Brazil’s cracked city leaves corporate heavyweights on the hook

By Gram Slattery and Amanda Perobelli

MACEIO, Brazil (Reuters) – A sudden, violent tremor knocked José Rinaldo Januario to the floor of his kitchen one Saturday afternoon two years ago – a mystery given the Brazilian city of Maceio had little history of seismic activity.

After seven seconds or so, when the shaking stopped, the bar owner and his 21-year-old son Arthur raced out onto the street, fearing the house might collapse.

“It was like a volcano exploded,” said Januario, 47.

Cracks in his home, which he had long assumed to be construction defects, widened in the months after the tremor in March 2018. His family was forced to abandon the house last year, part of an exodus of thousands of people being evacuated from the sweltering seaside city to keep them safe.

Last May, federal authorities identified a culprit: petrochemical giant Braskem. The authorities said nearby salt mines operated by the company threatened the structural integrity of more than 9,000 homes.

The saga, little known outside northeastern Brazil, has enraged many residents and officials in the state of Alagoas, the nation’s second-poorest. It represents a serious financial risk for Braskem and its two largest investors, bankrupt construction group Odebrecht and state-run oil firm Petrobras, Latin America’s biggest company.

Braskem believes the federal study that determined the reasons for the cracks in Maceio is methodologically flawed and inconclusive, and has commissioned studies of its own.

Nonetheless, in January the company announced a deal with prosecutors to provide 1.7 billion reais ($387.4 million) over two years to relocate and compensate 17,000 residents, though it did not admit blame for the damage. Its Brazil-listed shares shot up on investor hopes the accord would draw a line under a multi-billion-dollar question mark.

However seven state and federal prosecutors involved in the case told Reuters that the 1.7 billion reais – a cost estimate by Braskem – was a minimum initial payment and that the company may have to pay more out.

“That’s a floor, not a ceiling,” said Ricardo Melro, head of the Alagoas public defender’s office, the most explicit public indication from officials that Braskem’s compensation and relocation costs could exceed the figure flagged in January.

Melro said he believed the company would end up paying about 2.3 billion reais, about a third more.

In response to Reuters queries, Braskem representatives said they were confident in their estimate. The company has an extra 2 billion reais available in the unlikely event costs run over, they added.

Federal prosecutor Niedja Kaspary, however, said Braskem would also likely be required to compensate 23,000 other residents in adjacent neighborhoods as a result of a 6.7 billion reais federal lawsuit launched against the company last year.

Unlike the 17,000 people, those residents are not deemed in imminent danger, but authorities warn their homes could be vulnerable in coming years.

(Graphic: Braskem Disaster – https://graphics.reuters.com/BRAKSEM-DISASTER/0100B5H03VF/braskem-disaster.jpg)

“They’re suffering losses because their homes are worth less, they’re scared (of a collapse),” Kaspary told Reuters. “That gives them a right to compensation.”

All the prosecutors said Braskem would likely have to pay out a significant amount in that case, with Melro estimating close to 2 billion reais. A decision or potential settlement is not expected for at least several months, prosecutors say, while any appeal could take years.

Braskem has not formally provisioned for any potential costs related to that case as its outcome remains “very uncertain,” a representative said.

Petrobras, which owns 36.1% of Braskem, and Odebrecht, with a 38.3% stake, declined to comment.

EARTH HOLLOWED OUT

On the ground, the frustration among residents is palpable. Some said financial compensation was beside the point.

“So many people have had their homes here for so long. They’ve lived here for so long, and they have stories to tell,” said Silvania Carmo Machado, 67, who moved 35 years ago into her hilltop house, which overlooks surrounding countryside.

While authorities want her to leave, and Braskem is set to offer 81,500 reais for her home, she has pledged to stay put.

Since the 1970s Braskem, Latin America’s largest petrochemical producer and a household name in Brazil, has dug more than 30 salt wells in Maceio, many next to the Mundau lagoon, a scenic estuary popular with boaters.

The salt is pumped to a nearby Braskem plant, where it is transformed into chlorine-based products that eventually become PVC piping and other consumer goods.

Above ground, the mining operations are inconspicuous, with little more than a large metal tube above each well.

Yet slowly, authorities say, the mines have hollowed out a layer of the earth about 1,000 meters (3,280 feet) below the surface. As the ground has settled, they say cracks have emerged in homes in four neighborhoods that harbor everything from expensive apartment blocks to hillside shanty towns.

Januario, the bar owner, was among the many residents whose walls and ceilings had been cracking for several years. But the fissures were initially small and easily fixed. That changed with the 2018 tremor, which followed a heavy rainstorm a month before, residents told Reuters. The cracks began to expand, prompting local and federal authorities to investigate.

In May 2019, Brazil’s federal geological survey issued a report, saying Braskem was to blame.

Ana Laura Sivieri, Braskem’s marketing and communications chief, told Reuters there could potentially be other causes for the tremor and cracking, however, including water damage, the type of soil in the region or a geological fault.

“Outside those other causes, Braskem is singled out by the geological service as one of the principal causes. Braskem has raised doubts about this,” she said.

‘WE WANTED TO STAY’

Braskem, which has closed all its salt mines in Maceio, said it had not laid anyone off at its chlorine plant, where it has halted production. Its operations employ hundreds of people and account for 3% of the state’s economic output.

During a Reuters visit to the plant, dozens of workers could be seen performing maintenance tasks such as raking leaves and cleaning the premises. Braskem is considering importing salt to allow it to restart production.

With billions of reais on the line, major shareholders are watching the situation in Maceio closely. In December, the then-CEO of Braskem was dismissed, partly because Petrobras was dissatisfied with how the company was dealing with the case, according to a source with direct knowledge of the matter.

Braskem and Petrobras (Petroleo Brasileiro SA) declined to comment about the circumstances of the former CEO’s dismissal. The former CEO, Fernando Musa, could not be reached for comment.

Braskem said it would execute the January deal with speed and compassion. It has hired dozens of professionals, from real estate agents to psychologists, to help those displaced.

For displaced residents like Januario, the wrench of leaving their homes is tough to overcome. Januario’s family now lives 22 miles away in a nondescript district next to an airport.

He had to abandon his bar, and is now helping out at a transportation firm. His children have switched schools. His mother and wife have both been diagnosed with clinical anxiety and depression.

“We wanted to stay in our neighborhood,” he said. “That doesn’t have a price.”

(Reporting by Gram Slattery and Amanda Perobelli in Maceio, Brazil; Additional reporting by Marta Nogueira in Rio de Janeiro and Paula Laier in Sao Paulo; Editing by Pravin Char)