SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

BRASKEM S.A.

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class		Name of Each Exchange on which Registered
Preferred Shares, Class A, no par value per share, each represented by American Depositary Receipts		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The total number of issued shares of each class of stock of Braskem S.A. as of December 31, 2006 was: 123,492,142 Common Shares, no par value per share, 246,107,138 Preferred Shares, Class A, no par value per share, and 803,066 Preferred Shares, Class B, no par value per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 þ

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

 

 

TABLE OF CONTENTS

PART I
ITEM 1. Identity of Director, Senior Management and Advisers			6
ITEM 2. Offer Statistics and Expected Timetable			6
ITEM 3. Key Information			6
ITEM 4. Information on the Company			24
ITEM 4A. Unresolved Staff Comments			87
ITEM 5. Operating and Financial Review and Prospects			87
ITEM 6. Directors, Senior Management and Employees			133
ITEM 7. Major Shareholders and Related Party Transactions			145
ITEM 8. Financial Information			152
ITEM 9. The Offer and Listing			162
ITEM 10. Additional Information			166
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk			187
ITEM 12. Description of Securities Other than Equity Securities			190
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies			191
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			191
ITEM 15. Controls and Procedures			191
ITEM 16A. Audit Committee Financial Expert			191
ITEM 16B. Code of Ethics			191
ITEM 16C. Principal Accountant Fees and Services			192
ITEM 16D. Exemptions from the Listing Standards for Audit Committees			192
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			193
PART III
ITEM 17. Financial Statements			194
ITEM 18. Financial Statements			194
ITEM 19. Exhibits			194
SIGNATURES
EX-1.01 By-laws, as amended through April 2, 2007
EX-4.04 Share Purchase Agreement
EX-4.05 Investment Agreement
EX-4.06 Amendment to Investment Agreement
EX-4.07 Private Instrument of Chattel Mortgage
EX-4.08 Shareholders Agreement
EX-4.09 Memorandum of Understanding
EX-4.10 Agreement for Maintenance of Reversibility of Operations
EX-12.01 Certification of PEO
EX-12.02 Certification of PFO
EX-13.01 Certifications of PEO and PFO

INTRODUCTION

     All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars.

     All references herein (1) to “we,” “us” or “our company” are references to Braskem S.A., its consolidated subsidiaries and jointly controlled entities, and (2) to “Braskem” are references solely to Braskem S.A.

     On May 31, 2007, the exchange rate for reais into U.S. dollars was R$1.929 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. The selling rate was R$2.138 to US$1.00 at December 31, 2006 and the commercial selling rate was R$2.341 to US$1.00 at December 31, 2005 and R$2.654 to US$1.00 at December 31, 2004, in each case, as reported by the Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate at May 31, 2007 may not be indicative of future exchange rates. See “Item 3. Key Information—Exchange Rates” for information regarding exchange rates for the Brazilian currency since January 1, 2002.

     Solely for the convenience of the reader, we have translated some amounts included in “Item 3. Key Information—Selected Financial Information” and elsewhere in this annual report from reais into U.S. dollars using the selling rate as reported by the Central Bank at December 31, 2006 of R$2.138 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Such translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date.

Financial Statements

Braskem Financial Statements

     We maintain our books and records in reais.

     Our consolidated financial statements at December 31, 2006 and 2005 and for each of the years ended December 31, 2006, 2005 and 2004 have been audited, as stated in the report appearing herein, and are included in this annual report.

     We prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on:

	•		Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97 and Brazilian Law No. 10,303/01, which we refer to collectively as the Brazilian Corporation Law;
	•		the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários); and
	•		the accounting standards issued by the Brazilian Institute of Independent Accountants (Instituto dos Auditores Independentes do Brasil).

     Brazilian GAAP differs in certain respects from accounting principles generally accepted in the United States, or U.S. GAAP. For a discussion of certain differences relating to these financial statements, see note 31 to our audited consolidated financial statements included elsewhere in this annual report.

     Consistent with Brazilian GAAP, our consolidated financial statements at December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 have been prepared in accordance with Brazilian Securities Commission Instruction No. 247/96, as amended by Brazilian Securities Commission Instruction Nos. 269/97 and 285/98, which we refer to collectively as Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries, but which we jointly control with one or more other shareholders.

     Our consolidated financial statements reflect reclassifications in 2005 and 2004 of the following items to provide a better comparison among 2006, 2005 and 2004:

	•		Prior to January 1, 2006, we recorded expenditures for programmed maintenance shutdowns of our plants as “Deferred charges.” Such expenses occur at scheduled intervals from one to six years and are depreciated to production cost until the beginning of the next maintenance shutdown. Beginning January 1, 2006, in accordance with IBRACON Technical Interpretation 01/2006, we recorded all programmed maintenance shutdown expenses in property, plant and equipment as “Machinery, equipment and facilities.” In addition, the retrospective effects of depreciation with the adoption of this interpretation was recognized as shareholders’ equity. Accordingly, for periods ending after January 1, 2006, we have reclassified the amount of R$400.2 million from deferred charges to property, plant and equipment, and recognized the amount of R$164.9 million in shareholders’ equity.
	•		Prior to January 1, 2006, we recorded quotas subject to mandatory redemption as a separate line item of our balance sheet and not as part of loans and financing. Pursuant to Brazilian Securities Commission (Comissão de Valores Mobiliários , or CVM) Release 01/2006, we now present liabilities related to quotas subject to mandatory redemption as part of loans and financing. Accordingly, short-term loans and financing (including current portion of long-term debt) at December 31, 2005 and 2004 reflect the reclassification of quotas subject to mandatory redemption in the amount of R$225.4 million and R$22.4 million, respectively, and long-term loans and financing at December 31, 2005 and 2004 reflect the reclassification of quotas subject to mandatory redemption in the amount of R$404.1 million and R$201.8 million, respectively.
	•		Prior to 2005, our management was considering strategic alternatives with respect to the share capital that we own in Petroflex Indústria e Comércio S.A., or Petroflex, including the possible sale of this share capital. In 2005, our management decided to maintain its investment in Petroflex. At December 31, 2005, we owned 20.1% of the total and voting share capital of Petroflex. As a result, we have proportionally consolidated Petroflex in our consolidated financial statements at and for the year ended December 31, 2005. In previous years, we recorded our investment in Petroflex as an investment in an associated company. In order to provide a better comparison among 2006, 2005 and 2004, we have proportionally consolidated Petroflex in our consolidated financial statements at and for the year ended December 31, 2004.
	•		Beginning on January 1, 2005, pursuant to CVM Instruction 408, we are required to fully consolidate special purpose entities in our consolidated financial statements if specific criteria are met. These special purpose entities include, among others, Chemical Credit Rights Investment Fund ( Chemical Fundo de Investimento em Direitos Creditórios ) and Chemical Credit Rights Investment Fund II ( Chemical II Fundo de Investimento em Direitos Creditórios ). In order to provide a better comparison between 2006, 2005 and 2004, we have fully consolidated our special purpose entities in our consolidated financial statements at and for the year ended December 31, 2004. See notes 2 and 4 to our consolidated financial statements.
	•		Prior to 2005, we proportionally consolidated Companhia de Desenvolvimento Rio Verde, or Codeverde, in our consolidated financial statements. At December 31, 2005, we owned 35.5% of the total share capital and voting share capital of Codeverde. In 2005, the CVM granted our request for authorization to record our investment in Codeverde as an investment in an associated company pursuant to Instruction 247. In order to provide a better comparison between 2006, 2005 and 2004, we have recorded our investment in Codeverde as an investment in an associated company in our consolidated financial statements at and for the year ended December 31, 2004. See notes 2 and 4 to our consolidated financial statements.
	•		Prior to December 31, 2004, judicial deposits were recorded as long-term receivables. Pursuant to CVM Deliberation No. 489, we now state contingent liabilities net of the corresponding judicial deposits. In our 2004 consolidated balance sheet, we have reclassified R$170.3 million as long-term taxes and contributions.

     The financial statements for the year ended December 31, 2006 consider the full consolidation of Politeno Indústria e Comércio S.A., or Politeno, which became effective on April 1, 2006 (from January to March 2006, Politeno’s financial statements were proportionally consolidated). The financial statements of Politeno are presented in Note 3 (g) of the consolidated financial statements.

Copesul Financial Statements

     We have included separate consolidated financial statements of Copesul—Companhia Petroquímica do Sul, or Copesul, in this annual report because Copesul constitutes a “significant” jointly controlled company, accounting for 96.6% of our income from continuing operations before income taxes in 2006. Copesul maintains its books and records in reais and prepares its financial statements in accordance with Brazilian GAAP. Copesul’s consolidated financial statements at December 31, 2006 and 2005 and for each of the years ended December 31, 2006, 2005 and 2004 included in this annual report have been audited, as stated in the report appearing herein. Copesul’s consolidated financial statements are proportionally consolidated into the Braskem’s consolidated financial statements under Brazilian GAAP, as described above under “—Braskem Financial Statements.”

Share Splits

     On October 20, 2003, we authorized the split of all of our issued common shares, class A preferred shares and class B preferred shares into 20 shares for each issued share. This 20-for-one share split was effective on October 21, 2003. As a result of this share split, the ratio of our class A preferred shares to American Depository Shares, or ADSs, changed from 50 class A preferred shares per ADS to 1,000 class A preferred shares per ADS.

     On March 31, 2005, we authorized the reverse split of all of our issued common shares, class A preferred shares and class B preferred shares into one share for each 250 issued shares. This reverse share split became effective on May 16, 2005. In connection with this reverse share split, we authorized a change in the ratio of our ADSs. Upon the effectiveness of our reverse share split and the ratio change, the ratio of our class A preferred shares to ADSs changed from 1,000 class A preferred shares per ADS to two class A preferred shares per ADS. All references to numbers of shares and dividend amounts in this annual report have been adjusted to give effect to the 20-for-one share split and the one-for-250 reverse share split.

Market Share and Other Information

     We make statements in this annual report about our market share in the petrochemical industry in Brazil and our production capacity relative to that of other petrochemical producers in Brazil and Latin America. We have made these statements on the basis of information obtained from third-party sources that we believe are reliable. We have calculated our Brazilian market shares with respect to specific products by dividing our domestic net sales volumes of these products by the total Brazilian domestic consumption of these products estimated by the Brazilian Association of Chemical Industry and Derivative Products (Associação Brasileira de Indústrias Químicas e de Produtos Derivados). We derive information regarding the production capacity of other companies in the Brazilian petrochemical industry and the estimated total Brazilian domestic consumption of petrochemical products principally from reports published by the Brazilian Association of Chemical Industry and Derivative Products. Although we have no reason to believe that any of this information is inaccurate in any material respect, neither we nor the initial purchasers have independently verified the production capacity, market share, market size or similar data provided by third parties or derived from industry or general publications.

Production Capacity and Sales Volume

     As used in this annual report:

	•		“production capacity” means the annual projected capacity for a particular facility, calculated based upon operations for 24 hours each day of a year and deducting scheduled downtime for regular maintenance; and
	•		“ton” means a metric ton, which is equal to 1,000 kilograms or 2,204.62 pounds.

Rounding

     We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be arithmetic aggregations of the figures that precede them.

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

     This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the Securities Act or the U.S. Securities Exchange Act of 1934, or the Exchange Act.

     Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us.

     Our forward-looking statements may be influenced by factors, including the following:

	•		general economic, political and business conditions in our company’s markets, both in Brazil and abroad, including demand and prices for petrochemical products;
	•		interest rate, commodity price, inflation and exchange rate volatility;
	•		the cyclical nature of the Brazilian and global petrochemical industries;
	•		our ability to obtain financing on satisfactory terms;
	•		competition;
	•		actions taken by our major shareholders and other shareholders with convertible securities entitling them to acquire significant numbers of our shares;
	•		prices of naphtha and other raw materials;
	•		decisions rendered in pending major tax, labor and other legal proceedings;
	•		final decisions by Brazilian antitrust authorities regarding recent acquisitions by our company; and
	•		other factors identified or discussed under “Item 3. Key Information—Risk Factors.”

     Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.

     We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. IDENTITY OF DIRECTOR, SENIOR MANAGEMENT AND ADVISER

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Information

     The following selected financial data has been derived from our consolidated and combined financial statements.

     The selected financial data at December 31, 2006 and 2005 and for the three years ended December 31, 2006 have been derived from our consolidated financial statements included in this annual report. The selected financial data at December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 has been derived from our audited consolidated and combined financial statements that are not included in this annual report.

     Our consolidated and combined financial statements are prepared in accordance with Brazilian GAAP, which differs in certain respects from U.S. GAAP. For a discussion of certain differences relating to these financial statements, see note 31 to our audited consolidated financial statements included in this annual report.

     This financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements in this annual report.

		At and for the Year Ended December 31,
		2006(1)				2006				2005				2004				2003(2)				2002(2)(3)
		(in millions of
		US$, except
		financial
		ratios)								(in millions of reais, except financial ratios)
Statement of Operations Data
Brazilian GAAP:
Net sales revenue		US$	6,077.0			R$	12,992.7			R$	13,075.1			R$	12,389.5			R$	10,300.2			R$	7,576.6
Cost of sales and services rendered			(5,047.7	)			(10,792.1	)			(10,361.7	)			(9,223.0	)			(8,224.6	)			(6,175.5	)
Gross profit			1,029.3				2,200.6				2,713.4				3,166.5				2,075.6				1,401.1
Selling, general and administrative expenses			(445.0	)			(951.5	)			(787.1	)			(677.0	)			(488.4	)			(577.7	)
Investment in associated companies, net(4)			(13.5	)			(28.8	)			(109.8	)			(107.6	)			(170.5	)			(251.7	)
Depreciation and amortization			(180.1	)			(385.0	)			(355.6	)			(359.7	)			(193.5	)			(222.4	)
Financial expenses			(513.5	)			(1,097.9	)			(675.8	)			(1,307.2	)			(720.8	)			(3,481.5	)
Financial income			74.5				159.5				(33.6	)			68.6				9.2				619.6
Zero-rated IPI credit			—				—				—				—				—				1,030.1
Other operating income, net			87.1				186.1				22.8				43.0				55.5				102.6
Operating income (loss)			38.8				83.0				774.3				826.6				567.1				(1,379.9	)
Non-operating expenses, net			3.3				7.1				(25.2	)			(29.8	)			(4.5	)			(98.0	)
Income (loss) before income tax and social contribution (current and deferred) and minority interest			42.1				90.1				749.1				796.8				562.6				(1,477.9	)
Income tax and social contribution (current and deferred)			6.0				12.8				(177.3	)			(85.1	)			(121.3	)			(89.8	)
Income (loss) before minority interest			48.1				102.9				571.8				711.7				441.3				(1,567.7	)

		At and for the Year Ended December 31,
		2006(1)				2006				2005				2004				2003(2)				2002(2)(3)
		(in millions of
		US$, except
		financial
		ratios)								(in millions of reais, except financial ratios)
Minority interest			(0.7	)			(1.6	)			54.0				(24.6	)			(226.2	)			189.0
Net income (loss)		US$	47.4			R$	101.3			R$	625.8			R$	687.1			R$	215.1			R$	(1,378.7	)
Number of shares outstanding at year end, excluding treasury shares (in thousands):
Common shares							123,492				120,860				120,860				102,432				98,087
Class A preferred shares							231,744				240,393				240,373				170,379				168,491
Class B preferred shares							803				803				842				916				916
Net income (loss) per share at year end			0.13				0.28				1.73				1.90				0.79				(5.15	)
Net income (loss) per ADS at year end			0.27				0.57				3.46				3.80				1.57				(10.31	)
Dividends declared per share:
Common shares			—				—				0.90				0.56				—				—
Class A preferred shares			0.07				0.16				0.90				0.56				—				0.13
Class B preferred shares			0.07				0.16				0.56				0.56				—				0.13
Dividends declared per ADS			0.15				0.32				1.80				1.12				—				—
U.S. GAAP:
Net income (loss) for the year		US$	75.6			R$	161.6			R$	741.2			R$	843.1			R$	378.1			R$	(1,144.0	)
Basic earnings (loss) per share (weighted average):
Common shares			0.06				0.13				2.05				2.63				1.41				(11.93	)
Class A preferred shares			0.28				0.59				2.05				2.69				1.37				—
Class B preferred shares			0.29				0.63				0.63				0.56				0.44				—
Basic earnings (loss) per ADS (weighted average)			0.55				1.18				4.10				5.38				2.74				—
Diluted earnings (loss) per share (weighted average):
Common shares			0.06				0.13				1.95				2.40				1.41				(11.93	)
Class A preferred shares			0.28				0.59				1.95				2.40				1.37				—
Class B preferred shares			0.29				0.63				0.63				0.56				0.44				—
Diluted earnings (loss) per ADS (weighted average)			0.55				1.18				3.90				4.80				2.40				—
Balance Sheet Data
Brazilian GAAP:
Cash, cash equivalents and other investments		US$	917.2			R$	1,961.0			R$	2,281.5			R$	1,815.6			R$	1,221.2			R$	821.0
Short-term trade accounts receivable			746.0				1,594.9				1,493.3				1,630.6				1,241.0				959.0
Short-term inventories			826.6				1,767.3				1,567.4				1,562.4				1,092.3				889.1
Property, plant and equipment, net (5)			3,128.5				6,688.7				6,364.4				5,830.4				5,090.9				5,296.7
Total assets			7,626.0				16,304.3				15,590.8				15,050.4				14,005.6				13,898.2
Short-term loans and financing (including current portion of long-term debt) (6)			305.8				653.9				1,120.4				1,808.3				2,764.1				2,746.1
Short-term debentures			541.5				1,157.7				9.3				5.0				353.4				32.1
Short-term related party debt			—				—				3.1				—				5.5				8.2
Long-term loans and financing (6)			1,840.9				3,935.8				3,261.6				3,261.4				3,628.0				3,891.6
Long-term debentures			459.4				982.2				1,599.3				1,167.9				1,143.0				1,190.2
Long-term related party debt			2.2				4.8				3.0				115.8				177.6				189.3
Minority interest			10.2				21.8				121.2				203.1				554.4				433.1

		At and for the Year Ended December 31,
		2006(1)				2006				2005				2004				2003(2)				2002(2)(3)
		(in millions of
		US$, except
		financial
		ratios)								(in millions of reais, except financial ratios)
Share capital			1,640.9				3,508.3				3,403.0				3,403.0				1,887.4				1,845.4
Shareholders’ equity			2,016.8				4,311.9				4,535.8				4,183.7				2,112.6				1,821.8
U.S. GAAP
Total assets		US$	6,964.8			R$	14,890.7			R$	13,634.0			R$	12,671.7			R$	11,058.2			R$	10,531.7
Shareholders’ equity			1,387.7				2,966.8				2,918.4				2,439.6				7.8				(415.2	)
Other Financial Information
Brazilian GAAP:
Cash Flow Data:
Net cash provided by (used in):
Operating activities		US$	189.6			R$	405.3			R$	1,719.4			R$	1,916.0			R$	596.9			R$	790.0
Investing activities			(567.4	)			(1,213.1	)			(1,048.0	)			(1,014.4	)			(469.4	)			(646.7	)
Financing activities			102.5				219.2				(329.7	)			166.0				379.1				(237.2	)
Other Information:
Capital expenditures:
Property, plant and equipment and intangible assets		US$	445.7			R$	953.0			R$	930.2			R$	704.4			R$	223.7			R$	419.9
Investments in other companies			104.2				222.7				34.0				23.6				71.7				13.1

		At and for the Year Ended December 31,
		2006				2005				2004				2003				2002
Operating Data(7):
Ethylene:
Domestic sales volume (in thousands of tons)			1,108.5				1,169.8				1,098.9				1,047.3				994.8
Average domestic price per ton (in R$)			2,282				2,204				2,095				1,655				1,292
Propylene:
Domestic sales volume (in thousands of tons)			413.0				497.5				446.8				403.4				415.2
Average domestic price per ton (in R$)			2,110				2,132				1,833				1,477				1,106
Polyethylene:
Domestic sales volume (in thousands of tons)			672.0				502.3				498.7				446.1				491.7
Average domestic price per ton (in R$)			3,276				3,072				2,987				2,567				2,007
Polypropylene:
Domestic sales volume (in thousands of tons)			453.2				419.9				418.5				374.9				395.1
Average domestic price per ton (in R$)			3,344				3,344				3,155				2,689				1,931
Polyvinylchloride:
Domestic sales volume (in thousands of tons)			400.4				378.9				394.4				342.4				350.1
Average domestic price per ton (in R$)			2,518				2,747				3,042				2,390				2,034
Number of employees (at period end)			3,494				3,262				2,996				2,868				2,817

Exchange Rates

Prior to March 14, 2005, there were two principal foreign exchange markets in Brazil:

	•		the commercial rate exchange market; and
	•		the floating rate exchange market.

     Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. The floating rate exchange market generally applied to transactions to which the commercial market rate did not apply.

     On March 4, 2005, the National Monetary Council (Conselho Monetário Nacional) enacted Resolution No. 3,265, as well as additional regulations, that consolidated the two foreign exchange markets into a single foreign exchange market, effective as of March 14, 2005, in order to make foreign exchange transactions more straight-forward and efficient. Consequently, all foreign exchange transactions in Brazil are now carried out in this single foreign exchange market through authorized financial institutions. We cannot predict the impact of the enactment of any new regulations on the foreign exchange market.

     Foreign exchange rates continue to be freely negotiated, but may be influenced from time to time by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real/U.S. dollar exchange rate to float freely. Since then, the real/U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably. From December 31, 2000 through December 31, 2002, the real depreciated by 80.6% against the U.S. dollar. From December 31, 2002 through December 31, 2006, the real appreciated by 39.5% against the U.S. dollar. At May 31, 2007, the selling rate for U.S. dollars was R$1.929 per US$1.00. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political or economic instability or other factors. We also cannot predict whether the real will depreciate or appreciate in value in relation to the U.S. dollar in the future.

     The following table shows the commercial selling rate or selling rate, as applicable, for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the periods presented.

		Reais per U.S. Dollar
Year		High				Low				Average				Period End
2002			R$3.995				R$2.271				R$2.998				R$3.533
2003			3.662				2.822				3.071				2.889
2004			3.205				2.654				2.909				2.654
2005			2.762				2.163				2.413				2.341
2006			2.371				2.059				2.176				2.138

		Reais per U.S. Dollar
Month		High				Low
December 2006			R$2.169				R$2.138
January 2007			2.156				2.125
February 2007			2.118				2.077
March 2007			2.139				2.050
April 2007			2.048				2.023
May 2007			2.031				1.929

     

Source: Central Bank

Risk Factors

Risks Relating to Brazil

Brazilian political and economic conditions, and the Brazilian government’s economic and other policies, may negatively affect demand for our products as well as our net sales revenue and overall financial performance.

     The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil.

     Our results of operations and financial condition may be adversely affected by factors such as:

	•		fluctuations in exchange rates;
	•		exchange control policies;
	•		interest rates;
	•		inflation;
	•		tax policies;
	•		expansion or contraction of the Brazilian economy, as measured by rates of growth in gross domestic product, or GDP;
	•		liquidity of domestic capital and lending markets; and

•

other political, diplomatic, social and economic developments in or affecting Brazil.

     The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operations and financial performance of businesses, such as our company. Mr. Luiz Inácio Lula da Silva was reelected in October 2006 for a four-year presidential term commencing on January 1, 2007. We cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance.

The Brazilian government’s actions to combat inflation may contribute significantly to economic uncertainty in Brazil and reduce demand for our products.

     Historically, Brazil has experienced high rates of inflation. Inflation, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. The inflation rate, as measured by the General Price Index—Internal Availability (Índice Geral de Preços—Disponibilidade Interna), reached 2,708% in 1993. Although inflation rates have been substantially lower since 1994 than in previous periods, inflationary pressures persist. Inflation rates were 26.4% in 2002, 7.7% in 2003, 12.1% in 2004, 1.2% in 2005 and 3.8% in 2006, as measured by the General Price Index—Internal Availability. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.

     Brazil may experience high levels of inflation in future periods. Increasing prices for petroleum, the depreciation of the real and future governmental measures seeking to maintain the value of the real in relation to the U.S. dollar may trigger increases in inflation in Brazil. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which would lead to reduced demand for our products in Brazil and decreased net sales revenue. Inflation also is likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our real-denominated debt may increase, causing our net income to be reduced. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could adversely affect our ability to refinance our indebtedness in those markets. Any decline in our net sales revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our class A preferred shares and the ADSs.

Fluctuations in interest rates could raise the cost of servicing our debt and negatively affect our overall financial performance.

     Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. At December 31, 2006, we had, among other debt obligations, R$1,472.5 million of loans and financing and debentures that were subject to the TJLP (Taxa de Juros de Longo Prazo), a long-term interest rate, R$1.660.3 million of loans and financing and debentures that were subject to the CDI (Certificado Depositário Interbancário), an interbank rate, and R$347.1 million of loans and financing that were subject to LIBOR. The TJLP includes an inflation factor and is determined quarterly by the Central Bank. In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, in 2006 the CDI rate declined from 17.99% per annum at December 31, 2005 to 13.17% per annum at December 31, 2006. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” A significant increase in any of these interest rates could adversely affect our financial expenses and negatively affect our overall financial performance.

Fluctuations in the real/U.S. dollar exchange rate could increase inflation in Brazil, raise the cost of servicing our foreign currency-denominated debt and negatively affect our overall financial performance.

     The exchange rate between the real and the U.S. dollar and the relative rates of depreciation and appreciation of the real have affected our results of operations and may continue to do so.

     The Brazilian currency has devalued often during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. For example, the real appreciated in value against the U.S. dollar by 18.2% in 2003, 8.1% in 2004, 11.8% in 2005 and 8.7% in 2006.

     Devaluation of the real relative to the U.S. dollar also could result in additional inflationary pressures in Brazil by generally increasing the price of imported products and services and requiring recessionary government policies to curb demand. In addition, a devaluation of the real could weaken investor confidence in Brazil and reduce the market price of our class A preferred shares and the ADSs. On the other hand, further appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments and may dampen export-driven growth.

     We had total foreign currency-denominated debt obligations in an aggregate principal amount of R$3,117.3 million (US$1,458.0 million) at December 31, 2006, representing 46.3% of our indebtedness, excluding related party debt, on a consolidated basis. At December 31, 2006, we had US$493.4 million in U.S. dollar-denominated cash equivalents and other investments. A significant devaluation of the real in relation to the U.S. dollar or other currencies could reduce our ability to meet debt service requirements of our foreign currency-denominated obligations, particularly as our net sales revenue is primarily denominated in reais.

     In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. For example, the 34.3% devaluation of the real in 2002 substantially increased our financial expenses and was a significant factor in our net loss for that year.

     The prices of naphtha, our most important raw material, and of some of our other raw materials are denominated in or linked to the U.S. dollar. In 2006, 73.0% of our direct and indirect consolidated cost of sales and services rendered represented the cost of naphtha. When the real depreciates against the U.S. dollar, the cost in reais of our U.S. dollar-linked raw materials increases, and our operating income in reais decreases to the extent that we are unable to pass on these cost increases to our customers.

Brazilian government exchange control policies could increase the cost of servicing our foreign currency-denominated debt and impair our liquidity.

     The purchase and sale of foreign currency in Brazil is subject to governmental control. In 1990, the Central Bank centralized certain payments of principal on external obligations. Many factors could cause the Brazilian government to institute more restrictive exchange control policies, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy towards the International Monetary Fund and political constraints to which Brazil may be subject. A more restrictive policy could increase the cost of servicing our foreign currency-denominated debt obligations and other liabilities. Our foreign-currency denominated debt represented 46.3% of our indebtedness on a consolidated basis at December 31, 2006. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our class A preferred shares and the ADSs.

Changes in tax laws may result in increases in certain direct and indirect taxes, which could reduce our gross margin and negatively affect our overall financial performance.

     The Brazilian government implements from time to time changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In April 2003, the Brazilian government presented a tax reform proposal, which was mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states, and to redistribute tax revenues. Certain elements of this proposal were adopted, while other elements have been stalled and are unlikely to be enacted. We cannot predict the changes to Brazilian tax law that may be proposed and enacted in the future. However, future changes in

Brazilian tax law may result in increases in our overall tax burden, which could reduce our gross margin and negatively affect our overall financial performance.

Risks Relating to the Ipiranga Transaction

We may experience difficulties integrating Copesul, Ipiranga Química and Ipiranga Petroquímica and may fail to achieve the expected benefits from the acquisition.

     On March 18, 2007, we entered into agreements with Ultrapar Participações S.A., or Ultrapar, and Petróleo Brasileiro S.A.—Petrobras, or Petrobras, under which, among other things, we acquired control of Ipiranga Química S.A., or Ipiranga Química, and Ipiranga Petroquímica S.A., or Ipiranga Petroquímica, and the ownership of Ipiranga Petroquímica of 29.5% of Copesul’s share capital. To enable the effective transfer of these assets, we will enter into a series of transactions that we refer to as the Ipiranga Transaction. In connection with the Ipiranga Transaction, we have filed a request with the CVM through our subsidiary EDSP58 Participações S.A., or EDSP58, to delist the share capital of Copesul from the São Paulo Stock Exchange through a public tender offer for the Copesul shares not currently owned by our company, Ipiranga Petroquímica or Petrobras Química S.A., or Petroquisa, a subsidiary of Petrobras, which we refer to as the Copesul tender offer. For a discussion of these transactions, see “—Ipiranga Transaction.” Following these transactions:

	•		(1) we will own shares of Ipiranga Química S.A. representing 60% of its total share capital and voting share capital, and (2) assuming that all of the holders of the shares of Ipiranga Petroquímica accept the Ipiranga tender offer described below, Ipiranga Química will own all of the total share capital and voting share capital of Ipiranga Petroquímica; and
	•		(1) we will continue to own shares of Copesul representing 29.5% of the total and voting share capital of Copesul, (2) Ipiranga Petroquímica will continue to own shares of Copesul representing 29.5% of the total and voting share capital of Copesul, and (3) assuming that all of the holders of the shares of Copesul accept the Copesul tender offer, we will own 60% of the share capital of EDSP58 which will own shares of Copesul representing 25.5% of the total and voting share capital of Copesul;
	•		we will own shares of Refinaria de Petróleo Ipiranga S.A., or RPI, representing 33.3% of total share capital and voting share capital of RPI.

     Integrating Copesul, Ipiranga Química and Ipiranga Petroquímica with our operations will be a complex, costly and time-consuming process. Risks and challenges that may impair our ability to achieve the benefits of the Ipiranga Transaction include:

	•		Although we have experience integrating the operations of acquired companies into our operations, we lack experience integrating operations as substantial as the combined operations of Copesul, Ipiranga Química and Ipiranga Petroquímica. The Ipiranga Transaction is significantly larger than any other acquisition we have completed and integrating these operations into ours may require significant management time and resources and may divert management’s attention from our day-to-day business.
	•		Our acquisition of Ipiranga Química and Ipiranga Petroquímica was made on the basis of publicly available information about these companies and our acquisition of additional interests in Copesul was made on the basis of publicly available information about Copesul and information otherwise available to us as a significant shareholder of Copesul. Since our acquisition of Copesul, Ipiranga Química and Ipiranga Petroquímica on April 18, 2007, we have conducted only limited due diligence of non-public information about these companies, given the short period of time between this acquisition and the preparation of this annual report.
	•		We may incur unexpected liabilities or contingencies related to environmental regulation, labor, taxes or other matters as a result of our acquisition of Ipiranga Química and Ipiranga Petroquímica, and rights of acceleration or termination under agreements to which Ipiranga Química and Ipiranga Petroquímica are bound and that may be triggered as a result of our acquisition of Ipiranga Química and Ipiranga

			Petroquímica that could result in unanticipated expenses or adversely affect the results of operations and financial condition of Ipiranga Química or Ipiranga Petroquímica and, consequently, our company.
	•		We may have difficulty retaining and integrating key employees of Copesul, Ipiranga Química and Ipiranga Petroquímica. The operations of Copesul, Ipiranga Química or Ipiranga Petroquímica could be adversely affected if we cannot retain their key employees to assist in the integration of these companies into our company and in their ongoing operations.
	•		We may encounter difficulties or delays in implementing common information systems, operating procedures, sales and credit policies and financial controls.

     If we are unable to successfully respond to these risks and challenges, we may experience higher than expected operating costs or fail to achieve the anticipated benefits of the Ipiranga Transaction.

We have incurred and will incur a substantial amount of indebtedness in connection with the Ipiranga Transaction, which could limit our operating flexibility.

     As of December 31, 2006, we had R$6,729.6 million of outstanding indebtedness, excluding related party debt. The total purchase price to our company of the shares that we will acquire from Ultrapar in the Ipiranga Transaction is expected to be R$1,503.9 million. As part of the Ipiranga Transaction, our company has filed a request with the CVM to make a mandatory tender offer for the outstanding voting shares of Ipiranga Petroquímica not owned by Ipiranga Química, as required under Brazilian law, which we refer to as the Ipiranga tender offer, and to cancel the registration of Ipiranga Petroquímica as a public company with the CVM. If all holders of these shares accept the Ipiranga tender offer, the purchase price for these shares will be R$117.9 million. In addition, we will make payments in connection with the Copesul tender offer. If the holders of all of the Copesul shares accept the Copesul tender offer, our portion of the purchase price for these shares will be R$862.2 million. See “—Ipiranga Transaction.”

     As a result of the Ipiranga Transaction, we will consolidate the indebtedness of Ipiranga Química and Copesul into our financial statements. At December 31, 2006, Ipiranga Química had consolidated indebtedness, after giving effect to the proportional consolidation of Copesul, of R$930.0 million, and Copesul had consolidated indebtedness of R$334.6 million. At December 31, 2006, our consolidated indebtedness included R$98.6 million of Copesul’s indebtedness as a result of the application of proportional consolidation.

     On April 11, 2007, we entered into an unsecured credit agreement with three financial institutions in the aggregate amount of US$1.2 billion to finance the Ipiranga Transaction and the Copesul tender offer. We refer to this credit agreement as the acquisition credit agreement. On April 13, 2007, we received the first disbursement under the acquisition credit agreement in the aggregate amount of US$330.0 million to fund the first payment due as part of the Ipiranga Transaction.

     The substantial increase in our outstanding debt could limit our operating flexibility. In particular:

	•		A substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, reducing the funds available to us for other purposes.
	•		Our higher levels of indebtedness may impair our ability to adjust to changing market conditions or withstand competitive pressures.

     In addition, the principal amount of each disbursement under the acquisition credit agreement is payable on the second anniversary of such disbursement. If we are unable to refinance the amounts borrowed under the acquisition credit agreement on equivalent or more favorable terms, or at all, our inability to do so would have a material adverse effect on our results of operations and financial condition.

The Brazilian antitrust authorities could impose costly or restrictive conditions on the approval of the Ipiranga Transaction.

     The Ipiranga Transaction 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. Our company, together with Ultrapar and Petrobras, submitted the terms and conditions of the Ipiranga Transaction for review by the Brazilian antitrust authorities on April 9, 2007. These antitrust authorities will determine whether these transactions negatively impact competitive conditions in the markets in which we compete or whether they would negatively affect consumers in these markets.

     On April 17, 2007, CADE issued a writ of prevention relating to the Ipiranga Transaction, which, among other things, prevented our exercise of strategic management control over Ipiranga Química and Ipiranga Petroquímica. In issuing the writ of prevention, CADE stated that the purpose of the writ of prevention was to guarantee that the Ipiranga Transaction could be reversed in the event that CADE so determined following its review of the Ipiranga Transaction.

     On April 25, 2007, CADE revoked this writ of prevention upon the agreement of our company to execute an agreement designed to preserve the reversibility of the Ipiranga Transaction. Under this agreement, our company agreed to preserve all of the assets we acquire in the Ipiranga Transaction until CADE makes a final determination with respect to the Ipiranga Transaction, and our company is permitted to effectively own and manage these assets pending this final determination.

     Any action by the Brazilian antitrust authorities to impose conditions or performance commitments on our company as part of the approval of the Ipiranga Transaction could materially adversely affect our business, negatively affect our overall financial performance and prevent our company from achieving the anticipated benefits of the Ipiranga Transaction.

The businesses of Copesul and Ipiranga Petroquímica are subject to risks relating to the petrochemical business in which we currently operate.

     The acquisitions of Copesul and Ipiranga Petroquímica will subject us to risks connected with their businesses, many of which are similar to risks we already face as part of our operations. In particular, we note that:

	•		The operations of Copesul and Ipiranga Petroquímica are conducted in Brazil and Copesul and Ipiranga Petroquímica are exposed to traditional risks associated with operations in Brazil, such as fluctuations in interest rates, inflation and exchange rates, and changes in tax laws. See “—Risks Relating to Brazil.”
	•		Similarly to our company, Copesul and Ipiranga Petroquímica face risks relating to the cyclicality of the petrochemical markets, fluctuations in commodity prices, competition from Brazilian and international producers of polyethylene and polypropylene, the application of Brazilian federal, state and local environmental laws and regulations, and hazards associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and petrochemical products. See “—Risks Relating to Our Company and the Petrochemical Industry.”
	•		Copesul purchases approximately two-fifths of its supply of naphtha from Petrobras. Similarly to our Basic Petrochemicals Unit, Copesul’s production volume and net sales revenue would likely decrease and our overall financial performance would likely be negatively affected in the event of (1) significant damage to Petrobras’ refineries or logistics facilities, or (2) the termination by Petrobras of its supply contract with Copesul. See “—Risks Relating to Our Company and the Petrochemical Industry—We depend on Petrobras to supply us with the substantial portion of our naphtha requirements.”
	•		Copesul is the only supplier of ethylene and propylene to Ipiranga Petroquímica, which exposes Ipiranga Petroquímica to the same risks as our Polyolefins Unit as described under “—Risks Relating to Our Company and the Petrochemical Industry—Our Polyolefins and Vinyls Units depend on our Basic Petrochemicals Unit and Copesul to supply them with their ethylene and propylene requirements.”

Risks Relating to Our Company and the Petrochemical Industry

The cyclical nature of the petrochemical industry may reduce our net sales revenue and gross margin.

     The Brazilian petrochemical industry, including the markets in which we compete, is cyclical and sensitive to changes in supply and demand that are, in turn, affected by political and economic conditions in Brazil and elsewhere. This cyclicality may reduce our net sales revenue and gross margin. In particular:

	•		downturns in general business and economic activity may cause demand for our products to decline;
	•		when demand falls, we may face competitive pressures to lower our prices; and
	•		if we decide to expand our plants or construct new plants, we may do so based on an estimate of future demand that never materializes or materializes at levels lower than we predicted.

     The global petrochemical industry is also cyclical. Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase, followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. The Brazilian petrochemical industry has become increasingly integrated with the global petrochemical industry for a number of reasons, including increased demand for, and consumption of, petrochemical products in Brazil and the ongoing integration of regional and world markets for commodities. We establish the prices for the products we sell in Brazil with reference to international market prices. Our net sales revenue and gross margin are increasingly linked to global industry conditions that we cannot control.

We face competition from producers of polyolefins, vinyls and other petrochemical products.

     We face competition in Brazil from Brazilian and international producers of polyethylene, polypropylene, vinyls and other petrochemical products. In addition, we generally set the prices for our second generation products with reference to the prices charged for these products by foreign producers in international markets. We anticipate that we may experience increasingly intense competition from other producers of polyolefins and vinyls products, both in Brazil and in selected foreign markets in which we sell these products. Many of our foreign competitors are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.

     We face significant competition in the polyethylene market. Rio Polímeros S.A., or Rio Polímeros, a Brazilian petrochemical company, commenced operations of a major petrochemical plant in Brazil in 2005. The maximum annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene. In addition, Suzano Petroquímica S.A., or Suzano, expanded its annual polypropylene production capacity by 60,000 tons in July 2006, and Solvay Indupa do Brasil S.A., or Solvay, expanded its annual polyvinylchloride, or PVC, production capacity in Brazil by 35,000 tons in December 2005. Actions by our competitors, including any future increases in their capacity, may make it increasingly difficult for us to maintain our domestic market share in our thermoplastic products (i.e., polyethylene, polypropylene and PVC).

Higher naphtha costs would increase our cost of sales and services rendered and may reduce our gross margin and negatively affect our overall financial performance.

     Naphtha, a crude oil derivative, is the principal raw material of our Basic Petrochemicals Unit and, indirectly, of our other business units. In 2006, naphtha accounted, directly and indirectly, for approximately 73.0% of our consolidated cost of sales and services rendered. The price of naphtha supplied by Petróleo Brasileiro S.A.—Petrobras, or Petrobras, is linked to the Amsterdam-Rotterdam-Antwerp market price of naphtha and to the real/U.S. dollar exchange rate. The price of naphtha that we purchase from other international suppliers is also linked to the Amsterdam-Rotterdam-Antwerp market price. The Amsterdam-Rotterdam-Antwerp market price of naphtha fluctuates primarily based on changes in the U.S. dollar-based price of crude oil in the international markets.

     During 2006, the average price of naphtha in U.S. dollars increased by 18.6% to US$564.74 per ton in 2006 from US$476.04 per ton in December 2005. The U.S. dollar price of naphtha was volatile during 2006, ranging from a low of US$514.96 in November 2006 to a high of US$644.24 in July 2006. The U.S. dollar price of naphtha remained volatile in the first three months of 2007. See “Item 4. Information on the Company—Basic Petrochemicals Unit—Raw Materials of our Basic Petrochemicals Unit.” The price of naphtha may continue its upward trend or the real may devalue significantly in the future. Any increase in naphtha costs would reduce our gross margin and negatively affect our overall financial performance to the extent that we are unable to pass on these increased costs to our customers and could result in reduced sales volumes of our products.

We do not hedge against changes in naphtha prices, so that we are exposed to fluctuations in the price of our primary raw material.

     We currently do not hedge our exposure to fluctuations in naphtha prices, which are linked to the real/U.S. dollar exchange rate. Although we attempt to pass on increases in naphtha prices through higher prices for our products, in periods of high volatility in the U.S. dollar price of naphtha or the real/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar price of naphtha increases or the U.S. dollar appreciates and the time that we may effectively pass on those increased costs in reais to our customers in Brazil. As a result, if the U.S. dollar price of naphtha increases precipitously or the real depreciates precipitously against the U.S. dollar in the future, we may not immediately be able to pass on all of the corresponding increases in our naphtha costs to our customers in Brazil, which would likely reduce our gross margin and net income.

We depend on Petrobras to supply us with the substantial portion of our naphtha requirements.

     Petrobras currently is the only Brazilian supplier of naphtha and supplied 74.9% of the naphtha consumed by our company in 2006. Petrobras produces most of the naphtha it sells to us and imports the balance. Our production volume and net sales revenue would likely decrease and our overall financial performance would likely be negatively affected in the event of:

	•		significant damage to Petrobras’ refineries or to the port facilities through which Petrobras imports naphtha, or to any of the pipelines connecting our plants to Petrobras’ facilities, whether as a consequence of an accident, natural disaster, fire or otherwise; or
	•		any termination by Petrobras of the naphtha supply contract with our company, which provides that Petrobras may terminate the contract for a number of reasons, including as a result of a national emergency affecting the supply of petroleum derivatives in Brazil.

     In addition, although regulatory changes have ended Petrobras’ monopoly in the Brazilian naphtha market and have allowed us to import naphtha, any reversal in the continuing deregulation of the oil and gas industry in Brazil could increase our production costs.

Our Polyolefins and Vinyls Units depend on our Basic Petrochemicals Unit and Copesul to supply them with their ethylene and propylene requirements.

     Our Basic Petrochemicals Unit is the only supplier of ethylene to our Vinyls Unit, and our Basic Petrochemicals Unit and Copesul are the only suppliers of ethylene and propylene to our Polyolefins Unit. Because the cost of storing ethylene and propylene is substantial and there is inadequate infrastructure in Brazil to permit the importation of large quantities of these products, our production volumes of, and net sales revenue from, vinyls and polyolefins products would decrease, and our overall financial performance would be negatively affected, in the event of:

•

significant damage to our Basic Petrochemicals Unit’s or to Copesul’s facilities through which ethylene or propylene is produced, or to the pipeline or other facilities that connect these units to our Basic Petrochemicals Unit or Copesul, whether as a consequence of an accident, natural disaster, fire or otherwise; or

•

any significant reduction in the supply of naphtha to our Basic Petrochemicals Unit or to Copesul, as naphtha is the principal raw material used in the production of ethylene and propylene.

Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.

     Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard and Poor’s, and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard and Poor’s and Fitch maintain ratings of our company on a local and a global basis. Standard and Poor’s maintains a rating of our company on a local basis of “br AA/Stable Outlook” and Fitch maintains a national rating for our company of “AA- (bra)/Stable Outlook.” On a global basis, Standard and Poor’s maintains a local currency rating for our company of “BB” and a foreign currency rating for our company of “BB,” while Fitch maintains a local currency rating for our company of “BB+/Positive Outlook” and a foreign currency rating for our company of “BB+/Positive Outlook.” Any decision by these or other rating agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us and our liquidity.

Some of our shareholders may have the ability to determine the outcome of corporate actions or decisions, which could affect the holders of our class A preferred shares and the ADS.

     As of May 24, 2007, ODBPAR Investimentos S.A., or ODBPAR Investments, and its wholly owned subsidiary, Nordeste Química S.A.—Norquisa, or Norquisa, own 74.9% of our voting share capital. ODBPAR Investments is a member of a group of companies controlled by the Odebrecht family which we refer to as the Odebrecht Group. Designees of ODBPAR Investments currently constitute a majority of the members of our board of directors. Petroquisa has veto and other rights under a shareholders agreement as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders— Shareholders Agreements.” As a result, ODBPAR Investments and Petroquisa may have the ability to determine the outcome of major corporate actions or decisions requiring the approval of our shareholders or our board of directors, which could affect the holders of our class A preferred shares and the ADSs.

We may face conflicts of interest in transactions with related parties.

     We maintain trade accounts receivable and current and long-term payables with some of our affiliates and other related parties, including Petrobras (which is our sole domestic supplier of naphtha). As of May 24, 2007, Petrobras, through Petroquisa, is the indirect holder of 9.8% of our voting share capital and 8.2% of our total share capital. These accounts receivable and accounts payable balances result mainly from purchases and sales of goods, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. We also engage in financial and other transactions with some of our shareholders. These and other commercial and financial transactions between us and our affiliates could result in conflicting interests.

We may make significant acquisitions which, if not successfully integrated with our company, may adversely affect our operating results.

     We may make significant acquisitions in the future to continue our growth. Acquisitions involve risks, including the following:

	•		failure of acquired businesses to achieve expected results;
	•		possible inability to retain or hire key personnel of acquired businesses;
	•		possible inability to achieve expected synergies and/or economies of scale;
	•		unanticipated liabilities; and

•

antitrust considerations.

     If we are unable to integrate or manage acquired businesses successfully, we may not realize anticipated cost savings, revenue growth and levels of integration, which may result in reduced profitability or operating losses.

Future adjustments in tariffs on imports that compete with our products could cause us to lower our prices.

     We currently benefit from tariffs imposed by the Brazilian government on imports that allow us to charge prices for our polyolefins and vinyls products in the domestic market that include a factor based on the tariffs levied on comparable imports of those products. However, the Brazilian government has in the past used import and export tariffs to effect economic policies, with the consequence that tariffs can vary considerably, especially tariffs on petrochemical products. For example, in 2004 the Brazilian government lowered the tariffs applicable to most of the thermoplastic products that we produce by 1.5%. Future adjustments of tariffs could cause us to lower our domestic prices, which would likely result in lower net sales revenue and could negatively affect our overall financial performance.

Our business is subject to stringent environmental regulations, and imposition of new regulations could require significant capital expenditures and increase our operating costs.

     Our company, like other Brazilian petrochemical producers, is subject to stringent Brazilian federal, state and local environmental laws and regulations concerning human health, the handling and disposal of solid and hazardous wastes and discharges of pollutants into the air and water. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations. As environmental laws become more stringent in Brazil and worldwide, the amount and timing of future expenditures required for us to remain compliant could increase substantially and could decrease the availability of funds for other capital expenditures and other purposes.

We manufacture products that are subject to the risk of fire, explosions and other hazards.

     Our operations are subject to hazards, such as fires, explosions and other accidents, associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and petrochemical products. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A sufficiently large accident at one of our plants or storage facilities could force us to suspend our operations temporarily and result in significant remediation costs and lost net sales revenue. Although we maintain insurance coverage for losses due to fire damage and for losses of income resulting from shutdowns due to fire, explosion or electrical damage, those insurance proceeds may not be available on a timely basis and may be insufficient to cover all losses.

Unfavorable outcomes in pending litigation may reduce our liquidity and negatively affect our financial performance and financial condition.

     We are involved in numerous tax, civil and labor disputes involving significant monetary claims. If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts, which could materially adversely affect our financial condition and results of operations. For some of these lawsuits, we have not established any provision on our balance sheet or have established provisions only for part of the amounts in question, based on our judgments or opinions of our legal counsel as to the likelihood of winning these lawsuits.

     The lawsuits for which we have not established provisions or have established only partial provisions include the following:

•

Social Contribution on Net Income. We have challenged the constitutionality of the Brazilian federal Social Contribution on Net Income (Contribuição Social Sobre o Lucro Líquido). A Brazilian Federal Supreme Court (Supremo Tribunal Federal) decision in our favor was overruled in a subsequent rescission action filed by the Brazilian tax authorities, and our appeal of that suit is pending. We believe that it is reasonably possible that we will lose our appeal. If we lose our appeal, we believe that we would be required to pay

			Social Contribution on Net Income only from the date that a final decision is published. However, as Brazilian law allows rescission actions to relate back to, and to take effect from, the date of the initial decision, we believe that it is reasonably possible that we will be required to pay this tax from the date of the original decision, in which case our total estimated exposure at December 31, 2006, including interest, would be R$743.0 million. This amount does not include approximately R$199.5 million in penalties at December 31, 2006 that we believe we would not be required to pay because we relied upon a judicial decision in not paying the Social Contribution on Net Income. We believe that there is a possibility that we will be required to pay related interest and a remote possibility that we will be required to pay fines as a result of this tax litigation. We have not established a provision for these lawsuits.
	•		Cost of Living Adjustments on Workers’ Wages. The unions that represent employers and workers at the facilities located in the petrochemical complex located in Camaçari in the State of Bahia, which we refer to as the Northeastern Complex, are involved in a lawsuit over the indices we and other companies have used for cost of living adjustments on workers’ wages since early 1990. For a description of the legal bases of this suit, see “Item 8. Financial Information—Legal Proceedings—Labor Proceedings.” The Brazilian Federal Supreme Court has held in favor of the employers’ union, but has accepted a divergence appeal requesting the resolution of conflict between the decisions given by the Brazilian Federal Supreme Court under this proceeding and prior decisions given by another panel of the Brazilian Federal Supreme Court. Accordingly, the decision of the Brazilian Federal Supreme Court in our favor is not yet final and does not address damages. We believe it is reasonably possible that the employers’ union will lose the divergence appeal, which could adversely affect us. While we believe that it is possible, although unlikely, that an adverse judgment against the employers’ union could impact wages that we paid from April 1990 to the present, we believe that any judgment would most likely impact wages that we paid from April 1990 to September 1990 (the effective date of the next collective bargaining agreement). As we believe that it is not probable that the employers’ union will lose this suit, we have not recorded a provision in respect of this suit. If the employers’ union loses this suit and we are required to pay damages from April 1990 to September 1990, we estimate that we could be subject to liability of up to R$35.0 million, although additional claims would have to be brought by the workers’ union or individual employees to quantify the amount of damages that we would be required to pay.

     In addition, we believe that our chances of success are remote in a series of lawsuits in which we challenged the constitutionality of an increase in the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social—COFINS), or COFINS, tax rate. For a description of the legal bases of these suits, see “Item 8. Financial Information—Legal Proceedings—Tax Proceedings.” We had established total provisions of R$134.6 million at December 31, 2006 for all of our lawsuits relating to the Social Integration Program (Programa de Integração Social), or PIS, and COFINS, including separate lawsuits challenging the basis of calculation of PIS and COFINS. Because we have deposited only R$93.7 million of this amount with the courts, we would be required, in the event we receive final, unfavorable decisions, to pay the remaining amounts for which we have not made deposits.

     We are also parties to a number of lawsuits seeking tax credits that we believe the Brazilian tax authorities have disallowed or limited in violation of the Brazilian Constitution and/or applicable law. In some cases in which we have received favorable lower court decisions, we have used these credits to offset other tax obligations and have established provisions in an equivalent amount until a final decision is rendered. These provisions totaled R$1,197.1 million at December 31, 2006, as adjusted based on the Sistema Especial de Liquidação e de Custódia, or SELIC, interest rate. If we ultimately lose any of these lawsuits, we would be required to pay the tax obligations we had previously offset with those credits, which could materially reduce our liquidity. We believe that losses related to some of these lawsuits are reasonably possible.

     For more information about our legal proceedings, see “Item 8. Financial Information—Legal Proceedings.”

Risks Relating to Our Class A Preferred Shares and the ADSs

Our class A preferred shares and the ADSs have limited voting rights.

     Under the Brazilian Corporation Law and our by-laws, holders of our class A preferred shares and, consequently, the ADSs are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of class A preferred shares, such as modifying basic terms of our class A preferred shares or creating a new class of preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council. Holders of our class A preferred shares and the ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies.

Holders of the ADSs may find it difficult to exercise even their limited voting rights at our shareholders’ meetings.

     Holders may exercise the limited voting rights with respect to our class A preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our class A preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs will receive notice of a shareholders’ meeting by mail from the depositary following our notice to the ADR depository requesting the ADR depository to do so. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of class A preferred shares. If it fails to receive timely voting instructions for all or part of the ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.

     In the limited circumstances in which holders of the ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote our class A preferred shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and they will have no recourse if the class A preferred shares underlying their ADSs are not voted as requested.

Exchange controls and restrictions on remittances abroad may adversely affect holders of the ADSs and the underlying class A preferred shares.

     The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds of their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. The Brazilian government imposed remittance restrictions for approximately six months in 1990.

     These restrictions could hinder or prevent the Brazilian custodian of the class A preferred shares underlying the ADSs or holders who have exchanged the ADSs for the underlying class A preferred shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our class A preferred shares will hold the reais that it cannot convert for the account of holders of the ADSs who have not been paid. Neither the custodian nor the depositary will be required to invest the reais or be liable for any interest.

Holders of the ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.

     Holders of the ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporation Law.

     Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our class A preferred shares underlying the ADSs under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.

     Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our class A preferred shares and the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.

Holders of the ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

     We are a corporation (sociedade anônima) organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.

Actual or anticipated sales of a substantial number of class A preferred shares could decrease the market prices of our class A preferred shares and the ADSs.

     Sales of a substantial number of our class A preferred shares could negatively affect the market prices of our class A preferred shares and the ADSs. If, in the future, substantial sales of shares are made by ODBPAR Investments, Petroquisa or other existing or future holders of class A preferred shares, the market price of our class A preferred shares and, by extension, the ADSs may decrease significantly. As a result, holders of the ADSs may not be able to sell the ADSs at or above the price they paid for them.

Holders of the ADSs may be unable to exercise preemptive rights with respect to our class A preferred shares underlying the ADSs.

     Holders of the ADSs will be unable to exercise the preemptive rights relating to our class A preferred shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of the ADSs, and we may not file any such registration statement. If we do not file a registration statement or if we and the depositary decide not to make preemptive rights available to holders of the ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.

Holders of the ADSs could be subject to Brazilian income tax on capital gains from sales of ADSs.

     Historically, any capital gain realized on a sale or other disposition of ADSs between non-Brazilian holders outside Brazil was not subject to Brazilian income tax. However, Brazilian law provides that, commencing on February 1, 2004, “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquirer is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.” The Brazilian tax authorities have recently issued a normative instruction confirming that they intend to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. In our view, ADSs representing class A preferred shares, which are issued by the depositary outside Brazil, will not be deemed to be “property located in Brazil” for purposes of this law. However, we cannot assure holders of our ADSs whether Brazilian tax authorities will attempt to tax any capital gains arising from the sale or other disposition of ADSs, even when the transaction is consummated outside Brazil between non-Brazilian residents.

The relative volatility and liquidity of the Brazilian securities markets may decrease the liquidity and market price of our class A preferred shares and the ADSs.

     The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The São Paulo Stock Exchange (Bolsa de Valores de São Paulo), which is the principal Brazilian stock exchange, had a market capitalization of US$723 billion (or R$1,545 billion) at December 31, 2006 and an average daily trading volume of US$1,120 million for 2006. In comparison, The New York Stock Exchange had a market capitalization of US$20 trillion at December 31, 2006 and an average daily trading volume of US$68 billion for 2006. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 51.3% of the aggregate market capitalization of the São Paulo Stock Exchange at December 31, 2006. The ten most widely traded stocks in terms of trading volume accounted for approximately 46.1% of all shares traded on The São Paulo Stock Exchange in 2006. These market characteristics may substantially limit the ability of holders of the ADSs to sell class A preferred shares underlying ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of the ADSs themselves.

Developments in other emerging markets may decrease the market price of our class A preferred shares and the ADSs.

     The market price of the ADSs may decrease due to declines in the international financial markets and world economic conditions. Although economic conditions are different in each country, investors’ reaction to developments in one country can affect the securities markets and the securities of issuers in other countries, including Brazil. Brazilian securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Any return to economic turmoil in Argentina or adverse economic developments in other emerging markets may adversely affect investor confidence in securities issued by Brazilian companies, causing their market price and liquidity to suffer. Any such developments could immediately affect our ability to raise capital when needed and the market price of our class A preferred shares and the ADSs.

ITEM 4. INFORMATION ON THE COMPANY

     We are the leading petrochemical company in Latin America, based on average annual production capacity in 2006. We are also one of the two largest Brazilian-owned private sector industrial companies, based on net sales revenue in 2005 (the most recent year for which comparative information is currently available). We recorded net income of R$101.3 million in 2006 on net sales revenue of R$12,992.7 million, in each case under Brazilian GAAP. We produce a diversified portfolio of petrochemical products and have a strategic focus on polyethylene, polypropylene and PVC. We have integrated first and second generation petrochemical production facilities, with 18 plants in Brazil, including plants that we have acquired in the Ipiranga Transaction.

     Our registered office is at Rua Eteno, 1561, CEP 42810-000, Camaçari, Bahia, Brazil, and our telephone number at this address is 55-71-632-5102. Our principal executive office is at Avenida das Nações Unidas, 4777, São Paulo, SP, CEP 05477-000, Brazil, and our telephone number at this address is 55-11-3443-9000.

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 (sociedade anônima) 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, the petrochemical subsidiary of Petrobras, owned 36.2% of our total share capital, representing 48.2% of our voting share capital. At that time, 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.

Auction of Banco Econômico’s Petrochemical Assets

     On July 25, 2001, the Central Bank, as liquidator of Banco Econômico S.A., a Brazilian financial institution that collapsed in 1995, or Banco Econômico, conducted an auction of the petrochemical assets that had been owned by Banco Econômico. This auction was part of a broader initiative of the Brazilian government to restructure the Brazilian petrochemical sector.

     In order to increase its investment in the Brazilian petrochemical industry, the Odebrecht Group participated in this auction through Conepar—Companhia Nordeste de Participações do Nova Camaçari Participações S.A., or Nova Camaçari, a holding company which acquired the petrochemical assets being auctioned. In addition, Nova Camaçari acquired additional petrochemical assets from the Odebrecht Group, a group of companies controlled by the Mariani family, or the Mariani Group, and other entities which were entitled to sell assets to Nova Camaçari under the terms of various shareholder agreements.

     Immediately following these transactions, we acquired Nova Camaçari from the Odebrecht Group in order to expand the scope of our operations and become a vertically integrated producer of petrochemical products. Following these transactions, we owned indirectly (1) Conepar— Companhia Nordeste de Participações, which, in turn, held 66.7% of the voting share capital of Polialden Petroquímica S.A., or Polialden, and 35.0% of the voting

share capital of Politeno, and (2) Proppet S.A., or Proppet. In connection with these transaction, the Odebrecht Group purchased shares of Norquisa from one of Norquisa’s other shareholders in order to increase its percentage ownership of Norquisa. Following these transactions, the Odebrecht Group owned 39.7% of the voting share capital of Norquisa and, together with the Mariani Group, held a combined 55.8% of the voting share capital of Norquisa. In order to streamline our corporate structure, in September 2001, we merged Proppet into our company.

Acquisition of OPP Química, Nitrocarbono and Interest in Copesul

     In order to continue to implement our strategy of vertically integrating our operations and to further expand the scope of our operations, on August 16, 2002, we acquired from the Odebrecht Group and Pronor Petroquímica S.A., or Pronor, a member of the Mariani Group:

	•		81.3% of the total share capital of OPP Química S.A., or OPP Química, including 100% of its voting share capital. OPP Química, 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.

     In connection with these transactions, we issued shares representing 43.7% of our voting and total share capital to the Odebrecht Group and issued shares representing 3.6% of our voting and total share capital to Pronor. In October and December 2002, we acquired all of OPP Química’s total share capital that we did not own.

     In February 2003, we commenced a public exchange offer for the remaining voting share capital of Nitrocarbono not owned by our company. On February 13, 2003, immediately following our exchange of the shares tendered in this exchange offer for 128,973 of our class A preferred shares, we owned 93.8% of the total share capital of Nitrocarbono, including 99.99% of its voting share capital. On March 31, 2003, we merged with Nitrocarbono. In connection with this merger, we issued 5,415 of our class A preferred shares to the holders of shares of Nitrocarbono other than our company.

     On March 31, 2003, we merged with OPP Química. As a consequence of our merger with OPP Química, we acquired ownership of the share capital of Trikem previously owned by OPP Química.

     On June 30, 2003, we entered into an agreement under which we assumed debt of Copene Participações S.A. (formerly Conepar—Companhia Nordeste de Participações) owed to Polialden in the amount of R$30.2 million as well as debt of Copene Participações S.A. owed to the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) in the amount of R$38.9 million. In return, we received the shares of Polialden and Politeno owned by Copene Participações S.A. As a result, all of our equity interests in Polialden and Politeno were, and continue to be, held directly by our company, and Copene Participações S.A. no longer owns material assets or conducts any material operations.

Acquisition of Common Shares of Trikem and Polialden Held by Mitsubishi and Sojitz

     In order to acquire the remaining outstanding common shares of Polialden and substantially all of the remaining outstanding common shares of Trikem, on July 14, 2003, we entered into (1) a share purchase and sale agreement with Odebrecht S.A., or Odebrecht, and Mitsubishi Chemical Corporation, or Mitsubishi, and (2) a memorandum of understanding with Odebrecht and Sojitz Corporation (formerly known as Nissho Iwai Corporation), or Sojitz.

     Under the share purchase and sale agreement, Mitsubishi agreed to sell to us all of the share capital of Trikem and Polialden it owned, consisting of 16.7% of Polialden’s voting share capital and 13.4% of Trikem’s voting share capital for R$44.2 million. We paid a portion of the purchase price in cash, and we were obligated to pay the

remaining US$13.5 million to Mitsubishi on July 31, 2007, or earlier if before that date we met certain financial tests. We prepaid the remainder of the purchase price on July 29, 2005. Under this agreement, we are required to make an additional payment to Mitsubishi in an amount that is contingent upon the outcome of pending litigation filed against Polialden by certain of its preferred shareholders. We assumed the defense of this litigation as a result of our merger with Polialden on May 31, 2006. The amount of the additional payment that we are obligated to pay to Mitsubishi is (1) R$21.6 million if we prevail in this litigation or if a definitive settlement is reached, or (2) R$5.4 million if we lose this litigation. In either event, we will convert the amount of this additional payment (as adjusted for inflation at the Índice Geral de Preços—Mercado, or IGP-M, rate from July 31, 2003 until the date that this litigation is finally adjudicated or settled) into U.S. dollars on the final adjudication or settlement date. We are required to make this additional payment, plus interest from the date of this agreement at an annual rate of LIBOR plus 3.0%, within 60 days after the date on which this litigation is finally adjudicated or settled. Odebrecht has guaranteed our obligation to pay Mitsubishi the additional payment in connection with the Polialden shareholders’ rights litigation.

     Under the memorandum of understanding with Odebrecht and Sojitz, we agreed to purchase all of the share capital of Trikem and Polialden that Sojitz owned, consisting of 16.7% of Polialden’s voting share capital and 10.1% of Trikem’s voting share capital, in exchange for 4,345,162 of our common shares. As a result of this transaction, which closed on July 31, 2003, and after giving effect to the purchase from Mitsubishi described above, we increased our direct and indirect ownership of Trikem’s voting share capital to 87.9% and increased our ownership of Polialden’s voting share capital to 100%.

Merger of Trikem into Braskem

     On November 3, 2003, we commenced a public exchange offer for the remaining voting share capital of Trikem not owned by our company. On December 4, 2003, immediately following our exchange of the shares tendered in this exchange offer for 1,753,080 of our class A preferred shares, we owned, directly and indirectly, 53.8% of Trikem’s total share capital, including 99.9% of its voting share capital.

     At an extraordinary shareholders’ meeting on January 15, 2004, our shareholders approved our merger with Trikem, an amendment to our by-laws to permit the conversion of our class A preferred shares into common shares upon the approval of the majority of our voting share capital, and the conversion of 487,793 of our class A preferred shares into 487,793 of our 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 completion of our merger with Trikem. In connection with this merger, we issued 592 of our class A preferred shares in exchange for 514,366 of Trikem’s common shares and 32,544,069 of our class A preferred shares in exchange for 28,260,456,441 of Trikem’s preferred shares.

Exchange of Polialden Shares for Our Class A Preferred Shares

     On December 15, 2004, we exchanged 2,020,201 of our class A preferred shares which were held in our treasury for 47,846,610 preferred shares issued by Polialden held by certain of the shareholders of Polialden. The shareholders of Polialden participating in this exchange were parties to suits brought against Polialden claiming, among other things, that certain dividends were owed to these shareholders. In connection with the exchange of shares, these claims were relinquished by the Polialden shareholders participating in the exchange. As a result of this exchange, we increased our interest in the total share capital of Polialden from 56.3% to 63.7%.

Formation of Petroquímica Paulínia S.A.

     Petroquímica Paulínia S.A., or Paulínia, was incorporated on September 16, 2005. On that date, we acquired 60.0% of the total and voting share capital of Paulínia. Paulínia is a joint venture between our company and Petroquisa for the construction and operation of a polypropylene plant to be located in Paulínia, in the State of São Paulo.

Politeno Acquisition

     On April 6, 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, 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.

Merger of Polialden into Braskem

     At an extraordinary shareholders’ meeting on May 31, 2006, our shareholders approved our merger with Polialden and the conversion of 2,632,043 of our class A preferred shares into 2,632,043 of our 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 completion of our merger with Polialden. In connection with this merger, we issued 7,878,825 of our class A preferred shares in exchange for 264,886,083 of Polialden’s preferred shares.

Merger of Politeno into Braskem

     At an extraordinary shareholders’ meeting on April 2, 2007, our shareholders approved our merger with Politeno and the conversion of 486,530 of our class A preferred shares into 486,530 of our 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 completion of our merger with Politeno. In connection with this merger, 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.

Current Corporate Structure

     The following chart presents the corporate structure of our principal subsidiaries and equity investments following the transactions described above. The percentages in bold italics represent the percentage of the voting share capital owned directly and indirectly by the parent company of each entity, and the percentages not in bold italics represent the percentage of the total share capital owned directly and indirectly by the parent company of each entity. All of these companies are organized under Brazilian law.

Ipiranga Transaction

Agreement to Acquire Petrochemical Assets of Ipiranga

     On March 18, 2007, we entered into an investment agreement with Ultrapar and Petrobras, which we refer to as the Investment Agreement. On the same date, Ultrapar and the controlling shareholders of RPI, Companhia Brasileira de Petróleo Ipiranga, or CBPI, and Distribuidora de Produtos de Petróleo Ipiranga S.A., or DPPI, entered into a share purchase and sale agreement, with our company and Petrobras as an intervening parties, which we refer to as the Purchase Agreement. We refer to the Investment Agreement and the Purchase Agreement together as the Ipiranga Transaction Agreement. Under the Ipiranga Transaction Agreement:

	•		Ultrapar is obligated to acquire, as a commission agent acting on behalf of Braskem and Petrobras, 100% of the share capital of Ipiranga Química. Ipiranga Química currently owns 86.9% of the voting share capital and 92.4% of the total share capital of Ipiranga Petroquímica, which in turn owns 29.5% of the share capital of Copesul. Under the Investment Agreement, Ultrapar is obligated to transfer 60% of the share capital of Ipiranga Química to our company and 40% of the share capital of Ipiranga Química to Petrobras.
	•		We are obligated under applicable law to conduct a public tender offer jointly with Petrobras for the 13.1% of the share capital of Ipiranga Petroquímica not currently owned by Ipiranga Química.
	•		Under the Investment Agreement, Ultrapar is obligated to transfer 33.3% of the share capital of RPI to our company and 33.3% of the share capital of RPI to Petrobras. We will jointly and equally control RPI with Petrobras and Ultrapar.

We refer to these transactions collectively as the Ipiranga Transaction.

     The total purchase price to our company of the shares that we will acquire from Ultrapar in the Ipiranga Transaction is expected to be R$1,503.9 million. As a result of the Ipiranga Transaction, we will consolidate the indebtedness of Ipiranga Química and Copesul into our financial statements. At December 31, 2006, Ipiranga Química had consolidated indebtedness, after effect to the proportional consolidation of Copesul, of R$930.0 million, and Copesul had consolidated indebtedness of R$334.6 million. At December 31, 2006, our consolidated indebtedness included R$98.6 million of Copesul’s indebtedness as a result of the application of proportional consolidation. In addition, we will proportionally consolidate RPI’s indebtedness into our financial statements. At December 31, 2006, RPI had no indebtedness on an unconsolidated basis.

Structure of the Transaction

     RPI currently owns:

	•		7.7% of the total capital of DPPI, including 15.3% of its voting share capital;
	•		11.4% of the total share capital of CBPI, including 24.8% of its voting share capital; and
	•		58.5% of the total share capital and voting share capital of Ipiranga Química.

In addition, DPPI currently owns 21.0% of the total share capital of CBPI, including 62.9% of its voting share capital, and CBPI owns 41.5% of the total share capital and voting share capital of Ipiranga Química. Under the Ipiranga Transaction Agreement and applicable law, Ultrapar is obligated to acquire the share capital of RPI, DPPI and CBPI that it does not own through a series of transactions as detailed below.

First Phase of Ipiranga Transaction

     On April 18, 2007, Ultrapar acquired from the controlling shareholders of RPI, DPPI and CBPI for a purchase price of R$2,000.2 million:

	•		29.9% of the total share capital of RPI, including 61.6% of its voting share capital;
	•		32.1% of the total capital of DPPI, including 69.2% of its voting share capital; and
	•		1.5% of the total share capital of CBPI, including 3.6% of its voting share capital.

     As part of the Ipiranga Transaction, we entered into a shareholders agreement with Ultrapar and Petrobras, which we refer to as the interim shareholders agreement, under which we obtained effective management control over Ipiranga Química, Ipiranga Petroquímica and over the interest of Ipiranga Petroquímica in Copesul as of April 18, 2007. Under the interim shareholders agreement, we have the right to nominate a majority of the board of directors of Ipiranga Química and Ipiranga Petroquímica, and have the right to nominate a majority of the nominees

of Ipiranga Petroquímica to the board of directors of Copesul. The provisions of our existing shareholders agreement with Ipiranga relating to our shares of Copesul will remain effective until the actual transfer of the shares of Ipiranga Química to our company and Petrobras as described below.

     As part of the Ipiranga Transaction, we entered into a memorandum of understanding with Petrobras regarding the interests of Ipiranga Petroquímica in Copesul and the control of Ipiranga Química and Ipiranga Petroquímica, which we refer to as the Ipiranga memorandum of understanding. The Ipiranga memorandum of understanding grants Petrobras veto rights with respect to certain matters that are subject to the approval of the shareholders and boards of directors of Ipiranga Química, Ipiranga Petroquímica and Copesul. For a description of these veto rights, see “—Our Subsidiaries, Jointly Controlled Companies and Joint Venture—Copesul” and “—Our Subsidiaries, Jointly Controlled Companies and Joint Venture—Ipiranga Química.”

     As a result of our obtaining effective control over Ipiranga Química, Ipiranga Petroquímica and the interests of Ipiranga Petroquímica in Copesul, we will fully consolidate the assets, liabilities and results of operations of Ipiranga Química, Ipiranga Petroquímica and Copesul at and for periods ending after March 31, 2007.

     As part of the Ipiranga Transaction, we entered into a shareholders agreement with Ultrapar and Petrobras, which we refer to as the RPI shareholders agreement, which gives each of Ultrapar, Petrobras and our company the right to nominate one-third of the directors of RPI. We will begin to proportionally consolidate the assets, liabilities and results of operations of RPI at and for periods ending after March 31, 2007.

Second Phase of Ipiranga Transaction

     In the second phase of the Ipiranga Transaction:

	•		Ultrapar will make a mandatory tender offer for the remaining outstanding voting shares of RPI, DPPI and CBPI, as required under Brazilian law, which we refer to as the Ultrapar tender offer. If all holders of these shares accept the Ultrapar tender offer, the purchase price for these shares will be R$771.8 million. We expect that this transaction will be consummated on or prior to July 31, 2007.
	•		our company has filed a request with the CVM to make the Ipiranga tender offer for the outstanding voting shares of Ipiranga Petroquímica not owned by Ipiranga Química, as required under Brazilian law. If all holders of these shares accept the Ipiranga tender offer, the purchase price for these shares will be R$117.9 million. We expect that the Ipiranga tender offer will be consummated on or prior to July 31, 2007.

Third Phase of Ipiranga Transaction

     In the third phase of the Ipiranga Transaction, Ultrapar will issue preferred shares in exchange for the outstanding shares of RPI, DPPI and CBPI that it does not own through an incorporação de ações. Upon the completion of this phase, Ultrapar will be the sole owner of the share capital of RPI, DPPI and CBPI. As part of the third phase of the Ipiranga Transaction, the share capital of DPPI and CBPI owned by RPI will be transferred to Ultrapar. We expect that this transaction will be consummated in August 2007.

Fourth Phase of Ipiranga Transaction

     In the fourth phase of the Ipiranga Transaction, Ultrapar will deliver (1) shares representing 60% of the total share capital and voting share capital of Ipiranga Química and 33.3% of the total share capital and voting share capital of RPI to our company, and (2) shares representing 40% of the total share capital and voting share capital of Ipiranga Química and 33.3% of the total share capital and voting share capital of RPI to Petrobras. We expect that this transaction will be consummated in November 2007.

Copesul Tender Offer

     In connection with the Ipiranga Transaction, we have filed a request with the CVM through our subsidiary EDSP58 to delist the share capital of Copesul from the São Paulo Stock Exchange through a public tender offer for

the Copesul shares not currently owned by our company, Ipiranga Petroquímica or Petroquisa. The Copesul tender offer will be made by EDSP58, a special purpose vehicle in which we own 60% of the share capital and Petrobras owns 40% of the share capital. Under the Copesul tender offer, we will offer to purchase these shares, which represent 25.5% of the total share capital and voting share capital of Copesul, for a purchase price of R$37.60 per share. The Copesul tender offer will be conditioned on its acceptance by the holders of at least two-thirds of the shares that are present or represented at the São Paulo Stock Exchange at the time of the tender offer auction. If the holders of all of these shares accept the Copesul tender offer, the purchase price for these shares will be R$1,437.0 million, and our portion of the purchase price for these shares will be R$862.2 million. We expect that this transaction will be consummated on or prior to September 30, 2007.

Structure of Our Company following the Ipiranga Transaction and the Copesul Tender Offer

     Following the completion of the Ipiranga Transaction and the Copesul tender offer:

	•		(1) we will continue to own shares of Copesul representing 29.5% of the total and voting share capital of Copesul, (2) Ipiranga Petroquímica will continue to own shares of Copesul representing 29.5% of the total and voting share capital of Copesul, and (3) we will own 60% of the share capital of EDSP58 which, assuming that all of the holders of the shares of Copesul accept the Copesul tender offer, will own shares of Copesul representing 25.5% of the total and voting share capital of Copesul;
	•		(1) we will own shares of Ipiranga Química representing 60% of its total share capital and voting share capital, and (2) assuming that all of the holders of the shares of Ipiranga Petroquímica accept the Ipiranga tender offer, Ipiranga Química will own all of the total share capital and voting share capital of Ipiranga Petroquímica; and
	•		we will own shares of RPI representing 33.3% of total share capital and voting share capital of RPI.

     The following chart presents the corporate structure of our principal subsidiaries and equity investments following the completion of the Ipiranga Transaction and the Copesul tender offer, assuming that all of the holders of the shares of Copesul accept the Copesul tender offer and all of the holders of the shares of Ipiranga Petroquímica accept the Ipiranga tender offer. The percentages in bold italics represent the percentage of the voting share capital owned directly and indirectly by the parent company of each entity, and the percentages not in bold italics represent the percentage of the total share capital owned directly and indirectly by the parent company of each entity. All of these companies are organized under Brazilian law.

     For a discussion of the operations of Ipiranga Química, Ipiranga Petroquímica, Copesul and RPI, see “—Our Subsidiaries, Jointly Controlled Companies and Joint Venture.”

Strategic Rationale

     Through this acquisition, we are taking an important step in the reorganization, consolidation and strengthening of the Brazilian petrochemical industry. We believe the acquisition of control of Copesul and Ipiranga Petroquímica will provide the following strategic and financial benefits to our company:

	•		Increase the size of our business allowing us to achieve greater economies of scale and operational flexibility. Through the growth in the size and geographic scope of our business, we believe that we will obtain 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 variety of resins, we will be able to utilize specific plants for longer production runs of specific resins, thus lowering our transition costs.
	•		Increase our market share in a polyethylene and polypropylene. Through the expansion of our client base, we believe that we will have greater opportunities to develop innovative products and product applications and provide value-added services to these clients based on our leadership in Brazil in thermoplastic technology.
	•		Increase our competitiveness through further integration of the thermoplastic production chain. Through our operation of Copesul, our principal supplier in the Southern Complex, and our operation of additional polyethylene and polypropylene plants in the Southern Complex, we anticipate that we will be able to improve the quality of our products, achieve operational and financial synergies and facilitate new investments in the productive assets of this complex.

Financing of the Purchase Price

     Under the Investment Agreement, Braskem paid Ultrapar R$652.2 million on April 18, 2007 and is required to pay Ultrapar (1) R$274.4 million on the settlement date of the Ultrapar tender offer described above under “—

Structure of the Transaction—Second Phase of Ipiranga Transaction, and (2) R$583.0 million on the date on which shares of Ipiranga Química and RPI are transferred to our company as described above under “—Structure of the Transaction—Fourth Phase of Ipiranga Transaction.” In addition, we will make payments in connection with the Ipiranga tender offer and the Copesul tender offer. If the holders of all of the shares of Ipiranga Petroquímica accept the Ipiranga tender offer, the purchase price for these shares will be R$117.9 million. If the holders of all of the shares of Copesul accept the Copesul tender offer, our portion of the purchase price for these shares will be R$862.2 million.

     On April 11, 2007, we entered into an unsecured credit agreement with three financial institutions in the aggregate amount of US$1.2 billion to finance the Ipiranga Transaction and the Copesul tender offer. The loans under the acquisition credit agreement may be disbursed in multiple disbursements on or prior to April 11, 2008. On April 13, 2007, we received the first disbursement under the acquisition credit agreement in the aggregate amount of US$330.0 million to fund the first payment due under the Investment Agreement. Each disbursement under the acquisition credit agreement bears interest at the rate of LIBOR plus 0.35% per annum until the first anniversary of such disbursement and thereafter at the rate of LIBOR plus 0.55% per annum, payable in arrears. The principal amount of each disbursement under the acquisition credit agreement is payable on the second anniversary of such disbursement. The acquisition credit agreement includes limitations on our ability to incur liens, enter into related party transactions or merge with certain other entities.

     In order to lengthen the average maturity of our outstanding indebtedness and to reduce our refinancing risks, we are exploring refinancing of the acquisition credit agreement in the near term. We are analyzing opportunities to refinance this indebtedness through bank credit agreements, pre-export financing agreements, offerings of securities in the domestic or international markets or a combination of these instruments. The form, manner and timing of the refinancing of amounts borrowed under the acquisition credit agreement will depend on market conditions.

Our Jointly Controlled Companies

     We hold equity investments in Petroflex and Paulínia, which we jointly control with third parties. We proportionally consolidate the results of these jointly controlled companies in our consolidated financial statements, which has a significant impact on these financial statements. We own 29.5% of the voting share capital and total share capital of Copesul. At dates and for periods prior to March 31, 2007, we proportionally consolidated Copesul’s results in our consolidated financial statements. As a result of the consummation of the first phase of the Ipiranga Transactions described above under “—Ipiranga Transaction” on April 18, 2007, we control Copesul. As a result of our obtaining effective control over Copesul, we will fully consolidate the assets, liabilities and results of operations of Copesul on and for periods ending after March 31, 2007. For a description of our jointly controlled companies, see “—Subsidiaries, Jointly Controlled Companies and Joint Venture.”

Petrochemical Industry Overview

Structure

     The petrochemical industry transforms crude oil by-products, principally naphtha, or natural gas into widely used industrial and consumer goods. The Brazilian 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

     Brazil’s first generation producers, which are referred to as “crackers,” break down or “crack” naphtha or natural gas, their principal feedstock, into basic petrochemicals. Three of these crackers purchase naphtha, which is a by-product of the oil refining process, primarily from Petrobras, as well as from other suppliers located outside of Brazil. The fourth, Rio Polímeros, purchases natural gas from Petrobras. The basic petrochemicals produced by the crackers include:

•

olefins, primarily ethylene, propylene and butadiene; and

•

aromatics, such as benzene, toluene and xylenes.

     We, Petroquímica União and Rio Polímeros operate Brazil’s four crackers and sell basic petrochemicals to second generation producers, including, in our case, second generation producers that are part of our company. The basic petrochemicals, which are in gaseous or liquid form, are transported primarily via pipelines to the second generation producers’ plants, generally located near the crackers, for further processing.

Second Generation Producers

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

	•		polyethylene, polystyrene and PVC (each produced from ethylene);
	•		polypropylene and acrylonitrile (each produced from propylene);
	•		caprolactam (produced from benzene); and
	•		polybutadiene (produced from butadiene).

     There are 36 second generation producers operating 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 located far from the second generation producers. We and Rio Polímeros are the only integrated first and second generation petrochemical companies in Brazil.

Third Generation Producers

     Third generation producers, known as transformers, 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); 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. There are more than 8,500 third generation producers operating in Brazil.

Petrochemical Complexes

     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, where we operate the cracker;
	•		the petrochemical complex located in Triunfo in the State of Rio Grande do Sul, which we refer to as the Southern Complex, where our subsidiary Copesul operates the cracker;

	•		the São Paulo Complex located in Capuava in the State of São Paulo, or the São Paulo Complex, where Petroquímica União operates the cracker; and
	•		the Rio de Janeiro Complex located in Duque de Caxias in the State of Rio de Janeiro, or the Rio de Janeiro Complex, where Rio Polímeros operates the cracker.

     Each complex has a single first generation producer, also known as the “raw materials center,” 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 14 second generation producers situated around the raw materials center operated by our company. At December 31, 2006, our raw materials center had an annual ethylene production capacity of 1,280,000 tons, which we estimate accounted for approximately 36.5% of Brazil’s ethylene production capacity.

     The Southern Complex began operations in 1982. Copesul is the raw materials center at the Southern Complex and supplies first generation petrochemicals to seven second generation producers, including our Polyolefins Unit. At December 31, 2006, Copesul had an annual ethylene production capacity of 1,200,000 tons. We own 29.5% of the total share capital of Copesul. As a result of the consummation of the first phase of the Ipiranga Transactions described above under “—Ipiranga Transaction” on April 18, 2007, we control Copesul. Upon the consummation of the last phase of the Ipiranga Transaction which we expect to occur in November 2007, we expect to own, directly and through our subsidiaries, assuming that all of the holders of the shares of Copesul accept the Copesul tender offer, 84.7% of the total share capital of Copesul. See “—Ipiranga Transaction.”

     The São Paulo Complex, which is the oldest petrochemical complex in Brazil, began operations in 1972. Petroquímica União is the raw materials center at the São Paulo Complex and supplies first generation petrochemicals to 20 second generation producers located at the São Paulo Complex and elsewhere, including our company. At December 31, 2006, Petroquímica União had an annual ethylene production capacity of 500,000 tons.

     The Rio de Janeiro Complex commenced operations in 2005. Rio Polímeros, a Brazilian petrochemical company, is the raw materials center at the Rio de Janeiro Complex and supplies first generation petrochemicals to two second generation producers. At December 31, 2006, Rio Polímeros had a maximum annual ethylene production capacity of 520,000 tons.

Role of the Brazilian Government

     The current structure of the Brazilian petrochemical industry reflects the Brazilian government’s plan, developed during the 1970’s, to establish a domestic petrochemical industry to serve Brazilian markets. First and second generation producers, including our company, are located within close proximity of each other to allow the common use of facilities, such as utilities, and to facilitate the delivery of feedstocks. Prior to their privatization by the Brazilian government, the expansion of production capacity at the crackers and the second generation producers was coordinated to ensure that the supply of petrochemicals met expected demand. The infrastructure developed around the complexes fostered the interdependence of first and second generation producers, as limited facilities were constructed for purposes of transportation and storage of feedstocks for import or export. Following their privatization, this interdependence has increased as second generation producers, which continue to rely upon the crackers for feedstocks and utilities, have increased their ownership of, and participation in the management of, the crackers.

     The Brazilian government developed the Brazilian petrochemical industry generally by promoting the formation of three-way joint ventures among the Brazilian government, foreign petrochemical companies and private Brazilian investors. In these joint ventures, Petrobras’ subsidiary, Petroquisa, participated as the representative of the Brazilian government, with Petrobras as the supplier of naphtha; a foreign petrochemical company provided technology; and a Brazilian private sector company provided management.

     In 1992, the Brazilian government began a privatization program to reduce significantly its ownership of the petrochemical industry. This program was designed to increase private investment in the petrochemical industry and

to improve its efficiency. As a result of the privatization program, the Brazilian government’s ownership of our common shares, and of the common shares of Copesul and Petroquímica União, was significantly reduced, replaced by private sector entities. As a result of a similar privatization process, private ownership of the second generation producers increased.

     The following table sets forth the percentage of the indirect ownership interests held in the crackers’ voting shares by Petroquisa, private sector entities and other investors before the privatization of the crackers and at December 31, 2006.

		Before Privatization														At December 31, 2006
								Private												Private
		Date of						Sector				Other								Sector				Other
		Privatization		Petroquisa				Groups				Investors(1)				Petroquisa				Groups				Investors(1)
Copesul		May 15, 1992			67.2	%			2.1	%			30.7	%			15.6	%			58.9	%			25.4	%
Petroquímica União		January 24, 1994			67.8				31.9				0.3				17.4				60.8				21.8
Braskem		August 15, 1995			48.2				50.4				1.4				9.8				81.1				9.1
Rio Polímeros		—			—				—				—				16.7				66.6				16.7

Role of Petrobras

     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 by-products 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, by concession or authorization from the Brazilian government. Since 1995, the Brazilian government has taken several measures to liberalize the petrochemical industry in Brazil.

     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 de Petróleo), which were charged with regulating and monitoring of the oil industry and the Brazilian energy sector. Following the creation of the National Petroleum Agency, new rules and regulations have been implemented, aimed at gradually ending Petrobras’ monopoly. Since 1997, our company has imported naphtha from trading companies and oil and gas producers located abroad.

     During 2006, Petrobras produced and sold approximately 69% of the naphtha consumed by our company and Copesul, and the remaining naphtha consumed by our company and Copesul was imported.

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, which also take into account 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 generally vary significantly, especially those imposed on petrochemical products. Imports and exports

within the free trade area composed of Argentina, Brazil, Paraguay and Uruguay in South America, or Mercosul (Mercado Comum do Sul), have not been subject to tariffs since December 2001. The following table shows the fluctuation of the tariffs on certain basic petrochemicals and second generation petrochemicals from 1996 through 2006. The tariff rates shown are those applicable at the end of the respective years, except where indicated.

		2006				2005				2004				2003				2002(1)				2001(2)				2000				1999				1998				1997(3)
		(%)
First generation petrochemicals:
Ethylene			2.0				2.0				2.0				3.5				3.5				4.5				5.0				5.0				5.0				5.0
Propylene			2.0				2.0				2.0				3.5				3.5				4.5				5.0				5.0				5.0				5.0
Caustic soda			8.0				8.0				8.0				9.5				9.5				10.5				11.0				11.0				11.0				11.0
Second generation petrochemicals:
Polyethylene			14.0				14.0				14.0				15.5				15.5				16.5				17.0				17.0				17.0				17.0
Polypropylene			14.0				14.0				14.0				15.5				15.5				16.5				17.0				17.0				17.0				17.0
PVC (4)			14.0				14.0				14.0				15.5				15.5				16.5				17.0				17.0				17.0				17.0
Caprolactam			12.0				12.0				12.0				13.5				13.5				14.5				15.0				15.0				15.0				15.0

Source: Brazilian Association of Chemical Industry and Derivative Products.

Operating Environment

     The Brazilian markets in which we compete are cyclical and are sensitive to relative changes in supply and demand. Demand for petrochemical products 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 with 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. Reductions in tariffs and other trade barriers have increasingly exposed the Brazilian petrochemical industry to price competition in the international markets.

     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.

     Brazilian GDP increased by 3.7% in 2006. This moderate growth contributed to a 7.4% increase in domestic polyolefins consumption and a 10.5% increase domestic PVC consumption. The strong growth in civil construction sector positively affected domestic PVC consumption and the significant growth in other industrial sectors, such as durable goods, automotive and beverage, positively affected domestic consumption of thermoplastic resins generally. Although imports represent a small percentage of total Brazilian domestic consumption, in 2006, imports of polyolefins increased by 5.7% and imports of PVC increased by 6.0%. In 2006, Brazil’s exports of polyolefins increased by 30.5%, while exports of PVC declined by 22.5%. As a result of increased production capacity of Brazilian producers, including our company, higher rates of capacity utilization, and the continuing appreciation of the real against the U.S. dollar in 2006, Brazilian petrochemical producers significantly improved their sales in 2006.

     We anticipate that demand for our products in Brazil may grow due to increasing consumption of plastic-based products, as well as population growth and expected general economic growth in Brazil. In addition, Brazilian per capita consumption of second generation petrochemicals has been modest compared to per capita consumption in many other more developed countries, which we believe suggests a potential for future growth in demand in Brazil. However, that growth could be hindered by the factors described in “Item 3. Key Information—Risk Factors—Risks Relating to Brazil” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Company and the Petrochemical Industry.”

     The following table sets forth information relating to our production, the estimated production of other Brazilian companies and exports and imports of the products included therein for the years indicated.

										Total												Estimated
		Total								Production of												Total Brazilian
		Brazilian				Our Total				Other Brazilian				Total				Total				Domestic
		Production				Production				Companies				Imports				Exports				Consumption
		(thousands of tons)
Olefins(1)
2006(2)			5,297.7				1,783.4				3,514.2				3.2				171.3				5,129.5
2005			4,775.2				1,889.9				2,885.2				18.5				120.0				4,672.7
2004			4,779.0				1,809.6				2,969.4				19.9				121.5				4,677.3
Aromatics(3)
2006(2)			1,531.1				720.2				810.9				90.7				410.4				1,211.4
2005			1,518.0				733.7				784.3				47.6				453.8				1,111.8
2004			1,562.4				714.8				847.6				100.4				317.8				1,345.0
Polyolefins(4)
2006(2)			3,569.7				1,629.6				1,940.1				401.5				1,021.8				2,949.4
2005			3,148.3				1,289.2				1,859.1				379.9				782.8				2,745.4
2004			3,042.6				1,175.1				1,867.5				354.4				651.4				2,745.7
PVC
2006(2)			676.3				447.4				228.9				126.6				50.9				752.0
2005			640.3				449.3				191.0				119.5				65.6				694.2
2004			629.7				420.7				209.1				94.5				44.1				680.1
PET (5)
2006(2)			307.4				65.1				242.3				172.5				30.6				449.2
2005			352.6				69.7				282.9				178.4				32.6				498.3
2004			357.6				72.6				285.0				137.1				62.0				432.7
Caprolactam
2006(2)			44.9				44.9				—				6.7				17.8				33.8
2005			49.7				49.7				—				4.1				16.2				37.5
2004			50.5				50.5				—				6.4				7.6				49.3

Sources: Brazilian Association of Chemical Industry and Derivative Products and Braskem.

The above 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.

Overview of Our Company’s Operations

     We are the leading petrochemical company in Latin America, based on average annual production capacity in 2006. We are also one of the two largest Brazilian-owned private sector industrial companies, based on net sales revenue in 2005 (the most recent year for which comparative information is currently available). We recorded net income of R$101.3 million in 2006 on net sales revenue of R$12,992.7 million. We produce a diversified portfolio of petrochemical products in our 18 plants in Brazil and have a strategic focus on polyethylene, polypropylene and PVC. We were the first Brazilian company with integrated first and second generation petrochemical production facilities.

     We have grown over the past five years primarily as the result of the integration of the operations of six Brazilian petrochemical companies: our company; OPP Química; Polialden; Politeno; Trikem; Proppet; and Nitrocarbono. Our business operations are organized into four business units, which correspond to our principal production processes and products:

	•		Basic Petrochemicals, which accounted for R$6,883.6 million, or 50.3%, of the net sales revenue of all segments, including net sales to our other business units, and had an operating margin of 7.8% in 2006;
	•		Polyolefins, which accounted for R$4,775.8 million, or 34.9%, of the net sales revenue of all segments and had an operating margin of 9.6% in 2006;
	•		Vinyls, which accounted for R$1,541.7 million, or 11.3%, of the net sales revenue of all segments and had an operating margin of 13.5% in 2006; and
	•		Business Development, which accounted for R$483.1 million, or 3.5%, of the net sales revenue of all segments and had a negative operating margin of 18.0% in 2006.

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

Strategy

     Our vision is to strengthen our position as a world-class petrochemical company. We seek to reinforce our leading position in the Latin American petrochemical market, with a focus on polyethylene, polypropylene and PVC and integration with our production of ethylene and propylene. Our business model focuses on enhancing shareholder value, with strategic drivers consisting of market leadership, cost competitiveness and technological autonomy.

     We were the first Brazilian company to integrate first and second generation petrochemical production facilities. Our competitive advantages are derived from our leadership position in the Latin American market and on our favorable cost structure, resulting from our production scale and synergies realized from integration of the companies that formed our company.

     We are committed to providing technological support to our customers through the Braskem Technology and Innovation Center, which develops processes, products and applications for the sector.

     The formation of our company marked a milestone in the restructuring of an industrial sector that is vital to Brazil’s economic development. We supply petrochemical products with application in a wide variety of industries, such as food packaging, automotive parts, paints, construction, agriculture, fabrics and personal care products.

     The key elements of our strategy include:

•

Focus on Customer Relationships: We seek to establish close, long-term relationships with our customers. We serve as partners with our customers in developing new products and applications and, consequently,

business opportunities for them. 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.

             Our Polyolefins Unit and our Vinyls Unit maintain technology and innovation centers that seek to:

	•		optimize customers’ processing of our products;
	•		identify new products and applications to meet our clients’ needs; and
	•		increase customers’ productivity.

•

Pursuit of Selected Business Opportunities: We are pursuing new business opportunities by, for example:

	•		manufacturing new products such as: UTEC™, our ultra high molecular weight polyethylene, or UHMWP, product that is used in technical applications; Braskem Flexus®, a high-performance polyethylene product used for specialized packaging; and Braskem Symbios®, a high-performance flexible packaging sealant. We are the world’s second largest producer of UHMWP, which we sell mainly in the United States;
	•		manufacturing linear low density polyethylene, or LLDPE, and low density polyethylene, or LDPE, using a specialized production process 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;
	•		replacing traditional materials such as glass, wood, steel and paper, with our thermoplastics products; and
	•		developing manufacturing process to produce “green” polymers made out of renewable raw materials.

	•		Expansion of Our Production Capacity: We plan to expand the production capacity of our business units during the next several years based on anticipated growth in demand for our products. We plan to expand our production capacity in the short-term principally through efficiency enhancements at our plants and by modernizing our production technology, although from time to time we may consider acquisitions of second generation producers that currently compete with us or produce products that are complementary to ours, such as our acquisition of Ipiranga Química, or enter into joint ventures with others to build new petrochemical plants.
			We have entered into a joint venture with Petroquisa for the construction of a polypropylene plant in Paulínia, in the State of São Paulo, with an initial annual production capacity of 350,000 tons. In addition, we have entered into Project Development Agreements with Petroquímica de Venezuela, S.A., or Pequiven, the petrochemical company of the Bolivarian Republic of Venezuela, with respect to (1) the development, construction and operation of the Jose Olefins Project, a petrochemical complex that will be located in the Jose Petrochemical Complex in the State of Anzoategui, Venezuela and 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, polyethylene production facilities with a combined annual production capacity of 1.1 million tons, and integrated plants to produce other second-generation petrochemicals, and (2) the construction and operation of a polypropylene plant in the Jose Petrochemical Complex, with an annual production capacity of approximately 450,000 tons. We believe that additional capacity 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.
	•		Continued Reductions in Operating Costs and increases in Operating Efficiencies: 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 have completed a program—the Braskem+ Program—to increase operating efficiencies and to reduce operating costs. We also continue to realize synergies from our integration process.
			Our cost reduction program is linked to initiatives to purchase feedstocks at competitive prices. We began to import lower-cost naphtha in 2002, and during 2006, we imported approximately 25.1% of our feedstock requirements, primarily from North Africa.
	•		Commitment to Our Employees and Communities: We are focused on our human resources, which are vital to our competitiveness and growth. We continue to train our employees to develop skills necessary to operate an internationally competitive, vertically integrated petrochemical company. We have adopted a policy that makes all of our directors, officers, and employees responsible for worker safety and for preserving the environment. We are also committed to sustainable development and to improving the quality of life in the communities in which our facilities are located.

Formula Braskem

     In 2005, we commenced a new program named “Formula Braskem” to implement a comprehensive integrated management system. Formula Braskem is intended to incorporate the best practices in the international petrochemical industry in our management systems and the most recent technological developments available in the marketplace. This program, together with the Braskem+ program, was designed to support our expansion and future internationalization, and we expect to realize productivity and efficiency gains through their implementation. In addition, the implementation of Formula Braskem has assisted us with our compliance with the requirements of the U.S. Sarbanes-Oxley Act of 2002 in a manner consistent with our commitment to transparency and corporate governance.

     We have engaged SAP Brasil Ltda., or SAP, and Accenture do Brasil Ltda., or Accenture, to assist us in implementing Formula Braskem under agreements that provide for the payment of bonuses to SAP and Accenture in the event that we achieve identified annual cost savings as a result of the implementation of Formula Braskem in excess of those identified in our calculations of the projected net present value of this project.

     The first phase of Formula Braskem became operational on October 1, 2006. We had a dedicated team of approximately 110 employees working together with SAP and Accenture on the implementation of the first phase of Formula Braskem which we are implementing at a cost expected to be approximately R$130 million. We expect to make capital expenditures of R$10.6 million in 2007 to complete the first phase of Formula Braskem.

     We are implementing the second phase of Formula Braskem which consists of the integration of Politeno into our management system, the implementation of payroll and capital budgeting systems and other process improvements. We have a dedicated team of approximately 85 employees working together with SAP and Accenture on the implementation of the second phase of Formula Braskem which we expect to be operational in August 2007. We anticipate that we will make capital expenditures of R$6.8 million in 2007 related to second phase of Formula Braskem.

Basic Petrochemicals Unit

     At December 31, 2006, our Basic Petrochemicals facilities had one of the largest average annual production capacities of all first generation producers in Latin America. Our Basic Petrochemicals Unit accounted for R$6,883.6 million, or 50.3%, of the net sales revenue of all segments in 2006, including net sales to our other business units. 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 and ortho-xylene;
	•		fuels, such as automotive gasoline and liquefied petroleum gas, or LPG; and

•

methyl tertiary butyl ether, or MTBE, 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 other business units. We also supply utilities to other plants located in the Northeastern Complex and render services to the operators of those plants. In 2006, 87.1% of our Basic Petrochemicals Unit’s sales (including intra-company sales) were derived from the sale of basic petrochemicals, 7.8% from the sale of utilities and services, and 5.1% from the sale of fuels.

     We believe that our Basic Petrochemicals Unit is well positioned to take advantage of increasing demand for basic petrochemicals products in Brazil, both by our other business units and by third parties. We anticipate that long-term growth for these products in Brazil will continue due to increasing demand for consumer products.

Products of Our Basic Petrochemicals Unit

     The following chart shows the major products produced by our Basic Petrochemicals Unit, their derivative intermediate products and their most common end uses.

Our Basic		Intermediate Products Derived from
Petrochemical Products		Our Basic Petrochemical Products		Common End Uses
Olefins
Ethylene		LDPE /LLDPE (1)		Garbage bags, packaging film, toys, housewares, electrical insulation, paper coatings
		High density polyethylene (1)		Blow-molded plastic bottles (such as milk bottles)
		UHMWP (1)		Technical parts, industrial applications, medical applications, parts for automotive industry products
		Ethyl vinyl acetate copolymer (1)		Shoe soles, hot melt, plastic film for special applications
		Ethylene oxide, used to produce ethylene glycol		Polyester fibers and PET resin
		Ethylene dichloride, used to produce PVC (2)		Pipes, home siding, upholstery, floor coverings
Propylene (polymer and chemical grade)		Ethylbenzene, used to produce styrene monomer and then polystyrene Polypropylene (1)		Disposable cups and containers, high-impact plastics Carpet-backing, luggage, bottles, diapers, raffia bags
		Acrylonitrile		Clothing, plastics
		Propylene oxide		Polyurethane foams for furniture and insulation, cleaning compounds and coatings
Butadiene		Synthetic rubber, elastomers, resins		Tires, shoes, hoses, surgical gloves
Butene–1		LLDPE (1)		Garbage bags, packaging film, toys, housewares, electrical insulation, paper coatings
Aromatics
Benzene		Ethylbenzene (used to make styrene monomer/polystyrene)		Disposable cups, containers, high-impact plastics
		Cumene		Epoxies
		Cyclohexane and cyclohexanone (3)		Nylon
		Linear alkyle benzene		Detergents
		Caprolactam (3)		Nylon
		Ammonium sulfate (3)		Fertilizers
Isoprene		Styrene-isoprene-styrene (SIS)		Adhesive
Toluene		Toluenediisocianate		Urethane foams
				Solvents
Para-xylene		Purified terephthalic acid and DMT (4)		Polyester film and fibers, PET resin (4)
Ortho-xylene		Phthalic anhydride and plasticizers		Flexible products from PVC
Others
MTBE		—		Octane booster for gasoline
Solvent C9		—		Solvents and thinners
Pyrolysis C9		—		Octane booster for gasoline
Fuels
Automotive Gasoline		—		Fuel for internal combustion engines
LPG		—		Cooking gas

     The following table sets forth a breakdown of the sales volume and net sales revenue of our Basic Petrochemicals Unit (including our intra-company sales) by product line and by market for the years indicated.

		Years Ended December 31,
		2006												2005												2004
		Quantities												Quantities												Quantities
		Sold (1)				Net Sales Revenue								Sold (1)				Net Sales Revenue								Sold (1)				Net Sales Revenue
		(thousands				(millions of								(thousands				(millions of								(thousands				(millions of
		of tons)				reais)				(%)				of tons)				reais)				(%)				of tons)				reais)				(%)
Domestic net sales:
Ethylene			1,108.5			R$	2,530.6				42.2	%			1,169.8			R$	2,578.2				40.8	%			1,098.9			R$	2,302.2				40.1	%
Propylene			413.0				871.6				14.5				497.5				1,060.9				16.8				446.8				819.1				14.3
Para-xylene			82.8				201.7				3.4				171.0				385.0				6.1				148.7				319.6				5.6
Benzene			203.0				398.0				6.6				199.9				439.8				7.0				216.7				522.6				9.1
Butadiene			140.9				341.9				5.7				150.2				331.3				5.2				160.0				296.0				5.2
Mixed xylenes			34.1				78.0				1.3				35.4				61.7				1.0				74.5				126.4				2.2
Ortho-xylene			61.7				136.0				2.3				41.3				87.0				1.4				52.7				109.9				1.9
Toluene			34.8				62.5				1.0				29.5				48.0				0.7				33.2				57.4				1.0
Others			178.6				379.9				6.3				203.8				380.1				6.0				255.3				405.0				7.1
Total domestic net sales of basic petrochemicals			2,257.4				5,000.1				83.4				2,498.4				5,372.0				85.0				2,486.8				4,958.2				86.4
Total export net sales of basic petrochemicals			544.4				953.4				16.6				535.0				950.0				15.0				436.6				778.9				13.6
Total net sales of basic petrochemicals			2,801.8				5,953.4				100	%			3,033.4				6,322.0				100	%			2,923.4				5,737.1				100	%
Automotive gasoline and utilities (2)							930.2												904.7												742.9
Total Basic Petrochemicals Unit net sales revenue (3)						R$	6,883.6											R$	7,226.7											R$	6,480.0
% of the total net sales revenue of all segments							50.3	%															53.5	%											52.1	%