining common shares of Trikem not owned by our company.

·          In 2004, (1) we merged with Trikem, and (2) we acquired additional non-voting shares of Polialden, increasing our interest in the total share capital of Polialden from 56.3% to 63.7%.

·          In April 2006, we purchased all of the common and preferred shares of Politeno that were owned by SPQ Investimentos e Participações Ltda., or SPQ, a subsidiary of Suzano Petroquímica S.A., or Suzano, Sumitomo Chemical Company Limited, or Sumitomo, and Itochu Corporation, or Itochu. We refer to this transaction as the Politeno Acquisition. Following the Politeno Acquisition, we owned 100% of the voting share capital and 96.2% of the total share capital of Politeno.

·          In May 2006, Polialden merged with and into Braskem. In connection with this merger, (1) we converted 2,632,043 of our class A preferred shares into 2,632,043 common shares in order to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after the completion of our merger with Polialden, and (2) we issued 7,878,825 of our class A preferred shares in exchange for 264,886,083 of Polialden’s preferred shares.

·          In April 2007, Politeno merged with and into Braskem. In connection with this merger, (1) we converted 486,530 of our class A preferred shares into 486,530 common shares in order to maintain the required minimum ratio of our common shares to preferred shares in accordance with the Brazilian Corporation Law after the completion of our merger with Politeno, and (2) we issued 1,533,670 of our class A preferred shares in exchange for 412,901,157 of Politeno’s class A preferred shares and 2,126,856,433 of Politeno’s class B preferred shares.

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Ipiranga Transaction

In March 2007, we entered an investment agreement with Ultrapar Participações S.A., or Ultrapar, and Petrobras, which we refer to as the Ipiranga Investment Agreement. We refer to the transactions contemplated by the Ipiranga Investment Agreement and the related transactions described below as, collectively, the Ipiranga Transaction. Under the Ipiranga Investment Agreement, Ultrapar, as a commission agent acting on behalf of Braskem and Petrobras, acquired 100% of the share capital of Ipiranga Química S.A., or Ipiranga Química. As of March 18, 2007, Ipiranga Química owned 86.9% of the voting share capital and 92.4% of the total share capital of Ipiranga Petroquímica. Ipiranga Petroquímica, in turn, owned 29.5% of the share capital of Copesul.

Under the Ipiranga Investment Agreement, we entered into the following transactions, which we refer to as the Ipiranga Transaction:

·          we acquired, directly and indirectly, shares of Copesul representing 62.7% of the total and voting share capital of Copesul;

·          we acquired shares of Ipiranga Química representing 60% of its total share capital and voting share capital, which in turn owns all of the total share capital and voting share capital of Ipiranga Petroquímica; and

·          we acquired shares of Refinaria de Petróleo Ipiranga S.A. (which changed its corporate name to Refinaria de Petroleo Riograndense S.A., or RPR, in October 2008), representing 33.3% of its total share capital and voting share capital.

As a result of the Ipiranga Transaction, we fully consolidated the results of Copesul and its subsidiaries and consolidated the results of Ipiranga Química and its subsidiaries, including Ipiranga Petroquímica, into our financial statements as from April 1, 2007. In addition, we have accounted for our interest in the results of RPR under the equity method in our financial statements as from April 1, 2007.

In February 2008, Ultrapar transferred 60.0% of the share capital of Ipiranga Química to our company and 40.0% of the share capital of Ipiranga Química to Petrobras, as required by the Ipiranga Investment Agreement. In March 2009, Ultrapar transferred 33.3% of the share capital of RPR to our company. As a result of this transfer, we jointly and equally control RPR with Petrobras and Ultrapar.

Under the Ipiranga Investment Agreement, we paid Ultrapar R$651.9 million in April 2007, R$156.7 million in October 2007, R$47.0 million in November 2007 and R$633.5 million in February 2008 for the shares of Ipiranga Química and RPR that we have acquired from Ultrapar in the Ipiranga Transaction.

As part of the Ipiranga Transaction:

·          in June 2007, EDSP67 Participações S.A., or EDSP67, acquired the 7.6% of the total share capital of Ipiranga Petroquímica not owned by Ipiranga Química for a purchase price of R$117.9 million. In August 2007, EDSP67 merged with and into Ipiranga Petroquímica. As a result of these transactions, Ipiranga Petroquímica became a wholly-owned subsidiary of Ipiranga Química; and

·          in October 2007, our subsidiary EDSP58 Participações S.A., or EDSP58, acquired 22.7% of the total and voting share capital of Copesul through a public tender offer, or the Copesul Tender Offer, for the Copesul shares not then owned by our company, Ipiranga Petroquímica, Petroquisa or its affiliate, Petroquímica Triunfo S.A., or Triunfo.  The purchase price for these shares was R$1,294.2 million. At the time of the Copesul Tender Offer, we owned 60% of the total and voting share capital of EDSP58, and Petrobras owned the remaining share capital of EDSP58. In October 2007 and November 2007, EDSP58 purchased additional shares of Copesul at the price per share paid in the Copesul Tender Offer. In November 2007, Copesul redeemed all of its outstanding shares, other than shares held by our company, EDSP58, Ipiranga Petroquímica, Petroquisa and Triunfo at the price per share paid in the Copesul Tender Offer. The aggregate purchase price for the shares purchased and redeemed after the completion of the Copesul Tender Offer was R$124.3 million. In December 2007, EDSP58 merged with and into Copesul. Following this merger, Braskem owned 39.2% of the total and voting share capital of Copesul, Ipiranga Petroquímica owned 39.2% of the total and voting share capital of Copesul and Petroquisa and Triunfo owned 21.6% of the total and voting share capital of Copesul.

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Petrobras Transaction

On November 30, 2007, Braskem entered into an investment agreement with Odebrecht, Petrobras, Petroquisa and Norquisa. On May 14, 2008, Braskem, Odebrecht, Norquisa, Petrobras and Petroquisa entered into an amendment to this agreement. We refer to this agreement, as amended, as the Petrobras Investment Agreement and to the transactions under the Petrobras Investment Agreement as the Petrobras Transaction. Under the Petrobras Investment Agreement, the Petrobras Transaction was completed in two phases.

In the first phase of the Petrobras Transaction, on May 30, 2008, Petroquisa contributed the following assets to its wholly-owned subsidiary Grust Holdings S.A., or Grust:

·          36.4% of the voting and outstanding share capital of Copesul;

·          40.0% of the voting and outstanding share capital of Ipiranga Química; and

·          40.0% of the voting and outstanding share capital of Paulínia.

In addition, on May 30, 2008, Braskem, Petroquisa and Grust engaged in an exchange of shares transaction ( incorporação de ações ) in which an aggregate of 46,903,320 of our common shares and 43,144,662 of our class A preferred shares were issued to Petroquisa in exchange for all of the outstanding share capital of Grust.

As a result of the completion of the first phase of the Petrobras Transaction, Petrobras owned, directly and indirectly, 23.1% of our total share capital, including 30.0% of our voting share capital, and Braskem owned, directly and indirectly:

·          99.2% of the outstanding share capital of Copesul;

·          all of the outstanding share capital of Ipiranga Química, which in turn owns all of the outstanding share capital of Ipiranga Petroquímica; and

·          all of the outstanding share capital of Paulínia.

Paulínia was incorporated on September 16, 2005 to construct and operate a polypropylene plant that has been constructed in Paulínia, in the State of São Paulo. On that date, we acquired 60.0% of the total and voting share capital of Paulínia. Prior to the completion of the first phase of the Petrobras Transaction, Paulínia was a joint venture between our company and Petroquisa and its results were proportionally consolidated in our financial statements. As a result of the completion of the first phase of the Petrobras Transaction, we have fully consolidated the results of Paulínia into our financial statements as from April 1, 2008.

Under the Petrobras Investment Agreement, Petrobras had the option in the second phase of the Petrobras Transaction to contribute up to 100% of the share capital of Triunfo to Braskem in exchange for approximately 13.4 million of our class A preferred shares.

On May 5, 2009, the second phase of the Petrobras Transaction was completed with the merger of Triunfo with and into Braskem. Braskem issued an aggregate of 13,387,157 of our class A preferred shares to the shareholders of  Triunfo as consideration for their equity interests in Triunfo. Triunfo owned and operated a polyethylene plant located in the Southern Complex with an annual production capacity of 160,000 tons.

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Petroflex Transactions

In October 2007, we acquired shares of Petroflex representing 13.4% of its total and voting share capital from Suzano for an aggregate purchase price of R$61.0 million as a result of our exercise of our preemptive rights in August 2007 following the announcement of the acquisition of control of Suzano by Petrobras. As a result of this acquisition, we owned 33.5% of the total share capital of Petroflex including 33.6% of its voting share capital.

In April 2008, we sold all of our share capital in Petroflex to Lanxess Participações Ltda., or Lanxess, for an aggregate price of R$252.1 million. As a result of this transaction, we registered a non-operational gain of R$115.6 million.

Mergers of Copesul, Ipiranga Petroquímica and Paulínia into Braskem

On July 16, 2008, Grust contributed all of the share capital of Copesul that it owned to Ipiranga Petroquímica in exchange for common shares of Ipiranga Petroquímica. On July 28, 2008, Grust distributed these shares of Ipiranga Petroquímica, together with all of the share capital that it owned in Ipiranga Química and Paulínia, to Braskem. On September 11, 2008, Copesul merged with and into Ipiranga Petroquímica. In connection with this merger, Ipiranga Petroquímica issued 494,052,653 of its preferred shares, representing 0.71% of its total share capital, to Triunfo as consideration for the share capital of Copesul that Triunfo owned.

On September 30, 2008, the share capital of Ipiranga Petroquímica owned by Ipiranga Química was transferred to Braskem, and Ipiranga Petroquímica merged with and into Braskem. In connection with this merger, we issued 1,506,060 of our preferred shares, representing 0.5% of our total share capital, to Triunfo as consideration for the share capital of Ipiranga Petroquímica that it acquired in the merger of Copesul into Ipiranga Petroquímica.

On September 30, 2008, Paulínia merged with and into Braskem.

Change of Corporate Name of Ipiranga Química

On October 2, 2008, Ipiranga Química changed its corporate name to IQ Soluções & Química.

The Sunoco Chemicals Acquisition

On April 1, 2010, we acquired all of the outstanding capital stock of Sunoco Chemicals, which we have renamed Braskem Americas, for US$356.0 million. The assets of Braskem Americas consist of three polypropylene plants located in La Porte, Texas, Marcus Hook, Pennsylvania and Neal, West Virginia, with an aggregate annual production capacity of 950,000 tons, as well as a petrochemicals research facility in Pittsburgh, Pennsylvania. As a result of our acquisition of Braskem Americas, we will consolidate the results of the Braskem Americas into our financial statements as from April 1, 2010.

Strategic Rationale for the Sunoco Chemicals Acquisition

Through the Sunoco Chemicals Acquisition, we are taking an important step in the internationalization of our company and the establishment of our company as a participant in the U.S. petrochemical industry. We believe our acquisition of Braskem Americas will provide access to raw materials at competitive prices, diversification of our sources of raw materials and access to leading consumer markets. In addition, we believe that this acquisition may provide commercial and logistics synergies with our other investments in Mexico and Venezuela when our additional planned capacity in these countries becomes operational. In addition, we anticipate that this acquisition will assist in positioning our company to participate in growth opportunities in the North American market that may arise from further consolidation of the petrochemical industry in North America.

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Financing of Purchase Price

On March 29, 2010, we entered into a syndicated unsecured credit agreement in an aggregate principal amount of US$210.0 million to finance the Sunoco Chemicals Acquisition. The loans under this credit agreement bear interest at the rate of LIBOR plus 2.625% per annum, payable quarterly in arrears through April 2015. The principal amount of these loans is payable in five equal semi-annual installments, commencing in April 2013.

CADE Review of the Sunoco Chemicals Acquisition

The Sunoco Chemicals Acquisition is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate this transaction prior to receiving this final approval, unless CADE issues a writ of prevention blocking the transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. We submitted the terms and conditions of the Sunoco Chemicals Acquisition for review by the Brazilian antitrust authorities on February 24, 2010. The antitrust authorities will determine whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affect consumers in these markets. There can be no assurances that the Brazilian antitrust authorities will approve the Sunoco Chemicals Acquisition as currently structured or that these authorities will not impose additional conditions on the Sunoco Chemicals Acquisition.

The Quattor Acquisition

On January 22, 2010, we entered into the Quattor Investment Agreement with Odebrecht, OSP, Petrobras, Petroquisa and Unipar under which, among other things:

·          In February 2010, a subsidiary of Petrobras, which owned all of our common shares that were owned by Petrobras and its subsidiaries, was merged into BRK, a subsidiary of Odebrecht to which Odebrecht had contributed all of our common shares that were owned by Odebrecht and its subsidiaries ;

·          Odebrecht, OSP, Petrobras, Petroquisa and our company entered into the Petrobras Shareholders’ Agreement, relating to, among other matters, the voting and transfer of our shares;

·          In April 2010, Odebrecht and Petrobras contributed an aggregate of R$3.5 billion to the share capital of BRK, and we conducted a capital increase through a private subscription by our shareholders as a result of which we received net cash proceeds of R$3,742.6 million in exchange for the issuance of 243,206,530 of our common shares and 16,697,781 of our class A preferred shares;

·          In April 2010, we purchased 60% of the outstanding share capital of Quattor from Unipar for an aggregate amount of R$ 659.4 million and the assumption of a put option granted by Unipar to BNDESPAR with respect to the shares of RioPol held by BNDESPAR. Quattor is a holding company that owns, directly and indirectly, 75.0% of the outstanding share capital of RioPol, 99.3% of the outstanding share capital of Quattor Petroquímica, 100% of the outstanding share capital of Quattor Química, and 33.3% of the outstanding share capital of Polibutenos;

·          In May 2010, we purchased from Unipar all of the outstanding share capital of Unipar Comercial e Distribuidora S.A., or Unipar Comercial, for an aggregate amount of R$27.1 million, and 33.3% of the outstanding share capital of Polibutenos for an aggregate amount of R$22.4 million;

·          We and Petroquisa agreed to engage in a merger of shares transaction in which we will issue an aggregate of approximately 18 million of our common shares to Petroquisa, and Quattor will become our wholly-owned subsidiary. We expect to complete this transaction in the second quarter of 2010; and

·          We will conduct a tender offer to acquire the remaining 0.7% of the share capital of Quattor Petroquímica. We expect to complete this transaction in the third quarter of 2010.

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In connection with BNDESPAR’s acquisition of its equity interest in RioPol, Unipar granted to BNDESPAR an option to sell to Unipar 190,784,674 common shares of RioPol and 30 preferred shares of RioPol, representing 15.0% of the total share capital of RioPol.

Agreements Relating to COMPERJ and Suape Complex

In connection with the Quattor Acquisition, on January 22, 2010, we entered into an Association Agreement with Odebrecht, OSP, Petroquisa and Petrobras regarding the continued development of two petrochemical complexes in the States of Rio de Janeiro and Pernambuco, Brazil. The Rio de Janeiro Petrochemical Complex ( Complexo Petroquímica do Rio de Janeiro ), which we refer to as COMPERJ, an integrated petrochemical complex to be located in Itaboraí in the State of Rio de Janeiro, is currently under development by Petrobras and Petroquisa. Petrobras has announced that COMPERJ is expected to have annual production capacity of:

·          1, 300,000 tons of ethylene;

·          8 00,000 tons of propylene;

·          8 5 0,000 tons of polypropylene; and

·          8 50,000 tons of polyethylene .

As part of our evaluation of a potential investment in COMPERJ, we are reviewing the scale and scope of this project.

Under the Association Agreement, within 60 days after Petrobras and Petroquisa deliver their development plan for COMPERJ to Braskem, Braskem has the option of entering into negotiations with the other parties to the Association Agreement to continue the development of, and assume control of, COMPERJ. If Braskem elects to exercise this option, the parties to the Association Agreement will use their best efforts to enter into such agreements as may be necessary to allow Braskem to assume control of COMPERJ within 120 days after delivery of the development plan. In the event that Braskem does not exercise its option, Braskem will have the right, for so long as Petrobras and Petroquisa collectively own a controlling interest in COMPERJ, to distribute COMPERJ’s products to third parties on terms mutually acceptable to Petrobras, Petroquisa and Braskem.

Petrobras and Petroquisa are also developing an integrated petrochemical complex to be located in Ipojuca in the State of Pernambuco, which we refer to as the Suape Complex. The Suape Complex will be composed of three integrated plants:

·          a purified tereftalic acid, or PTA, plant with an annual production capacity of 700,000 tons;

·          a polyethylene therephthalate, or PET, plant with an annual production capacity of 450,000 tons; and

·          a textile polymers and polyester filaments plant with an annual production capacity if 240,000 tons.

Under the Association Agreement, the parties have agreed that they will use their best efforts to execute all necessary corporate and contractual documentation to allow Braskem to acquire a controlling interest in the companies developing the Suape Complex during the second quarter of 2010. The acquisition price to be paid by Braskem in connection with this acquisition will be determined by investment advisers to Braskem, Petrobras and Petroquisa.

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Strategic Rationale for the Quattor Acquisition

Through our participation in the Quattor Acquisition, we are taking a further major step in the consolidation and development of the Brazilian petrochemical industry and therefore our position in the global petrochemical industry. We believe the Quattor Acquisition will provide the following strategic and financial benefits to our company:

• Diversify our principal feedstocks —By acquiring RioPol, which operates using ethane and propane as feedstocks, and Quattor Química, which uses naphtha, ethane and propane supplied by Petrobras, we have diversified the types of feedstocks that we use in our basic petrochemical business. In addition, the Quattor Acquisition will allow Braskem to optimize the naphtha supply logistics from Petrobras and from foreign suppliers, which we believe will permit us to reduce costs significantly in this area ;
• Expand our business to achieve greater economies of scale and operational flexibility —By expanding the size and geographic scope of our business, we believe that we will attain economies of scale, including reduced costs related to maintenance services, energy, raw materials and supplies and logistics. In addition, because we will have greater production capacity for a range of resins, we will be able to optimize our production mix and utilize specific plants for longer production runs of specific resins, thus lowering our transition costs; and

• Increased leadership role in Latin America – The Quattor Acquisition will allow us to join technological efforts and innovative actions in order to develop new products and applications, providing value-added services and solutions to our client base. In addition, Braskem will take a leading role in the petrochemical segment, reinforcing actions to protect and strengthen the entire value chain.

Accounting and Financial Impact of the Quattor Acquisition

As a result of our acquisition of control of the Quattor Companies, we have consolidated the results of the Quattor Companies into our financial statements as from April 1, 2010, including the indebtedness of the Quattor Companies. At December 31, 2009, (1) the total outstanding debt of Quattor was R$7,370.9 million, ( 2 ) the total outstanding debt of Polibutenos was R$41.3 million, of which R$13.6 million was reflected in the balance sheet of Quattor due to the proportional consolidation of the results of Polibutenos in the financial statements of Quattor, and (3) the total outstanding debt of Unipar Comercial was R$29.8 million.

CADE Review of the Quattor Acquisition

The Quattor Acquisition is subject to the final approval of the Brazilian antitrust authorities. However, Brazilian law permits us to consummate these transactions prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. We, together with Petrobras, submitted the terms and conditions of the Quattor Acquisition for review by the Brazilian antitrust authorities on February 5, 2010. The antitrust authorities will determine whether these transactions negatively impact competitive conditions in the markets in which we compete or adversely affect consumers in these markets. We cannot assure you that the Brazilian antitrust authorities will approve the Quattor Acquisition as currently structured or that these authorities will not impose additional conditions on the Quattor Acquisition.

Refinancing of Quattor Indebtedness

On March 31, 2010, Quattor prepaid its outstanding indebtedness to the International Finance Corporation, or the IFC, in the aggregate principal amount of US$145.0 million.

On April 8, 2010, Quattor entered into a credit agreement with an international financial institution under which Quattor borrowed an aggregate principal amount of R$563.0 million. This loan bears interest, payable in arrears at the CDI rate plus 1.20% per annum. The principal amount of this loan matures within 120 days after disbursement. This loan can be prepaid at any time without penalty.

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On April 15, 2010, Quattor prepaid its outstanding indebtedness to the Export-Import Bank of the United States, or the Exim Bank, and under its loan agreements guaranteed by Servizi Assicurativi del Commercio Estero, or SACE. The aggregate principal amount outstanding under these loans was US$281.2 million.

Following the Quattor Acquisition and through May 26, 2010, we prepaid R$2, 208 .9 million aggregate principal amount of Quattor’s outstanding real -denominated indebtedness and US$ 271.7 million of Quattor’s outstanding U.S. dollar-denominated indebtedness with the proceeds of our capital increase.

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Our Corporate Structure

The following chart presents our ownership structure and the corporate structure of our principal subsidiaries and equity investments as of May 26, 2010. The percentages in bold italics represent the percentage of the voting share capital owned by each entity and the percentages not in bold italics represent the percentage of the total share capital owned by each entity.

(2)   Includes shares held by Petroquisa.

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Petrochemical Industry Overview

Global Petrochemical Industry

The petrochemical industry transforms a variety of feedstocks, primarily naphtha (a by-product of the oil refining process), ethane, propane, butane and condensate (a by-product of the natural gas condensation process), into widely used industrial and consumer goods. The petrochemical industry is generally organized into first, second and third generation producers based on the stage of transformation of various petrochemical raw materials, or feedstocks.

First Generation Producers

First generation producers, which are referred to as “crackers,” break down or “crack” naphtha, ethane, propane, butane or condensate, their principal feedstocks, into basic petrochemicals. Crackers account for approximately 98% of global production of ethylene. The basic petrochemicals produced by these crackers include:

·          olefins, primarily ethylene, propylene and butadiene;

·          aromatics, such as benzene, toluene and xylenes (including para-xylene, ortho-xylene and mixed xylenes), which we refer to as BTX products; and

·          fuels, solvents and other products.

The use of different types of feedstock results in different products in the cracking process. Crackers using naphtha as their feedstock produce a larger quantity of by-products and co-products, such as propylene and BTX products, than crackers using ethane, propane or butane as their feedstocks.

Naphtha is the primary feedstock, accounting for almost 60% of the world’s ethylene production. The petrochemical industries in Asia and Europe predominantly use naphtha as feedstock, while those in the Middle East and North America primarily use ethane, propane or butane. First generation producers in South America predominantly use naphtha as their feedstock.

CMAI reports that annual global ethylene production capacity in 2009 was 133 million tons. The table below sets forth annual global ethylene production capacity by region for 2009.

Source: CMAI

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A number of petrochemical companies have announced plans to build significant additional ethylene production capacity, primarily in the Middle East and Asia. According to CMAI, 25.3 million tons of annual ethylene capacity are scheduled to be commissioned between 2010 and 2014. However, expansions of ethylene capacity are frequently subject to delays and we cannot predict when the planned additional capacity will be commissioned, if at all. For example, of the 11.0 million tons of annual ethylene capacity that was scheduled to be commissioned in 2009, only 5.0 million tons has actually commenced production.

Countering this trend towards increased supply have been the significant capacity closures announced during the fourth quarter of 2008 and during 2009 as a result of the global economic slowdown. As demand for products containing ethylene derivatives has declined, economically marginal ethylene capacity has been closed, primarily in the United States (approximately 1.7 million tons in 2009) and Western Europe (approximately 0.4 million tons in 2009).

Because ethylene must be stored and transported at cryogenic temperatures, the cost of storing and transporting ethylene is substantial and most ethylene is used to produce second-generation petrochemical products at plants located in or nearby the petrochemical complexes in which the ethylene is produced. Other products of the crackers are sold in global commodities markets.

Second Generation Producers

Second generation producers process the basic petrochemicals obtained from the crackers to produce intermediate petrochemicals, including thermoplastic resins. These petrochemicals include:

·          polyethylene, PVC and polystyrene (each produced from ethylene);

·          polypropylene and acrylonitrile (each produced from propylene);

·          caprolactam (produced from benzene); and

·          polyisobutylene (produced from butadiene).

Approximately 60% of all global ethylene production is used to produce polyethylene. Annual global production of polyethylene, polypropylene and PVC resins in 2009 was approximately 182 million tons, concentrated in Asia, followed by Europe and North America. CMAI estimates that by 2014 annual production capacity of these resins will increase by approximately 44 million tons, driven primarily by the growth in polyethylene production, concentrated in the Middle East and Asia, particularly in China.

Polyethylene, polypropylene and PVC resins are commodity products that are sold in global commodities markets. Prices of these resins are influenced by global macroeconomic factors, the cost of raw materials, demand trends in the industries that consume these resins and transportations costs. Industry profitability is measured based on the spread between the cost of feedstock and the price of the resins produced. As Asia is the largest regional producer and consumer of resins as well as the principal trader in the international market, demand in the region directly affects the spot prices in all regions. We use the Asia Resin Price – Naphtha Cost spread as a benchmark to analyze the profitability of the global petrochemical industry.

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Set forth below is a graph showing the Asia Resin Price – Naphtha Cost spread of high density polyethylene, or HDPE, from 2002 through 2009.

Source: CMAI

Third Generation Producers

Third generation producers purchase the intermediate petrochemicals from second generation producers and transform them into final products including:

·          plastics (produced from polyethylene, polypropylene and PVC);

·          acrylic fibers (produced from acrylonitrile);

·          nylon (produced from caprolactam);

·          elastomers (produced from butadiene, styrene and acrylonitrile); and

·          disposable containers (produced from polystyrene and polypropylene).

Third generation producers manufacture 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.

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Source: CMAI Braskem

Most of the polyethylene, polypropylene and PVC resins produced using the basic petrochemicals of the crackers located in Latin America is used in the country in which it is produced. The second generation producers in Brazil have historically exported a portion of their production to other countries in Latin America and elsewhere, second generation producers in Argentina have exported a significant portion of their production to Brazil and other countries in the region and second generation producers in Colombia have exported a portion of their production, primarily PVC, to other countries in the region.

Brazilian Petrochemical Industry

The production of first and second generation petrochemicals in Brazil centers around four major complexes. These complexes include:

·          the Northeastern Complex located in Camaçari in the State of Bahia, which commenced operations in 1978 and, at December 31, 2009, uses naphtha as its principal raw material and had an annual ethylene production capacity of 1,280,000 tons;

·          the Southern Complex located in Triunfo in the State of Rio Grande do Sul, which commenced operations in 1982 and, at December 31, 2009, uses naphtha as its principal raw material and had an annual ethylene production capacity of 1,252,000 tons;

·          the petrochemical complex located in Capuava in the city of Santo André, State of São Paulo, or the São Paulo Complex, which commenced operations in 1972 and, at December 31, 2009, uses naphtha as its principal raw material and had an annual ethylene production capacity of 700,000 tons; and

·          the petrochemical complex located in Duque de Caxias in the State of Rio de Janeiro, or the Rio de Janeiro Complex, which commenced operations in 2005 and, at December 31, 2009, uses ethane and propane as its principal raw materials and had an annual ethylene production capacity of 540,000 tons.

Each complex has a single first generation producer, also known as the raw materials center, and these raw materials centers supply basic petrochemicals to second generation production plants of our company and other second generation producers located in these complexes and elsewhere. The basic petrochemicals, which are in gaseous or liquid form, are transported primarily through pipelines to the second generation producers’ plants, which are generally located near the crackers, for further processing.

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We have owned and operated the cracker in the Northeastern Complex since it commenced operations. We have owned an interest in the cracker in the Southern Complex since 2002 and acquired the remaining interests in this cracker in 2007. Following the Quattor Acquisition, we will own and operate the crackers in the São Paulo Complex and the Rio de Janeiro Complex.

There are 33 second generation producers operating in Brazil. Following the Quattor Acquisition, we are the only producer of polyethylene and polypropylene located in Brazil, and one of two producers of PVC located in Brazil. Intermediate petrochemicals are produced in solid form as plastic pellets or powders and are transported primarily by truck to third generation producers, which generally are not located near the second generation producers.

Third generation producers manufacture 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 approximately 11,300 third generation producers operating in Brazil.

Petrobras’ Role in the Supply of Feedstocks to the Brazilian Petrochemical Industry

Prior to 1995, Brazil’s Constitution granted a monopoly to the Brazilian government, 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 byproducts of the refining process, such as naphtha, could only be supplied in Brazil by or through Petrobras. Naphtha is the principal feedstock used in Brazil for the production of basic petrochemicals such as ethylene and propylene. In 1995, the Brazilian Constitution was amended to allow petroleum and petroleum related activities to be carried out by private companies through concessions or authorizations granted by the Brazilian government.

In 1997, Law No. 9,478/97 implemented the 1995 constitutional amendment by creating the Brazilian Energy Policy Council ( Conselho Nacional de Política Energética ) and the National Petroleum Agency ( Agência Nacional do Petróleo ), or the ANP, which were charged with regulating and monitoring the oil industry and the Brazilian energy sector. Following the creation of the ANP, new rules and regulations were implemented, aimed at gradually ending Petrobras’ monopoly. Our company has imported naphtha from trading companies and oil and gas producers located abroad since 1997. In addition, during 2009, Petrobras supplied 64.7% of the naphtha consumed by our company, and the remaining naphtha consumed by our company was imported. In addition, during 2009, Petrobras supplied all of the naphtha ethane and propane consumed by Quattor.

Pricing and Tariffs

We set prices for ethylene, the principal first generation petrochemical product that we sell to third-party second generation producers, by reference to international market prices. See “—Basic Petrochemicals Unit—Sales and Marketing of Our Basic Petrochemicals Unit.” Prices paid by second generation producers for imported first generation petrochemical products partly reflect transportation and tariff costs. We establish the prices of ethylene by-products, such as butadiene, by reference to several market factors, including the prices paid by second generation producers for imported products. Prices paid for such imports also reflect transportation and tariff costs.

Second generation producers, including our company, generally set prices for their petrochemical products by reference to several market factors, including the prices paid by third generation producers for imported products. Prices paid for such imports also reflect transportation and tariff costs.

The Brazilian government has frequently used import tariffs to implement economic policies. As a result, import tariffs imposed on petrochemical products have varied in the past and may vary significantly in the future. Tariffs on imports of first generation petrochemical products, primarily propylene, have been set at 2.0% since 2004, while tariffs on polyethylene, polypropylene and PVC resins have been set at 14.0% since 2004.

Imports and exports within the free trade area in South America ( Mercado Comum do Sul ), or Mercosul, which is composed of Argentina, Brazil, Paraguay and Uruguay, have not been subject to tariffs since December 2001. Imports of suspension PVC from the U.S. and Mexico have been subject to tariffs of 16.0% and 18.0%, respectively, since 1992 as a result of the imposition of anti-dumping duties by the Brazilian Foreign Trade Chamber ( CAMEX—Câmara de Comércio Exterior ), or the CAMEX, of the Ministry of Development, Industry and Trade. These duties will expire on December 14, 2010, unless extended. Since 2008, imports of suspension PVC from the China have been subject to tariffs ranging between 10.5% and 21.6%, and imports of suspension PVC from South Korea have been subject to tariffs ranging between 2.7% and 18.9%, as a result of the imposition of anti-dumping duties by the CAMEX of the Ministry of Development, Industry and Trade. These duties will expire in August 2013, unless extended.

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Supply and Demand

Per capita consumption of polyethylene, polypropylene and PVC resins in Brazil has grown by a compound annual growth rate of 3.5% between 1995 and 2009, reaching 20.3 kilograms per person in 2009 according to reports of CMAI . However, Brazilian consumption of these resins is significantly lower than the consumption in the United States (76 kilograms per person), Europe (68 kilograms per person), and Japan (57 kilograms per person) reported by CMAI.

The Brazilian markets in which we compete are cyclical and are sensitive to changes in supply and demand. Demand for our petrochemical products in Brazil is significantly affected by general economic conditions in Brazil and other countries in Mercosul, particularly Argentina. The Brazilian markets are also impacted by the cyclical nature of international markets as prices for petrochemical products in Brazil are determined in part by reference to international market prices for these products and by the prices, including tariff and transportation costs, paid by importers of petrochemical products into Brazil.

Traditionally, the second and third calendar quarters have been the periods of the year with the highest sales for the petrochemical industry in the Brazilian market. The increase during this six-month period is tied in part to the production of consumer goods for sale during the year-end holiday season.

The following table sets forth information relating to the estimated production of Brazilian companies and to exports and imports of the products included therein for the years indicated. The estimates of total domestic consumption assume that all domestic production is immediately sold in the market and that there has been no change in total domestic inventory.

(1)   Includes ethylene, propylene and butadiene.

(2)   Preliminary data.

(3)   Includes benzene, toluene and xylenes.

(4)   Includes polyethylene, polypropylene, and ethyl vinyl acetate copolymer, or EVA.

(5)   Preliminary data.

Source: ABIQUIM and Braskem estimates.

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U.S. Polypropylene Industry

The polypropylene industry in the United States consists of 11 companies with an aggregate annual production capacity of 8.4 million tons of polypropylene. Competition is based on price, product quality, product delivery, reliability of supply, product performance and customer service. In general, demand is a function of economic growth in the United States and elsewhere in the world. Based on published rated industry capacities, Braskem Americas, which we acquired in April 2010, is the fourth largest producer of polypropylene in North America. The rated capacity of Braskem Americas’ polypropylene plants as of December 31, 2009 was approximately 950,000 tons per year, or approximately 11.1% of total industry capacity in the United States.

Basic Petrochemicals Unit

At December 31, 2009, our Basic Petrochemicals Unit’s facilities had one of the largest annual production capacities of all first generation producers in Latin America. Including net sales to our other business units, our Basic Petrochemicals Unit generated net sales revenue of R$11,144.2 million in 2009, or 54.5% of the net sales revenue of all segments in 2009. Net sales revenue generated by sales to our other business units was R$5,065.1 million during 2009, representing 45.5% of the net sales revenue of our Basic Petrochemicals Unit.

Prior to April 2007, our Basic Petrochemicals Unit was comprised of the operations conducted by our company in the Northeastern Complex. As a result of our obtaining effective management control over Copesul in April 2007, we have fully consolidated Copesul’s results in our consolidated financial statements and included Copesul’s results in our Basic Petrochemicals segment as from April 1, 2007. On September 11, 2008, Copesul merged with and into Ipiranga Petroquímica, and on September 30, 2008, Ipiranga Petroquímica merged with and into Braskem.

Our Basic Petrochemicals Unit produces:

·          olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene and butene-1;

·          aromatics, such as benzene, toluene, para-xylene, ortho-xylene and mixed xylene;

·          fuels, such as automotive gasoline and liquefied petroleum gas, or LPG; and

·          other basic petrochemicals, such as ethyl tertiary butyl ether, or ETBE, solvent C9 and pyrolysis C9.

The products of our Basic Petrochemicals Unit are used primarily in the manufacture of intermediate second generation petrochemical products, including those manufactured by our Polyolefins Unit and our Vinyls Unit. Our Basic Petrochemicals Unit also supplies utilities to other plants located in the Northeastern Complex and the Southern Complex and renders services to the operators of those plants.

In 2009, 83.9% of our Basic Petrochemicals Unit’s sales (including intra-company sales) were derived from the sale of basic petrochemicals, 5.4% from the sale of condensate, 5.2% from the sale of fuels, 4.7% from the sale of utilities and services and 0.8% from the sale of caprolactam and related products. In 2009, 52.2% of our Basic Petrochemicals Unit’s net sales revenue from sales of basic petrochemicals was derived from sales made to our Polyolefins and Vinyls Units.

We believe that our Basic Petrochemicals Unit is well positioned to take advantage of increased demand for basic petrochemicals products in Brazil, both by our other business units and by third parties, and to compete in the international market. As a result of the weakness in domestic demand for thermoplastics, as well as price instability as domestic prices of our products were realigned following the decline in global petroleum prices and the significant depreciation of the real against the U.S. dollar in the second half of 2008, we temporarily shut down one of our ethylene crackers in the Northeastern Complex and one of our ethylene crackers in the Southern Complex in December 2008. We resumed production at these facilities in February 2009 and beginning in March 2009 production reached historical capacity utilization rates.  As the margins that we expect to be able to generate on our exported basic petrochemical products are similar to those we have historically generated on our domestic sales of these products, we do not believe that the diversion of our basic petrochemical products to the export markets will have a material adverse effect on our operations or operating income. However, a prolonged slowdown in economic activity in Brazil and elsewhere could continue to reduce demand for some of our basic petrochemical products, which would adversely affect our results of operations.

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Products of Our Basic Petrochemicals Unit

Our other business units and third-party petrochemical producers use ethylene and propylene produced by our Basic Petrochemicals Unit to produce second generation products such as polyethylene, polypropylene and PVC. We also sell butadiene and a variety of aromatics, such as benzene, para-xylene, ortho-xylene and mixed xylenes, to third-party petrochemical producers for use as raw materials in the production of a variety of second generation products, including synthetic rubber, elastomers, resins, ethyl benzene (which is used to make styrene monomer/polystyrene), linear alkyl benzene, purified terephthalic acid, dimethyl terephthalate, or DMT, phthalic anhydride, plasticizers and paint.

The following table sets forth the sales volume of basic petrochemicals by our Basic Petrochemicals Unit (including our intra-company sales) for the periods indicated.

(1)   Includes Copesul as from April 1, 2007.

(2)   Includes the following intra-company sales:

·          approximately 1,966,300 tons of ethylene in 2009, 1,708,300 tons in 2008 and 1,644,000 tons in 2007;

·          approximately 630,900 tons of propylene in 2009, 638,400 tons in 2008 and 567,800 tons in 2007;

·          approximately 18,400 tons of para-xylene in 2007; and

·          approximately 25,300 tons of benzene in 2009, 55,800 tons in 2008 and 62,800 tons in 2007.

(3)   Includes benzene, toluene, ortho-xylene, para-xylene and mixed xylenes.

Olefins

Olefins are relatively unstable hydrocarbons characterized by a structure that is chemically active and permits other chemically reactive elements, such as oxygen, to be added. Ethylene and propylene, which are types of olefins, are the chemical “backbone” for many plastic resins used to manufacture consumer products. Our primary olefins products include polymer grade ethylene and propylene, also known as monomers. Different combinations of monomers are polymerized, or linked together, to form polymers or plastic resins with different properties and characteristics.

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Aromatics

Aromatics are hydrocarbons identified by one or more benzene rings or by chemical behavior similar to benzene. Aromatics readily react to add other active molecular groups, such as nitrates and sulfonates.

Caprolactam and Related Products

Caprolactam is a raw material that forms the basis for the production of Nylon-6 textile thread, engineering resins and film, and is a structural material in the motor and electronics industries. We also produce ammonium sulfate for use as a fertilizer, and cyclohexane and cyclohexanone, both for use in paint solvents, pesticides, natural resins, oils and rubber.

In May 2009, we temporarily closed our caprolactam plant. We are continuing to analyze our options regarding the resumption of caprolactam production based on our estimate of Brazilian demand for this product and our cost of production.

Condensate

Condensate is a low-density mixture of hydrocarbon liquids that are present in gaseous from in the raw natural gas produced from many natural fields and recovered through a condensation process. We resell condensate that we purchase from our raw material suppliers to RPR for further refining into naphtha which we then purchase from RPR.

Fuels

Our company has been authorized by the ANP to produce and sell automotive gasoline since August 15, 2000 and LPG since October 2, 2001, both domestically and for export. We have been producing and selling both automotive gasoline and LPG since these dates.

Utilities

We produce electric power, steam, compressed air and purified drinking and demineralized water, some of which are by-products of our production of basic petrochemicals. We use these utilities in our own production processes, including those of our Polyolefins Unit and our Vinyls Unit, and sell these utilities to other companies in the Northeastern Complex and the Southern Complex. Our utilities facilities include units for thermoelectric power generation, water treatment and the production of steam and compressed air.

Production Facilities of Our Basic Petrochemicals Unit

We believe that the technological processes we use at our basic petrochemicals plants are among the most advanced in the world. Our Basic Petrochemicals Unit currently owns and operates:

·          five major basic petrochemicals units in the Northeastern Complex (two olefins units, two aromatics units and a utilities unit); and

·          four major basic petrochemicals units in the Southern Complex (two olefins units, one aromatics unit and a utilities unit).

We define the term “unit” to mean several production lines that are linked together to produce olefins, aromatics or utilities. During 2008, we expanded the annual production capacity of one of our olefins units in the Southern Complex by 52,000 tons of ethylene and 30,000 tons of propylene. At December 31, 2009, our basic petrochemicals plants had total annual production capacity of 2,532,000 tons of ethylene and 1,210,000 tons of propylene.

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The table below sets forth the primary products of our Basic Petrochemicals Unit, annual production capacity at December 31, 2009 and annual production for the years presented.

(1)   Includes Copesul as from April 1, 2007.

(2)   Actual production may exceed production capacity based on the quantity of toluene and mixed xylenes consumed in the production of para-xylene.

(3)   In May 2009, we temporarily closed our caprolactam plant.

(4)   Automotive gasoline in cubic meters.

(5)   In September 2007, we completed the conversion of our methyl tertiary butyl ether, or MTBE, plant in the Southern Complex to the production of ETBE, and in July 2009 we completed the conversion of our MTBE plant in the Northeastern Complex to the production of ETBE.

Raw Materials of Our Basic Petrochemicals Unit

Naphtha

Naphtha is the principal raw material that we use to produce our basic petrochemical products and represents the principal production and operating cost of our Basic Petrochemicals Unit. We also use condensate as a raw material in our basic petrochemical units in the Southern Complex.

The price of naphtha and condensate that we purchase varies primarily based on changes in the U.S. dollar-based international price of crude oil. Naphtha and condensate accounted for 89.5% of the total cost of sales of our Basic Petrochemicals Unit during 2009, and accounted for 66.6% of our direct and indirect consolidated cost of sales and services rendered during 2009.

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The following table shows the average Amsterdam-Rotterdam-Antwerp market price of naphtha for the periods indicated.

___________________________

(1)   The information in the “Average” row represents (i) during 2009, 2008 and 2007, the mean average of average monthly naphtha prices during the year, and (ii) during 2010, the mean average of average monthly naphtha prices from January through April.

(2)   Through May 26, 2010.

Source : Bloomberg L.P.

Supply Contracts and Pricing of the Basic Petrochemicals Unit

The following table shows the distribution of the naphtha purchases by our Basic Petrochemicals Unit for the periods indicated.

___________________________

(1)   Includes Copesul as from April 1, 2007.

Supply Contracts with Petrobras

In July 2009, we and Petrobras entered into a Petrochemical Naphtha Purchase and Sale Contract, which we have operated under since March 2009. This contract replaced the naphtha supply contract between our company and Petrobras for the supply of naphtha to our basic petrochemicals plants located in the Northeastern Complex, which was terminated in June 2008, and superseded the naphtha supply contract between our company and Petrobras for the supply of naphtha to our basic petrochemicals plants located in the Southern Complex. This contract has a term of five years, expiring in March 2014, and is automatically renewable for one five-year period, unless either party notifies the other party in writing at least one year prior to the expiration of the contract that it does not intend to renew the contract.

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Under the terms of this contract:

·          Petrobras has agreed to sell and deliver naphtha to our basic petrochemicals plants in the Northeastern Complex and the Southern Complex exclusively for our use as a raw material;

·          we are required to purchase a minimum monthly volume of naphtha;

·          we provide Petrobras with a firm commitment order for naphtha each month, together with an estimate of the volume of naphtha that we will purchase over the following six months;

·          we may request volumes of naphtha that exceed a monthly firm commitment order, which Petrobras may supply at its discretion;

·          since March 2009, the price that we pay for naphtha is based on a variety of factors, including the market prices of naphtha and a variety of petrochemical derivatives, the volatility of the prices of these products in the international markets, the real /U.S. dollar exchange rate, and the level of paraffinicity of the naphtha that is delivered;

·          the contract will be amended in the event that unforeseen extraordinary events occur that cause a disruption in the economic-financial equilibrium of the contract; and

·          Petrobras may terminate the contract, without prior notice, in the event of: (1) our failure to cure any breach of the contract following a 30 day grace period; (2) a force majeure event that continues for more than 90 days; (3) we transfer or offer as a guaranty all or part of our rights and obligations under the contract to a third party without Petrobras’ consent; (4) an alteration of our ownership or corporate purposes that conflicts with the object of the contract; or (5) our dissolution, bankruptcy or liquidation.

Supply Arrangements with SONATRACH

La Société Nationale pour la Recherché, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures—SONATRACH (the Algerian national petroleum company), or SONATRACH, is our most important supplier of imported naphtha and condensate. We have imported naphtha supplied by SONATRACH since 2002. On an annual basis, we negotiate the minimum and maximum volumes of naphtha and condensate that we will purchase from SONATRACH and the pricing formula for the naphtha and condensate supplied by SONATRACH. In the event that we were unable to renew our supply arrangements with SONATRACH, we believe that we could purchase sufficient quantities of naphtha from other suppliers, including Petrobras, to meet the supply needs of our basic petrochemicals plants in the Northeastern Complex and the Southern Complex.

Supply Contracts with Repsol

Copesul began importing naphtha from Repsol YPF Trading y Transporte S.A., or Repsol, in 2002. On an annual basis, we negotiate the minimum and maximum volumes of naphtha that we will purchase from Repsol and the pricing formula for the naphtha and condensate supplied by Repsol. In the event that we were unable to renew our supply arrangements with Repsol, we believe that we could purchase sufficient quantities of naphtha from other suppliers, including Petrobras, to meet the supply needs of our basic petrochemicals plant in the Southern Complex.

Other Supply Contracts

As part of our strategy to diversify our sources of supply of naphtha, we have entered into a short-term naphtha supply agreement with PDVSA and are negotiating a naphtha supply agreement with Pemex.

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Spot Market Purchases of Naphtha

In addition to our supplies of naphtha under the agreements described above, we purchase naphtha on the spot market from time to time from foreign suppliers located in North Africa and South America.

Utilities

We self-generate approximately 45% of the Northeastern Complex’s energy consumption requirements, and the remainder is furnished by Companhia Hidro Elétrica do São Francisco—CHESF, or CHESF, a Brazilian government-owned electric power generation company located in the State of Bahia, and by Companhia de Eletricidade do Estado da Bahia—COELBA.

We self-generate approximately 35% of the Southern Complex’s energy consumption requirements, and the remainder is acquired primarily under auction contracts in the free market for energy ( Mercado Livre de Energia ) from several companies.

Sales and Marketing of Our Basic Petrochemicals Unit

Basic Petrochemicals

We sell our basic petrochemical products principally in Brazil, mainly to second generation petrochemical producers, including our other business units, as well as to customers in the United States, Europe, South America and Asia.

As is common with other first generation petrochemical producers, our Basic Petrochemicals Unit has a high concentration of sales to a limited number of customers. Net sales to our Basic Petrochemicals Unit’s 10 largest customers (excluding intra-company sales) accounted for 53.7% of our Basic Petrochemicals Unit’s total net sales revenue (excluding intra-company sales) during the year ended December 31, 2009.

As part of our commercial strategy, our Basic Petrochemicals Unit focuses on developing longer-term relationships with our customers. We have entered into long-term supply contracts with Oxiteno do Nordeste S.A., or Oxiteno, and Innova S.A., or Innova. These supply contracts have an initial 15-year term and are automatically renewable for additional terms of five years (Innova) or 10 years (Oxiteno), unless one party notifies the other of its intention not to renew. These contracts also provide for minimum and maximum quantities to be purchased and monthly deliveries.

We determine the domestic prices that we charge for ethylene by reference to Western European contract prices. We determine the domestic prices that we charge for propylene based on a formula under which 70% of the price is determined by reference to Northwest Europe prices and the remaining 30% is determined by reference to U.S. Gulf prices. We determine the domestic price of butadiene by reference to the North American contract price for these products, and our price for butadiene, unlike our prices for our other basic petrochemical products, include freight costs. We set the domestic prices of benzene and ortho-xylene by reference to North American spot market prices. We set the domestic prices of solvents by reference to international market prices and we determine the domestic prices for our other olefins and aromatics products with reference to several market indicators.

We export basic petrochemicals mainly to customers in the United States and in Europe. We set export prices for:

·          benzene, toluene and para-xylene with reference to market prices prevailing in the U.S. Gulf market; and

·          propylene, ETBE , ortho-xylene, butene-l and isoprene with reference to market prices prevailing in the European market.

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We are focused on maintaining our leading position in the Brazilian market, while continuing to use our exports to hedge our operations and adjust the imbalances between demand and production. Export net sales of our Basic Petrochemicals Unit represented 18.2% of our Basic Petrochemicals Unit’s net sales revenue during 2009.

The following table sets forth export volumes of our Basic Petrochemicals Unit for the years indicated:

(1)   Includes Copesul as from April 1, 2007.

Caprolactam and Related Products

We sell caprolactam and related products in northeastern Brazil, primarily to third generation petrochemical producers located in the Northeastern Complex, as well as to customers in South America and Asia.

Fuels

We sell automotive gasoline and LPG to Petrobras and fuel distribution companies. Our Basic Petrochemicals Unit has been authorized by the ANP to produce and sell automotive gasoline since August 15, 2000. We sold approximately 551,900 cubic meters of type “A” automotive gasoline in 2009.

We set the domestic prices for fuels by reference to Brazilian market prices and we set export prices for automotive gasoline with reference to market prices prevailing in the U.S. Gulf market. Domestic net sales revenue of our Basic Petrochemicals Unit from automotive gasoline was R$444.9 million in 2009, and export net sales revenue of our Basic Petrochemicals Unit from automotive gasoline was R$61.6 million in 2009.

Utilities

We produce electric power, steam, treated water and compressed air for our own use and for sale to other second generation producers in the Northeastern Complex and the Southern Complex and other companies located outside of these complexes. We the prices of utilities based on our production costs. In 2009, our net sales revenue from sales of utilities (including sales to our other business units) was R$515.4 million.

Competition

Our basic petrochemical customers, which are mostly second generation petrochemical producers with plants located in the Brazilian petrochemical complexes, would have difficulty obtaining their feedstocks from other sources at lower prices due to the high cost of transportation of these products, as well as other logistical difficulties. In addition, because Brazil produces sufficient quantities of olefins to meet domestic demand, imports of these products are generally sporadic and usually related to scheduled plant maintenance shutdowns or to meet unsatisfied domestic demand.

As a result of the weakness in demand for our basic petrochemical products from second-generation producers in Brazil during the second half of 2008, we diverted sales of these products to the export market and continue to export a greater percentage of these products than we have historically exported. Competition in the international markets for these products is primarily based on the price of delivered products and competition has increased since mid-2008 as the balance between supply and demand has been disrupted due to the impact of the global economic downturn on consumers of these products. We expect the disruption of the balance between supply and demand for our olefins products to continue to be disrupted in 2010 as additional ethylene capacity is commissioned. In the international markets for our basic petrochemical products, we compete with a large number of producers, some of which are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.

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Polyolefins Unit

At December 31, 2009, our polyolefins production facilities had the largest annual production capacity of all second generation producers of polyolefins products in Latin America. Our Polyolefins Unit generated net sales revenue of R$7,216.9 million during 2009, or 35.3% of the net sales revenue of all segments in 2009.

As a result of our obtaining effective management control over Ipiranga Petroquímica in April 2007, we have fully consolidated Ipiranga Petroquímica’s results in our consolidated financial statements and included Ipiranga Petroquímica’s results in our Polyolefins segment as from April 1, 2007. On September 30, 2008, Ipiranga Petroquímica merged with and into Braskem.

Prior to the completion of the first phase of the Petrobras Transaction on May 30, 2008, we owned 60.0% of the total and voting share capital of Paulínia. As a result, at dates and for periods prior to April 1, 2008, we proportionally consolidated Paulínia’s results in our consolidated financial statements and did not include Paulínia’s results in our Polyolefins segment. Following the completion of the first phase of the Petrobras Transaction on May 30, 2008, we owned 100% of the total and voting share capital of Paulínia, and have fully consolidated Paulínia’s results in our consolidated financial statements and included Paulínia’s results in our Polyolefins segment as from April 1, 2008. The Paulínia plant commenced operations in April 2008 with an initial annual production capacity of 300,000 tons of polypropylene. On September 30, 2008, Paulínia merged with and into Braskem.

On May 5, 2009, the second phase of the Petrobras Transaction was completed with the merger of Triunfo with and into Braskem. Prior to this merger, Triunfo owned and operated a polyethylene plant located in the Southern Complex with an annual production capacity of 160,000 tons.

Products of Our Polyolefins Unit

Our Polyolefins Unit produces:

·          polyethylene, including LDPE, LLDPE, medium density polyethylene, or MDPE, HDPE, UHMWP, and EVA; and

·          polypropylene;

We manufacture a broad range of polyolefins products for use in consumer and industrial applications, including:

·          plastic films for food and industrial packaging;

·          bottles, shopping bags and other consumer goods containers;

·          automotive parts; and

·          household appliances.

We anticipate that long-term growth in domestic demand for these products will continue to increase due to:

·          greater consumption of plastic-based consumer products, as Brazil’s consumption of plastic based products on a per-capita basis is low when compared to the United States and many European countries; and

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·          the trend towards substitution of plastics for more traditional packaging materials, such as glass and paper.

Prior to May 2007, our Polyolefins Unit also produced PET resin and DMT. In May 2007, we permanently closed the DMT unit in our PET plant as a result of this plant’s high maintenance and operational costs due to its aging technology. DMT is the primary raw material used by our PET plant. As a result, our PET plant was also temporarily closed in May 2007 in order for us to review the technology used to produce PET. Pending completion of a review of our options to resume PET production, we continued to serve our PET customers with PET purchased from M&G Polimeros Brasil S.A., or M&G, the largest PET producer in Brazil and a subsidiary of M&G Finanziaria Industriale S.p.A. In December 2008, we permanently closed our PET plant. We continued to purchase PET from M&G until the expiration of our purchase agreement with M&G in April 2009 and we continued to serve our PET customers with PET purchased under this agreement until June 2009.

The following table sets forth a breakdown of the sales volume of our Polyolefins Unit by product line and by market for the years indicated.

(1)   Includes Paulínia as from April 1, 2008.

(2)   Includes Ipiranga Petroquímica as from April 1, 2007.

(3)   In May 2007, we temporarily closed our PET plant. In December 2008, we permanently closed our PET plant.