Crisis in China affects logistics in Brazil

Exporters already face higher freight rates and difficulty in shipping goods on the Brazil-Asia route — Foto: Ana Paula Paiva/Valor
Exporters already face higher freight rates and difficulty in shipping goods on the Brazil-Asia route — Foto: Ana Paula Paiva/Valor

Lockdown measures in China are beginning to affect ocean shipping in Brazil. Exporters already face higher freight rates and difficulty in shipping goods on the Brazil-Asia route – especially those reliant on refrigerated containers, such as the meat industry. As for imports, delays and trip suggest that there will be bottlenecks in the coming months.

Right now, the situation is more serious for exports due to congestion in Chinese ports, especially Shanghai, which concentrates the world’s largest container terminals. With no storage space or sockets available for containers, some shipping companies have halted orders for reefer cargo, or have diverted ships to other Chinese ports – which are also beginning to fill up, creating a cascade effect.

As a result, freight rates on the export route from Brazil to Asia, which were already high, have risen further since March. This month, the value reached $6,800 per 40-foot reefer container in the short-term market, compared with $3,000 to $4,000 before the pandemic. The price was up 58% year over year, a survey by the National Confederation of Industry (CNI) with data from consultancy Solve Shipping shows.

Freight rates of imports have not been affected yet, but prices, which had been falling, are expected to rise again in the coming months. In April, the value was $5,300 per 20-foot container, according to CNI. This is still a high level for the historical series, but well below the peaks recorded in recent months.

In the Brazilian market, the route coming from Asia was the most impacted by the logistical crisis caused by the pandemic. Prices, which were around $1,500 per container before the crisis, skyrocketed from the second half of 2020 onwards and reached record highs, above $10,000.

This rise was caused by the mismatch between supply and demand worldwide. On the one hand, consumption of goods soared from the end of 2020. On the other hand, the health crisis reduced the production capacity of industrial companies and generated logistical obstacles – with delays in the release of goods, reduction of teams due to contagion, lack of containers in the market and port congestion.

In recent months, the Brazilian market had seen a balance between supply and demand, which explains the recent reduction in the freight rates of imports on the Asia-Brazil route, said Matheus de Castro, an analyst at CNI. Now, however, the situation is expected to worsen again. “Lockdown measures in China will start to bring problems. The higher export freights are already a reflection of the difficulties, of stopover cancellations.”

Leandro Barreto, a partner at Solve Shipping, believes that the lower import freight rates seen at the beginning of the year are a one-off event, because it is a time of the year when demand is already low. Prices are expected to rise again from May on due to delays and cancelations.

In his view, the impacts of the crisis will be felt especially when the restrictions in China are lifted. “Bottlenecks are expected to emerge, and freight rates tend to rise once lockdown measures end, because there will be pent-up demand to meet. In addition, the peak season starts in June or July, when demand seasonally increases,” he said.

For Rafael Dantas, head of importer Asia Shipping, the biggest impact of the current crisis will not be so much on freight rates, but on the lack of imported goods due to logistics bottlenecks. “I do not believe that we will return to the level [of freight rates] of 2021. The scenario is different. Consumer spending has dropped in Brazil, the country is no longer under lockdown measures, demand has returned to normality. But we will certainly feel the lack of products.”

The analysts point out that, besides the restrictions in China, a number of factors have influenced prices. One is the war in Ukraine, Mr. Castro said. “This has not generated logistical bottlenecks, but has put pressure on fuel prices.” In addition, problems in Chinese ports are compounded by the congestion in U.S. ports – a situation that has been dragging on since last year, as a reflection of the logistical chaos generated by the pandemic, he said.

“Worldwide, the market is at the operational limit and any event delays normalization. The situation was expected to improve throughout 2023, but it may take longer,” he said.

According to the major shipping groups, it is still early to predict when normalization of the logistics chain in China will occur. “There are several factors to be considered, especially the duration of this outbreak of the omicron variant and the measures governments will take,” trade association Centronave said.

Source: Valor International

https://valorinternational.globo.com

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Biosafety agency approves gene-edited soybeans

GDM — a company of Argentinian origin and headquartered in the state of Paraná — was authorized in Brazil to produce the first variety of an oleaginous developed through gene editing — soy, in this case. The seed has fewer sugars (raffinose and stachyose), which impair digestion in monogastric organisms such as humans, poultry and pigs.

The National Technical Commission for Biosafety (CTNBio) gave the green light to the project in March, when the seed was classified as free of genetically modified organisms, which certifies that it is not transgenic: “The plant has alterations that resemble a natural mutation, so it is classified as free of genetically modified organisms”, said André Beló, manager of new technologies at GDM, to Valor.

He says that gene editing accelerates mutations that would happen naturally in nature. In the genetically modified organism, the change necessarily depends on genetic engineering — through which the insertion of a gene from another donor organism to a certain plant is made. Brazil, says Mr. Beló, has legislation that regulates gene editing techniques and allows the differences in classification.

The research to develop the variety took three years. Now, after the classification CTNBio gave to the seed, the company is preparing the next steps of the project: the final tests in the field and the multiplication of the variety. GDM’s goal is to bring the new soybean to the market starting in 2025. With revenues of R$ 1.3 billion last year, 130% more than in 2020, the company designates at least 20% of its annual revenue to research and development.

Julio Cesar Poletto — Foto: Divulgação
Julio Cesar Poletto — Foto: Divulgação

The company, which competes with giants such as the German Bayer and the American Corteva, believes that the new soybean is a relevant step in plant genetic improvement. “All the companies [that operate in the area] are certainly working with gene editing, but we came out ahead,” said Julio Cesar Poletto, GDM’s business leader.

GDM does not reveal the potential for earnings from sales of the new variety. The soybean developed by gene editing has a 75% reduction in raffinose and a 50% reduction in stachiosis. Those features contribute to better digestion and animal weight gain. With a more specific public of buyers in mind, the company wants to develop a new sales model. “The partners will not only be the traditional seeders,” Mr. Poletto said. “Large feed industries, for example, can join this list.”

Source: Valor International

https://valorinternational.globo.com

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Supreme Court unwilling to judge Amnesty Law this year

There is an understanding that an election year is an inappropriate time to analyze controversial issues — Foto: Felipe Sampaio/SCO/STF
There is an understanding that an election year is an inappropriate time to analyze controversial issues — Foto: Felipe Sampaio/SCO/STF

The Federal Supreme Court is unwilling to include in this year’s agenda the lawsuit questioning the Amnesty Law, which exempted from punishment the agents accused of torturing and killing about 70 people in the so-called Araguaia Guerrilla, during the last military dictatorship in Brazil (1964-1985).

Behind the scenes, there is an understanding that an election year is an inappropriate time to analyze controversial issues, which may cause new sticking points between the Judiciary branch and the federal government.

President Jair Bolsonaro is an enthusiast of the military regime. At the end of March, in a ceremony at the presidential palace, he praised the 1964 coup. Deputy Eduardo Bolsonaro (Liberal Party, PL, of São Paulo), his son, debauched the torture suffered by journalist Miriam Leitão in 1972.

Ms. Leitão, a columnist at the newspaper O Globo, released this Sunday audios of sessions of the Superior Military Court (STM) that prove the practice of torture during the dictatorship. The recordings cite, for example, the case of a pregnant woman who suffered electric shocks to her genitals.

On Monday, Vice President Hamilton Mourão, said that the reports are part of history and should remain in the past. When asked about a possible investigation, he ironically said: “Are you going to bring the guys back from the grave?”

At the Supreme Court, an appeal filed by the Brazilian Bar Association (OAB) against the plenary’s decision that, in 2010, considered legitimate the pardon granted to agents accused of torture during the regime, has been on hold for more than a decade.

At the time, by seven votes against two, the court understood that it was not the Judiciary branch’s place to review a political agreement made during the transition from military dictatorship to democracy, at the end of the 1970s.

OAB’s Federal Council appealed in 2011, but to date the court has not returned to the matter. The delay drew the attention of the Prosecutor General’s Office (PGR), which since 2019 has been waiting for a response to a request made to the Supreme Court to prioritize the case.

In practice, the result of the trial will define whether the Amnesty Law, validated by the Federal Supreme Court, should prevail or the condemnation imposed on Brazil also in 2010 by the Inter-American Court of Human Rights (IACHR), to punish those responsible for the violations.

Raquel Dodge, the then Prosecutor-General of the Republic, warned the Supreme Court about court decisions that, based on Brazilian law, have cleared torturers from answering for their acts – which is contrary to the IACHR’s ruling.

“These decisions demonstrate that jurisdictional bodies of the Brazilian state have imposed concrete obstacles to the criminal prosecution launched against civilian and military agents involved in serious human rights violations committed during the military regime.”

In the records, there are no manifestations of Ms. Dodge’s successor in office, Augusto Aras. The last change in the lawsuit is from December, when the rapporteur, Justice Dias Toffoli, denied the participation of the Brazilian Press Association (ABI) as an interested party in the case.

Justice Toffoli says that the request cannot be admitted because it was presented after the judgment on merits. He emphasized that the current phase, that of the appeals, “does not allow for rediscussing of the cause, much less imply the reopening of the investigation.”

Source: Valor International

https://valorinternational.globo.com

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Suzano sees “tight” global pulp market

Leonardo Grimaldi — Foto: Anna Carolina Negri/Valor
Leonardo Grimaldi — Foto: Anna Carolina Negri/Valor

Pulp prices continue to rise on the international market, with all the adjustments announced for April already implemented, amid the worsening imbalance between supply and demand. And there are no signs of any change in the short term, said Leonardo Grimaldi, head of commercial pulp, people and management at Suzano. “The fundamentals are still quite solid, especially on the supply side,” the executive said.

Last week, according to Fastmarkets Foex, the net price of hardwood pulp rose $1.90 in the Chinese market, to $783.61 per tonne, close to historical levels. Since the beginning of the year, the appreciation exceeds 35%. At resale, eucalyptus pulp prices remain above import prices, at $807.04 per tonne, according to BTG Pactual.

Softwood pulp was traded at $976.69 per tonne in China, with a slight decrease of $0.50, Foex reported. With this, the spread between the two types of fiber was at $193 per tonne, above normalized levels, around $120 per tonne. “Challenging logistics is one of the main factors. There were already challenges in 2021 and the [recent] Covid-19 outbreak in China has worsened the situation,” Mr. Grimaldi said.

Difficulties in global supply chains, concentrated maintenance stoppages at South American mills in the first quarter, the delayed start-up of Arauco’s and UPM’s projects, and non-recurring events, including strikes, have limited the global supply of the raw material in 2022, fueling the recent rally. If, historically, unscheduled downtime in production lines has taken 700,000 tonnes of fiber per year out of the market, in 2022 the volume could exceed the 2 million tonnes per year that were not produced in 2020 and 2021.

Suzano, the world’s largest producer of eucalyptus pulp, adjusted prices by $50 to $100 per tonne as from this month in all markets – North America, Europe and Asia. According to Mr. Grimaldi, the company still does not have available volumes to offer in the spot market and saw the negotiations for April being accelerated due to the clients’ fear of not having the desired quantities of fiber. “We are focused on serving long-time customers,” he said. Despite this environment, there is still no discussion about new adjustments in May.

While supply remains limited, demand for pulp in North America and Europe remains strong. In the European market, with the prolonged strike that closed UPM’s pulp and paper mills in Finland, paper mills from other countries raised the operating rate in an attempt to occupy the market that was served by the Finns. The war in Ukraine and sanctions on Russia, in turn, affected Ilim’s supply of bleached pulp.

In China, the executive said, local contacts suggest that stocks of eucalyptus fiber at customers and traders are at “extremely low” levels. The focal point, however, is on the potential impact of Covid-19 on the Chinese economy further down the road and the war in Ukraine on the global economy.

In a recent report, Santander analysts Rafael Barcellos and Arthur Biscuola wrote that pulp markets are expected to remain tight in 2022, with an estimated shortfall of 400,000 tonnes of short fiber. The average price projected for this year was revised by the bank, to $630 per tonne from $570 per tonne.

“Demand remains strong in Europe and in China the feeling has improved since October, with paper prices following the recent pulp rally,” the analysts wrote. Bottlenecks in global logistics chains also contribute to keeping fiber prices at high levels and there is no expectation of normalization in the short term.

“We believe a prolonged cycle of rising prices for pulp as a likely outcome as we expect the market to remain firm into 2022,” they added.

Source: Valor International

https://valorinternational.globo.com

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Tupy buys engine maker MWM, will supply finished products

Fernando de Rizzo — Foto: Silvia Zamboni/Valor
Fernando de Rizzo — Foto: Silvia Zamboni/Valor

Tupy, a Brazilian multinational maker of engine blocks and cylinder heads, gains a new business profile with the acquisition of MWM, a traditional truck engine manufacturer, unveiled Monday. The Joinville-based company becomes a supplier of on-demand finished products to heavy vehicle assemblers. At the same time, it enters the market of engine parts and takes the first step in the power generation industry.

Tupy acquired 100% of MWM Brasil for R$865 million. The target company is controlled by Navistar International Corp., a truck maker from the Traton group. MWM will bring revenues of R$2.7 billion a year, according to figures from 2021. Tupy earned R$7.1 billion last year.

Tupy’s expansion comes after another purchase, of competitor Teksid, which was started at the end of 2019 and is seen as a horizontal one. Since last October, the Santa Catarina-based company merged with Teksid’s operations of engine blocks and cylinder heads and other components in Betim, Minas Gerais, and Aveira, Portugal. This set of assets is expected to give Tupy a pro-forma revenue of R$11 billion.

Three years ago, the company defined a growth strategy with both horizontal and vertical moves seeking greater value generation in the production chain, Tupy’s CEO Fernando de Rizzo told Valor. “This acquisition brings this to Tupy’s business, which now assembles engines on demand. In addition, we entered power generation and decarbonization in agribusiness,” he said.

Founded in 1953, MWM is complementary to Tupy’s portfolio, but also opens new business fronts, according to the executive. One is the possibility to go further in power generation and decarbonization projects.

More than 20% of Brazilian trucks run with an MWM engine, and the company supplies truck, bus and machine makers in Brazil, Europe and North America. The company is also seen as a leading maker of electrical generation systems.

The value of the deal was based on a multiple of four times EBITDA, estimated at just over R$215 million, according to the notice of material fact.

MWM operates under engine manufacturing contracts, mainly with Volkswagen’s trucks division in Brazil, Mr. Rizzo said, and this business model will be extended to other Tupy customers around the world. The major engine markets are trucks, agricultural and construction machinery, and marine (boats and ferries).

Another segment considered relevant is the replacement of parts and components for engines – there are 600 stores in the country. In the technical support field, MWM boasts a network of 300 accredited workshops. Tupy is betting on power generation, both through generator sets and the conversion of engines for natural gas, biodiesel, biogas and biomethane, with a focus on agribusiness.

The company’s plant is located in the southern region of the city of São Paulo. MWM also operates a distribution center in Jundiaí (São Paulo state), 60 km from the capital city. The manufacturer employs 1,300 people.

Tupy becomes a more complete company after the acquisition, the executive said. “This asset will bring a lot of value to Tupy, which has an international presence. We will be able to supply other subsidiaries of the Traton group – U.S.’s Navistar, Sweden’s Scania and Germany’s MAN.”

The talks began two years ago, but had been pushed to the back burner because of the Covid-19 pandemic, Mr. Rizzo said.

The acquisition will be partly financed, while the other part will be paid for with the company’s own cash generation. Currently, Tupy’s net debt-to-EBITDA ratio is around 1.5 times. “There is room for leveraging,” Mr. Rizzo said.

BNDESPar, the Brazilian Development Bank’s equity arm, holds a 28% stake in Tupy, while Previ, Banco do Brasil’s pension fund, owns 25% of the company.

Source: Valor International

https://valorinternational.globo.com

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Prices of imported goods surge, drive inflation

The average prices of imported goods are rising fast and on a widespread fashion in early 2022. Average import prices rose 32.8% year over year from January to March, while the volume of foreign purchases fell 4.3%. The rise in import prices was relatively generalized, with a 53.1% rise in commodities and a 30.8% rise in non-commodities, raising concerns about the effects on domestic inflation.

Imports totaled $60.5 billion in the first quarter, up 27.1% in the same comparison, according to official data. The data are from the Foreign Trade Indicator (Icomex), expected to be released this Tuesday by Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre).

Although the Secretariat of Federal Revenue strike may have affected the release of foreign trade figures for the first quarter of the year, specialists see effects mostly caused by prices rather than volume, both for exports and imports.

The conflict in Eastern Europe, they wrote, will probably delay the price increase expected for 2022. The global scenario of price pressure, they added, includes an interruption of export deflation by Asia, a pandemic and a restructuring of production chains that may also result from a reorganization of European countries in order to become less dependent on Russian inputs.

Lia Valls — Foto: Leo Pinheiro/Valor

Lia Valls — Foto: Leo Pinheiro/Valor

, a researcher at Ibre, stressed that imports in the first three months of the year show a different behavior from the same period last year. In the first quarter of last year, according to data from Icomex, the volume imported increased 8.5% while prices fell 3.1%. In 2021, she said, imports were boosted in the first half by an increase in volumes while prices accelerated their pace in the second half. In the year, the recovery of domestic demand contributed to an increase of 21.9% in the volume of imported products, with an increase of 13.1% in average prices.

For this year, she says, the scenario is likely to be different. “The imported volume is not expected to see a big boost this year as the economy is seen as slowing down,” she said. The different element in relation to the pressure of imported prices on domestic inflation is the appreciation of the real at the beginning of 2022, she highlights, unlike what was seen during last year. Given the uncertainty of the exchange rate, however, says the economist, the appreciation of the real is a development unlikely to continue.

The data from the Foreign Trade Secretariat (Secex/ME) also show a price acceleration in imports in the first quarter, with a 29.8% rise in prices compared with the same period last year. Volumes dropped 2.2% in the same criterion. In March, prices rose 29.5% with a diffusion index of 67.68, also indicating that the upward price trend was disseminated.

The acceleration of prices caused imports to expand at a pace unrelated with domestic demand, said Yasmin Riveli, an economist at Tendências. She points out that import prices in the first months of the year continued to be subject to high freight costs and were driven, among other items, by fertilizers and fuels.

Livio Ribeiro, a partner at BRCG consultancy and also a researcher at Ibre, says there is a “lockdown war” scenario, with disorganization of activities and impact on the price structure of Brazilian imports. He says that this impact goes beyond the more visible effects of the Russia-Ukraine war on commodity prices, such as wheat and oil.

The global scenario of price pressure includes the interruption of a longer process of Asian deflation exporting, a phenomenon that dates back to 2019, with the trade war between the United States and China, Mr. Ribeiro said. Since then, he said, all the productive linkages that led Asian countries to flood the world with cheap “tradable” goods began to be lost.

The slowdown in Asian deflation export, says the BRCG partner, happened as a result, among other factors, from the displacement of Chinese production to other countries to the adoption of a strategy of less dependence on American supply.

These are costly processes at the time of implementation, he highlights, and that had already led to a change in the global production chain structure. Production models set up for decades and that were considered efficient from an economic standpoint changed because they were no longer efficient from a strategic standpoint, he said.

In addition to this phenomenon since the beginning of 2019, there was a pandemic that shuffled everything around, and since then successive shocks, including tighter lockdowns, and on top of all that came the war in Ukraine, the economist says.

“All of this suggests that at least for some time, until the production chains reorganize themselves, we are going to have higher prices. That certainly won’t be solved by the end of this year.” There is a realignment in the prices of tradable industrial goods in the world, which impacts Brazilian imports due to its composition and also due to the country’s industrial structure.

The reading of industrial goods within Brazil’s benchmark inflation index IPCA released by the Brazilian Institute of Geography and Statistics (IBGE) shows the impact of import prices of intermediate goods and final industrial goods on domestic prices, Mr. Ribeiro said. Since the middle of last year, he recalled, the monthly reading is at the peak of the historical series since 2012 and earlier this year there have already been monthly records in the first three months. In March, industrial goods inflation within the IPCA reached 1.21%.

Mr. Ribeiro points out that the result of Russia’s invasion of Ukraine will lead to a structural change, no longer to a cyclical one. Global value chains and logistics were not going to stay disorganized forever. “They were going to get organized at a certain time and a certain price eventually.”

But what we see now is a major player in the world, Europe, changing its production chaining as a matter of geopolitics, he said. European countries will seek to become less dependent on inputs from Russia, he added, which will lead to a new balance. “It is no longer a matter of waiting for a shock, even a prolonged one to pass. There is a change in the way of doing so that will impact the global productive chain.”

The productive structures created over the last 25 years, Mr. Ribeiro points out, are going through changes. In the first round, it was due to the trade war between the United States and China. In the second one, by the desire for strategic protection of production due to the impacts of Covid-19 on the productive chain. Now, in the third round, he says, by geopolitical issues triggered by the Russia-Ukraine conflict.

Source: Valor International

https://valorinternational.globo.com

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Default rate may rise more than expected as economy sours

The combination of high interest rates and income-eroding inflation means a very favorable environment for nonperforming loans, both from individuals and companies. The figures do not confirm a substantial advance for now, which can be explained by the efforts by banks to renegotiate with their clients and give them more time or even a grace period to pay debts. Yet, several market players say the warning is blaring.

Defaults were previously expected to end this year very close to the level seen before the pandemic. Now there are concerns that they will rise substantially beyond that. At this beginning of the cycle, defaults affect first the low-income population and riskier lines of credit, such as the revolving credit card.

The latest available data provided by the Central Bank shows that defaults on non-earmarked loans, both for individuals and businesses, rose to 4.6% in January. The data is quite outdated because a strike prevented the monetary authority from releasing the credit statistics for February. Yet, even as there was growth, the figures show that the default rate is still far from the level seen before the pandemic, of 5.6%.

Those who follow the market believe that the default rate will continue to rise this year but, right now, it is difficult to predict at what pace. Experts acknowledge that the current macroeconomic scenario is a great challenge for the models. Brazil’s benchmark interest rate Selic is rising more than expected – the market already foresees a policy rate between 13% and 14% a year at the end of the tightening cycle, compared with 11.75 % now – while inflation faces even more pressure as the Russia-Ukraine war weighs on commodities prices. This impacts the population’s income and the ability of companies to generate revenue.

The banks’ hands-on approach to renegotiations prevented the most pessimistic forecasts from materializing, said Flávio Esteves Calife, the chief economist at Boa Vista. He recalled that the rate of nonperforming loans was expected to skyrocket when social distancing measures were put in place back in 2020. “That didn’t happen. The curve flattened instead: defaults didn’t skyrocket, but they spread.”

Banks are still negotiating with clients who signaled that they will not be able to pay loans on time, which helps to limit, if not totally avoid, the advance of defaults. Boa Vista’s figures, which include clients with payments in arrears, including those of credit cards, suggest that the number of defaulters rose 5.1% in March compared to February (seasonally adjusted data). In the first quarter, there was a 9.2% year-over-year growth, or a 6.7% increase compared with the fourth quarter of 2021.

“There is pent-up default and that is why we think it will grow gradually over the coming months and also in 2023,” Mr. Calife said. In the revolving credit card segment, the default rate is already at 36.2%, the highest since October 2020. “The default rate will grow. It remains to be seen how fast. Contracts paused during the pandemic turned into nonperforming loans [with at least 90 days in arrears] in the first quarter,” said Michael Burt, an analyst at LCA.

In March, credit bureau Serasa held a large event aimed at people with a bad credit score and encouraged 3.3 million agreements with a combined discount of R$5.7 billion. The company saw a 0.54% increase in the number of indebted people from January to February, to 65.17 million people, the highest since May 2020. The main debts are: bank/credit card (28.6%), utility bills (23.2%) and retail (12.5%).

“Inflation has eroded purchasing power, especially among low-income people, and this directly affects the default rate. The first thing they stop paying is the credit card because they need to prioritize utility bills and buy food,” said Matheus Moura, a manager at Serasa.

Isabela Tavares, an economist at Tendências Consultoria Integrada, said that the bank’s very active renegotiation drive has slowed down growth in defaults. For this reason, she projects that defaults on non-earmarked loans will remain below the levels seen before the pandemic: 4.7% among individuals and 2.1% among companies. In February 2020, these rates were 5.1% and 2.3%, respectively. A recent survey by the Brazilian Federation of Banks (Febraban) with its members found that the projection for default in free credit at the end of this year increased to 4% from 3.7%.

However, Ms. Tavares stressed that the data changes according to the income bracket. In December 2021, the default rate among households earning up to two minimum wages (R$2.424) a month was 4.87%, compared to 4.03% in the same period in 2020. The default rate among those earning more than 20 minimum wages (R$ 24.240) a month fell to 0.5% from 0.71%. “The scenario is very risky, and the delay in updating the Central Bank data may bring some surprises,” she said.

Felipe Salgueiro, a partner at Multiplica Capital and head of special credits and nonperforming loans, said that “we have not yet realized the default caused by the pandemic.” Banks have moved ahead of potential delays from customers, both individuals and companies, and made renegotiations, extending deadlines or even offering grace periods for the payment of debts, he said. This effort cushioned the crippling effects of the pandemic on the economy. But the impact is expected to be seen clearly in the form of defaults during the second half of this year and in 2023. “Banks are clearing out their stock of distressed loans to prepare for the new stock of distressed loans that is being created,” he said.

Guilherme Ferreira — Foto: Silvia Zamboni/Valor
Guilherme Ferreira — Foto: Silvia Zamboni/Valor

This more complex credit environment is likely to make banks more selective. And, on the other hand, it will further heat up the activity of distressed asset managers, who have already been expanding their portfolios in recent years. According to Guilherme Ferreira, a partner at Jive Investments, sales of distressed portfolios – including both non-performing loans and those seen as likely to become non-performing – are expected to range from R$40 billion to R$60 billion this year. In 2021, they ranged between R$25 billion and R$45 billion, including banks and other financial firms.

Mr. Ferreira links the beefed-up portfolios of loans in arrears to the economic backdrop of low growth, high unemployment and political instability. At the same time, high inflation shrinks the margin of companies and the disposable income of households. “Companies don’t have now the time they had when the Selic was at 2%,” Mr. Ferreira said. “Many will have a hard time paying off their debts.”

This greater supply of portfolios of outstanding loans was noticed by Strategi Capital, an asset manager focused on alternative and illiquid investments. According to founder Cristian Lara, the company had planned to allocate all the R$75 million raised by its new fund over the next two years. But in the first quarter of this year, the fund has already allocated 25%. “If we continue at this pace, we will have almost 100% of the capital invested in the first year.”

Source: Valor International

https://valorinternational.globo.com

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Construction companies regain ground in highway auctions

Engineering companies — which used to dominate highway concessions in Brazil — have regained strength, but now with a new profile: by the association of medium-sized construction companies. This type of consortium has become usual in auctions in the sector, especially in state ones.

Of eight state tenders since 2019, five were won by consortiums constituted by medium-sized construction companies — alone or in association with a larger group.

This is the case of the Way 306 Consortium, which won a highway auction in Mato Grosso do Sul at the end of 2019. The group is led by GLP (a Singapore-based logistics company), with participation from engineering companies Bandeirantes, TCL, and Senpar.

The most recent example is last Wednesday’s bid for Rio Grande do Sul’s highways, won by the Integrasul Consortium, comprised of Silva e Bertoli (of Neovia Engenharia) and Gregor (of Greca Asfaltos).

In the federal auctions held since 2019, the pattern that predominates is the relay between CCR and Ecorodovias. Of the five projects in the period, only one was left with a consortium led by Conasa, in partnership with engineering firms Zeta, Rocha Cavalcante, and M4.

On the one hand, the movement of the construction companies brings new players to the market and increases competition. On the other, there is concern about the financial and operational capacity of the companies, according to analysts and companies.

One of the biggest challenges is financial, says Danniel Zveiter, president of the National Association of Highway Construction Companies (Aneor). “The concessions market is very different and involves a complex financial component, both to obtain credit and for the day-to-day financial operation,” he says.

For Igino Zucchi de Mattos, head of Infrastructure at Integral Investimentos, it is important that the groups gather all the necessary skills, which go far beyond the execution of the work. “It is necessary to know how to implement billing, organize the cash flow, and take care of the environmental issues,” he says.

The medium-sized construction company consortiums have been gaining ground, but they are not new. The biggest reference is the concessionaire MGO, composed of nine medium-sized companies, which, in 2013, won the operation of BR-050, between Minas Gerais and Goiás.

At the time, there were doubts about the group’s capacity. In the end, the concessionaire became known for being one of the few to be successful among the contracts bid during president Dilma Rousseff’s administration. In 2018, the construction companies sold the asset to Ecorodovias. Since then, members of the consortium have appeared in different road auctions.

For example, Gregor (part of the group that won last week’s auction) was a shareholder in MGO, as were the three construction companies that partnered with GLP in the Way 306 Consortium. Vale do Rio Novo, another former member, led a consortium that won a lot of highways in Mato Grosso at the end of 2020.

In the past, large construction firms reigned in infrastructure concessions. After the revelation of corruption cases and the economic crisis in the country, most of them withdrew from the contracts and stopped participating in the auctions. The main survivor of this era is CCR, controlled by Mover (formerly Camargo Corrêa), Soares Penido and Andrade Gutierrez — the latter is in the process of selling its stake to Votorantim and Itaúsa.

The exit of the contractors left a void, which was gradually filled by the entry of financial groups and other segments, such as Pátria and GLP. However, with the recent multiplication of road auctions, the perception that it is necessary to attract more groups has gained strength.

“Today, it is necessary to form new highway concessionaires. This can happen by attracting foreigners, but also by developing national players,” says Mr. Mattos. For analysts, there is a risk that not all the construction consortiums will be successful. However, the movement is seen as a great opportunity to form new platforms in the country.

Source: Valor International

https://valorinternational.globo.com

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Brazil- U.S. trade grows to new record

Abrão Árabe Neto — Foto: Sergio Dutti/Valor
Abrão Árabe Neto — Foto: Sergio Dutti/Valor

After the record of Brazil-United States bilateral trade in 2021, the expectation of the American Chamber of Commerce (Amcham Brasil) was for lower growth in 2022, but the surprisingly positive data from the first quarter affirmed the view that, despite the uncertainties, new records can be achieved this year.

Between January and March 2022, the two-way trade reached $19 billion, up 40.2% year over year and the highest value for a first quarter since the records began, in 1989.

“We expected the bilateral trade to continue to grow in 2022, but at a relatively lower level, because the uncertainties are considerable, due to global inflation, the pandemic, the potential slowdown in China and geopolitical and climatic events that affect the world economy. But the first-quarter results were strong,” said Abrão Árabe Neto, executive vice-president of Amcham Brasil.

The most positive aspect, according to him, is that there was growth both in exports from Brazil to the U.S. and in Brazilian imports from the North American country. “On both counts, we saw, for the first quarter, the best values ever.”

Brazilian exports to the U.S. grew 35.9% year over year in the first three months of 2022, to $7.6 billion. The Brazilian purchases from the U.S. totaled $11.4 billion, up 43.2%.

On the export side, the growth was widespread, seen in nine of the 10 main products. In absolute terms, the biggest contribution was from crude oil as sales, which represent more than 10% of total exports to the U.S., grew by almost 167% in the period. The gain was partly due to higher prices (48.5%), but mainly by the increase in volumes (79.5%), Mr. Árabe Neto said. Semifinished products of iron and steel still dominate with a share of almost 14%, but saw a smaller growth in the first quarter, of 4.4%.

Another highlight is the export of beef, which still accounts for only 3% of Brazilian sales to the U.S., but saw growth of 725.5% in the first quarter. As a result, Brazil was the main supplier of the product to the U.S., ahead of Canada, Mexico and Australia, Amcham said.

“There was an interruption in 2017, when sanitary issues arose and the U.S. market closed. In 2020, it was reopened, and it had already been growing at the end of last year,” Mr. Árabe Neto said. “Our production capacity in this industry is very high, and so is our competitiveness. We are very well positioned, and we start to see this good news shaping in the bilateral trade.”

As for the imports of U.S. products in Brazil, the growth was also widespread, with gains in eight of the 10 main items. Some broader factors that contributed to last year’s record persist, such as the purchase of natural gas to feed thermoelectric plants, which grew 263.9% in the first quarter of 2022, totaling $2.1 billion. In this case, growth has more to do with the increase in prices (232.5%) than with the higher volume imported (9.4%).

Even though Brazil’s national grid operator ONS has already signaled that electricity bills will be cheaper this year, suggesting that it will not be necessary to turn thermoelectric plants on as much as last year, Amcham’s view is that the demand for natural gas from the U.S. will remain heated in the first half of the year. “We may see a slowdown in the second half. But if there is a reduction in volume, values could potentially remain high,” Mr. Árabe Neto said.

The Brazilian demand for other energy products from the U.S. – such as fuel oils, crude oil and coal – remained high at the beginning of 2022. And Mr. Árabe Neto also highlighted the growth of more than 90% in purchases of fertilizers as a result of difficulties to buy agricultural inputs from Russia because of the war in Ukraine.

Amcham rejected the notion that the conflict in Eastern Europe can be a commercial opportunity for the Brazil-U.S. relationship because the net consequences for the global economy and world trade are negative, Mr. Árabe Neto said. But he acknowledged that the energy (oil, gas, coal), steel and agricultural inputs industries could see more trade, either by the price factor or by the higher volume.

Source: Valor International

https://valorinternational.globo.com

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Benchmark rate at 14% not impossible, J.P. Morgan says

Cassiana Fernandez — Foto: Ana Paula Paiva/Valor
Cassiana Fernandez — Foto: Ana Paula Paiva/Valor

If the Central Bank is willing to put inflation again at the center of the target range in 2023, the Selic, Brazil’s benchmark interest rate, must be raised above the expected 13.25%, said Cassiana Fernandez, J.P. Morgan’s chief economist for Brazil. For her, in a moment of high uncertainty, it is important that the monetary authority leave the door open for the coming steps in its statements. While the executive emphasizes the risks of high inflation in the short term, she also sees a more balanced scenario in the medium and long term given the stronger real against the dollar.

“Our recent revision of inflation for 2023 considers the IPCA [Brazil’s official inflation index] at 4.2% and a foreign exchange rate of R$5.3 to the dollar. With the exchange rate at R$4.7 to the dollar, I admit the downside risk to this projection,” Ms. Fernandez told Valor. She points out that the real tends to lose ground later this year in reaction to the tightening of the U.S. Federal Reserve and uncertainties about the presidential elections in Brazil, in October.

In this sense, the J.P. Morgan executive states that the high real interests in Brazil, seen in the yield curve of inflation-indexed bonds (NTN-B), reflect the risk premium over the uncertainty of Brazil’s economic policy in the coming years. “There is a risk premium regarding the credibility, not only of the Central Bank, but of the government and whether it will do what it needs to do to stabilize the debt as a proportion of GDP,” Mr. Fernandez said. Read the main excerpts from the interview below:

Valor: How far will the Central Bank tighten interest rates?

Cassiana Fernandez: We project a 13.25% Selic rate at the end of the cycle, in June, and the question mark is whether this will be enough. If the Central Bank wants to bring inflation to the center of the target range in 2023, it will probably require an even longer cycle. Our own projection [for the IPCA] is at 4.2% for 2023. The last few months have shown that there have been a lot of unexpected shocks in the global economy. Other factors have shown that the models are not matching the current scenario well. For me, it is difficult to say that a Selic of 14% is an unthinkable development, but I don’t think it is the most likely one.

Valor: What do you think of the most recent statement from the Central Bank?

Ms. Fernandez: [Central banker] Roberto Campos acknowledged the surprise of March inflation, which was significant. It was the biggest deviation in relation to the market consensus for the historical series, and 0.6 percentage points above the projection of the Central Bank. I think that a part of the market made a mistake when it considered that, with the signal that the Central Bank would stop tightening in May, it would be doing this regardless of the data. Roberto Campos’s remarks show that they are analyzing how this changes their scenario, without giving a clear sign whether they are going to maintain this guidance of stopping in May, but saying that they are open to reviewing the scenario.

Valor: But you were already predicting that the Central Bank would not be able to stop at 12.75%…

Ms. Fernandez: When the Central Bank announced that the next move would be a 100-basis-point hike and signaled that it might stop in May, just from what it projected for the March IPCA in the Inflation Report, we already had the perception that it would not be able to do this. So we forecast that it was likely to deliver another 50-basis-point hike in June. Given the uncertainties and the hikes as a whole, all this at least allows for it to pause in June to analyze other factors. I think it is even important for the Central Bank’s own communication to leave the door open for changes in the scenario because there are big risks. It is very difficult to say with conviction what is going to happen within the next two months.

Valor: Does the medium-term inflation scenario still have many upside risks?

Ms. Fernandez: In the short term, higher inflation is likely because the exchange rate appreciation is recent and commodities are a risk. But in the medium to long term, the picture is more balanced. Our recent revision of inflation for 2023 considers the IPCA at 4.2% and a foreign exchange rate of R$5.3 to the dollar. With the exchange rate at R$4.7 to the dollar, I admit the downside risk to this projection. And there are also the effects of the cut in the IPI [Industrialized Products Tax], which we are still unclear as to how it will affect the consumer, and the tightening cycle tends to be more severe. Our calculations show that it takes at least six months from the beginning of the interest rate hike cycle to have a real effect on inflation. Looking ahead, prices are likely to reflect the tighter interest rate.

Valor: How does the bank see the exchange rate trajectory?

Ms. Fernandez: We started the year very constructive about the currency, evaluating that the conditions favor the real, mainly commodity prices. High interest rates also help. In the short term, Brazil is in a comfortable position and it is difficult to find other countries to invest in. But, later in the second half and towards the end of the year, the elections and the [decisions of the] U.S. Federal Reserve could curb this appreciation. Our team started to project two consecutive 50-basis-point hikes in the United States and now projects a restrictive rate for the end of the year.

Valor: Does the scenario of activity also impacts the real?

Ms. Fernandez: Activity is likely to slow down, and this also tends to deteriorate the exchange rate scenario. Demand is expected to suffer from monetary tightening, and we expect Brazil to enter a recession in the second half of the year, not to mention the uncertainties regarding the elections and the fiscal policy from 2023 on. Three factors are expected to hold back the appreciation of the exchange rate: the accommodation of commodity prices, the domestic dynamics and the higher interest rates in the U.S.

Valor: What does the Fed tightening means for the Brazilian central bank?

Ms. Fernandez: Fed tightening also helps the Central Bank because Brazil has been importing a lot of global inflation. Actually, if the global situation is softened, the Fed would help.

Valor: But doesn’t a hike in U.S. interest rates tend to strengthen the dollar?

Ms. Fernandez: Yes, the Fed tightening manifests itself through the exchange rate channel, but this impetus to control American inflation and slow down demand in the U.S. would also cause global inflation to fall. Just take a look at the recent behavior of commodities. The risk of China growing less because of lockdowns weakens commodities, which ends up bringing projections of lower global demand. Lower commodity prices would help global inflation to fall, but would not help the exchange rate since we are large exporters of commodities. Everything has a limit, of course.

Valor: What would this limit be?

Ms. Fernandez: If we see a strong increase in interest rates and in the yields of U.S. Treasuries, generating great aversion to risk, this would harm emerging markets and Brazil. But we do not see this scenario as the main one yet. We expect a relatively gradual increase in interest rates and in global financial conditions.

Valor: The real yield curve in Brazil implies rates around 5.5% and close to 6% in some parts. What does this mean?

Ms. Fernandez: It does draw attention. Because if you look at the real interest rate for the NTN-B 2055, for example, it is around 5.5%. It is a very difficult real interest rate to materialize, and, if it does, we will most likely have a much bigger public debt problem. If the neutral real interest rate is between 4% and 4.5%, there is a premium given the uncertainty about economic policy in Brazil over the next few years.

Valor: How do you see the sustainability of the debt in the long term?

Ms. Fernandez: There is a risk premium in the real yield curve in relation to the credibility, not only of the Central Bank, but of the government and whether it will do what it needs to do to stabilize the debt as a proportion of GDP. Today, any exercise of ours of the dynamics of the public debt with the current figures show that a convergence of the debt in the long term to lower levels is very difficult. Brazil has a very low potential growth for emerging markets standards, which we can say is around 1 to 1.5%, and a very high debt, above 80% of the GDP, a scenario compounded by the neutral real interest rate of around 4%.

Source: Valor International

https://valorinternational.globo.com

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