Demand could reach R$53.5bn; stock price of Brazil’s main power utility will be defined Thursday in privatization process
By Maria Luíza Filgueiras, Talita Moreira — São Paulo
06/09/2022
Eletrobras’s power transmission towers — Foto: Custódio Coimbra/AgênciaO Globo
Brazil’s main power utility Eletrobras prices Thursday its great stock offering and, on the way to privatization, reaches the final stretch of the bookbuilding with plenty of volume to launch the operation. According to sources close to the operation, the company had already secured about R$53.5 billion by early Wednesday afternoon.
The demand via the Workers’ Severance Fund (FGTS) is around R$7.5 billion, but allocations will be limited to R$6 billion – which already signals sharing among investors. Workers could invest up to 50% of their resources in the fund, and applications closed on Wednesday at noon.
As it has already been launched with strong anchoring, the institutional investors that are not in these groups or that exceed the ceiling reserved for each profile will dispute what remains of the bookbuilding. There are about R$26 billion in reserves for a number of shares of around R$6.5 billion – that is, the demand is four times higher than the offer.
When the secondary offering was launched, Eletrobras shares were at R$44. On Wednesday, ELET3 closed at R$42.14 and ELET6 at R$41.63, which adjusts market expectations for a funding of around R$34 billion, with the allocation of the supplementary lot.
The banks BTG Pactual, Bank of America, Goldman Sachs, Itaú BBA, XP Investimentos, Bradesco BBI, Caixa Econômica Federal, Citi, Credit Suisse, J.P. Morgan, Morgan Stanley and Safra are coordinating the operation.
Economists say positive impact is temporary and that inflation will follow
*Alex Ribeiro — São Paulo
06/09/2022
Affonso Celso Pastore — Foto: Leo Pinheiro/Valor
The government’s measures to reduce fuel prices may lower inflation and stimulate the economy in the short term, during the election period, but they will lose a good part of these gains next year, making the scenario of the new presidential term more challenging.
“The best definition for this set of measures is fiscal populism,” said former Central Bank President Affonso Celso Pastore. “First, it brings down inflation in the election year, with the goal of boosting the approval rating of the president. It transfers inflation to next year since the measures cannot be extended if they have a minimum of responsibility. This is not economic policy. There are no economic or social objectives.”
The time-honored definition among economists for populism is precisely policies that bring gains in the short term, helping the approval ratings of the rulers, but that does not prove sustainable in the medium and long term.
Financial market economists are calculating the effect that the package of measures may have. Considering that the measures achieve all the goals expected by the government, inflation this year could be about 3 percentage points lower than forecast, according to calculations by Itaú Unibanco, which is in line with the estimates of other lenders.
The problem is that at least part of the measures is temporary. The Bolsonaro administration announced its intention to reimburse the states that cut the sales tax ICMS on diesel and cooking gas to 0% from 17%. It also intends to reduce to zero the federal tax rate by the end of the year.
This measure, according to Itaú, would have a downward impact of about 0.9 percentage points on inflation in 2022. But, as they are only valid for this year, they would also cause a 0.9 percentage point increase in inflation in 2023, which today is the main target of monetary policy.
Considering both effects, inflation this year would fall to 6% from around 9% estimated by the market, easing the pressure over President Bolsonaro during the election campaign. However, inflation could rise to 5.4% next year from 4.39% forecast by the market. Thus, it will be moving away from the inflation target of 3.25%.
A former head of the Central Bank, who asked not to be named, says that the inflationary impact in 2023 and beyond could be even more severe. States and municipalities are giving up non-permanent revenue gains and would have to replenish revenues with tax increases once the boom in commodity prices has passed.
The increased fiscal risk caused by the measure could also cloud the inflationary scenario, said Solange Srour, the chief economist at Credit Suisse. “The fiscal risk is increasing and creates a new problem for the new administration, whoever the president will be,” she said.
According to her, the states’ tax cuts, based on a revenue gain that does not tend to be permanent, could weaken their fiscal situation further down the road. “When states are in difficulties, the federal government is always called upon to bail them out.”
Short-term measures, on the other hand, give only short-term relief on some prices, but in essence do not change the dynamics of inflation. “The Central Bank should not feel more comfortable to end the cycle of interest rate hikes,” she said.
Itaú estimates that the entire tax reduction package would have a fiscal impact of 1.7% of the GDP, also considering the bill that limits the ICMS tax rate on electricity, telecommunications and fuels to 17%.
From the point of view of economic activity, the package would have an initial stimulus impact. Tax cuts expand the population’s disposable income and tend to make room for more spending in household budgets.
But, in a further moment, the economy will tend to feel the impacts of the worsening in financial conditions. As a result, the prospects for GDP expansion in 2022 may improve in relation to the 1.2% forecast by the market in Focus, the Central Bank’s weekly survey with economists. But for next year, it may fall below the estimate of 0.76%.
For now, Ms. Srour said, the market’s reaction has been relatively moderate, in interest rates, exchange rates and stock markets. But there may be an intensification of risks as the proposal of constitutional amendment (PEC) is discussed in Congress and it becomes clearer that the first year of the next federal and state governments will be more difficult.
“In the debates about the PEC, the pressure to offer a larger and longer compensation to the states, besides other demands, may increase,” she said.
Igor Barenboim, partner and director at Reach Capital, has a different view. For him, one cannot rule out the possibility of the measures having a more lasting positive effect. “It can be good for inflation, it can be good for economic activity,” he said.
He argues that Brazil is being impacted by a commodity price shock, with both positive and negative unfolding. On the negative side is inflation, particularly severe in fuel prices. But there is also a positive impact on the economy that favors tax collection.
For Mr. Berenboim, it is acceptable that political forces use some of those gains to mitigate the negative impacts of the shock. Another economist with a large bank says that even with the program launched by the government, the primary result will be much better than expected.
A few months ago, this economist’s estimate was for a primary deficit of R$100 billion. With the surprise in the tax collection and the auction of power utility Eletrobras, the outlook has changed to a positive result of R$80 billion. The new expenditure with the fuel package may lead to balance or a primary deficit, but not as high as previously predicted.
Mr. Barenboim says that the impacts of an eventual worsening of fiscal risks on inflation and activity are not guaranteed. At this first moment, the markets’ reaction was moderate, and the real economy would have already readjusted prices considering a weakened real.
Questions emerged after federal government’s decision to undermine fiscalanchor to hold fuel prices down
06/08/2022
Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal
Market analysts have begun to discuss whether the Central Bank’s Monetary Policy Committee (Copom) should reassess its balance of risks to inflation after the government unveiled the intention to go over the spending cap to reduce fuel prices in this election year.
In its last two meetings, the Copom became less downbeat about the fiscal situation. As a result, the danger that the lack of control of public accounts could lead to higher inflation than projected for next year took a back seat in its monetary policy decisions.
In March, the policymakers concluded that the balance of risks to inflation was less tilted to the negative side, arguing that current fiscal data were better than expected and that the foreign exchange rate and inflation expectations already reflect most risks. In May, for similar reasons, they saw risks balanced.
The rebalancing of risks was at odds with the view of most of the market. The pre-Copom survey made on the eve of the meeting in March showed that 50% of economic analysts evaluated that the fiscal situation had worsened at that moment, compared with 22% who said it had improved. The remaining 28% thought there had been no change.
Due to the strike by Central Bank employees, the results of the May pre-Copom survey were not released. The Central Bank has sent a new survey to the market to gauge opinions for its meeting next week.
In its official documents, the Central Bank has asked the financial market for “serenity” in assessing fiscal risks in an environment it considers to be one of great uncertainty. Many, however, say that the improvement in short-term data is undermined by the destruction of the fiscal anchor.
The exchange rate is again under pressure as the deterioration of the fiscal situation became clear after a new attempt by the federal government to go over the spending cap, the rule that limits public spending to the previous year’s inflation. Above all, such deterioration caused long-term interest rates to rise, which means that investors require a higher premium to buy National Treasury bonds.
A potential revision of the balance of risks would have implications for monetary policy. Currently, the Copom is managing interest rates with a view to meeting the 2023 inflation target. According to the most recent projection of the monetary authority, released in the May meeting, inflation is seen at 3.4% in 2023, above the 3.25% target for the year.
The market, however, already estimates inflation of 4.39% in 2023, after faster rates in April and May. The projections by the Central Bank may be revised upward as well.
If the Central Bank acknowledges the worsening of the balance of risks, making it asymmetric again, it would mean that the inflation expected by the policymakers would be even higher, since the chances of a higher-than-expected reading would be greater than of a lower-than-expected rate.
In theory, this would require even higher interest rates to bring inflation to the target within the relevant monetary policy horizon.
But many analysts are skeptical that the Central Bank will revise its balance of risks to inflation. The monetary authority has sent several messages that it is near the end of the monetary tightening cycle. In addition, considering that current inflation is rising more than expected, the Central Bank is unlikely to look for new reasons to raise interest rates even more.
Cheaper gasoline can make biofuel unviable because of loss of competitiveness
06/08/2022
Analysts say measure may lead owners of bi-fuel cars to fill tank withgasoline instead of ethanol — Foto: Hermes de Paula/Agência O Globo
Eager to reduce fuel prices by any means, the Bolsonaro administration may end up hurting sales of a renewable fuel like hydrous ethanol, which has an average carbon footprint 70% smaller than the gasoline currently sold in Brazil’s gas stations.
Analysts say the creation of a 17% ceiling on sales tax ICMS levied on fuels in a general way, as proposed in the complementary bill 18, both for fossil and renewable fuel, may lead owners of bi-fuel cars to fill their tanks with gasoline instead of ethanol.
This may happen because the ICMS tax on ethanol is already lower than the rate charged on gasoline in several states, which guarantees the biofuel competitiveness for a good part of the year in important consumption centers, such as São Paulo, Minas Gerais, Paraná and Goiás.
Together, the four states represent 80% of the Brazilian consumption of hydrous ethanol. In these states, the ICMS on gasoline is between 25% and 31%, while the tax on ethanol is 5 to 12 percentage points lower, between 13% and 25%.
If ICMS is limited to 17% across the board, the reduction in the gasoline tax burden will be much greater than the reduction in the ethanol tax burden.
In São Paulo, only gasoline would be favored, since the load on fossil fuels is currently 25%, while the ICMS tax rate on ethanol is 13.3%. According to simulations by ItaúBBA, gasoline would become cheaper, and ethanol would be worth 74.6% of its price, up from 69.4% today. For the average Brazilian bi-fuel fleet, hydrous ethanol becomes uncompetitive when its price exceeds 70% of the price of gasoline, because of efficiency.
The same is true for Minas Gerais, the second-largest biofuel consumption center in the country, where gasoline is taxed at 31% of ICMS and ethanol at 16%. With the reduction of the gasoline tax rate to 17%, the ratio between the price of biofuel and gasoline would rise from the current level of 70.1% — where the two fuels are equivalent in terms of efficiency — to 80.1%, making ethanol less competitive.
The discussion has reached the Senate. On Tuesday, Senator Fernando Bezerra Coelho (Brazilian Democratic Movement, MDB, of Pernambuco) said he is likely to present a constitutional amendment proposal of ethanol this Wednesday to ensure a 30% lower ICMS tax rate for biofuel compared to gasoline.
The PIS/Cofins tax exemption that the Bolsonaro administration intends to grant both on gasoline and ethanol would not change this scenario, since both fuels would be treated equally. According to BTG Pactual, gasoline would be 17% cheaper at the pumps in São Paulo, or R$1.14 a liter.
If ethanol producers want to prevent the destruction of demand for the product, they will have to accept receiving lower prices, analysts say. BTG Pactual calculates that the prices charged by São Paulo’s mills to distributors would have to drop 17%, or R$0.38 a liter, to R$2.87 a liter.
In the scenarios outlined by ItaúBBA, the São Paulo plants that supply the state would have to reduce the amount they receive by R$0.2806 per liter, while those in Minas Gerais would have to accept a reduction of R$0.6556 per liter.
Felipe Maia, a tax lawyer with Santos Neto Advogados, says that if there is no different treatment in the debate about tax reduction on consumption, “there will be a migration and there will be a lack of demand for ethanol, which will have an environmental impact.” In many states, biofuels already have tax incentives at the production stage, but Mr. Maia says this is not enough to encourage this market.
This dynamic would also impact the sugar market, since the reduction in the price of hydrous ethanol tends to discourage mills from producing more biofuel and stimulate the production of the sweetener – even if the additional remuneration from the Decarbonization Credits (CBios), linked to ethanol, is taken into account, BTG Pactual said.
Currently, the total remuneration offered by ethanol, already considering the gains with CBios, is 3% below the remuneration offered by sugar. With a drop in ethanol gains, the difference would reach 13%, according to the bank. As a result, the mills can produce more sugar than expected.
In a scenario with prices from last week, consultancy hEDGEpoint had already signaled a tendency of pressure on sugar prices if the ICMS bill is approved. According to the firm, the price of ethanol, converted to the value of sugar on the international market, which was the equivalent of 20.14 cents a pound last week, would fall to 18.46 cents a pound.
According to company’s plan for 2030, use of products in electric batteries for cars and other vehicles will represent 35% of revenue
06/08/2022
Ricardo Lima, Eduardo Ribeiro — Foto: Carol Carquejeiro/Valor
CBMM’s main business today continues to be the use of niobium in the steel industry. But in eight years, in its plan for 2030, the use in electric batteries for cars and other vehicles will represent 35% of the revenue of the Brazilian company, which is a world leader in the market of niobium products and its alloys.
An important step, within the strategy of the company controlled by the Moreira Salles family, one of the owners of Itaú Unibanco, is expected to be taken by the end of this year, said Eduardo Ayrosa Ribeiro, CEO of CBMM until the end of this month, when Ricardo Mendonça Lima, currently vice president, takes office.
Mr. Ribeiro told Valor that the company’s board of directors, chaired by Pedro Moreira Salles, will evaluate the proposal to build a niobium oxide plant capable of producing 20,000 tonnes per year. The plant is initially estimated at R$1.2 billion, Mr. Lima said.
It is from the ferroniobium alloy, Mr. Ribeiro explains, that products are produced for use in various noble applications, such as electric batteries.
So far, 90% of sales of niobium products leaving the company’s mine and metallurgy facilities in Araxá, Minas Gerais, go to the steel industry as ferroniobium. The remaining 10% are alloys and special oxides with various applications, such as in semiconductors.
Currently, CBMM has an oxides unit for 10,000 tonnes per year. And it has already made some sales of oxides for batteries, the executive said. There were 50 tonnes in 2021, and the company expects to sell 1,000 tonnes this year – destined for automobiles, commercial vehicles, motorcycles and electronic equipment. The company is already developing the product even for robots in logistics centers.
The focus is many years, or decades, ahead. The main niobium consumption trends, says Mr. Ribeiro, will be in the mobility industry, electrification, urbanization, digital transformation and sustainability, “where the material can add value. Our focus is on niobium products, using the company’s long-term reserves.” The niobium reserves in Araxá, at the current rate of production, are sufficient for more than 100 years.
“In the new scenario, we could have two to three more oxide plants of 20,000 tonnes each,” the CEO said. This is what is designed to meet the future demands for niobium in the new global consumption grid.
The production of electric batteries is advancing at a fast pace, with lithium as the base mineral for all of them. Other elements make up the parts of the batteries (cathode, anode, electrolyte and separator). These are niobium, nickel, cobalt, manganese, iron and carbon-based materials, such as natural and synthetic graphite, and hence graphene.
CBMM’s most advanced project is a partnership with Toshiba to manufacture electric batteries with a niobium anode. It is already in an advanced stage of testing with automotive customers in Japan. In Brazil, it will start with electric buses made by VW Caminhões, Mr. Ribeiro says. “In this partnership, we are in talks with customers, and production on a commercial scale will be accelerated from 2025 onwards,” he said.
In addition to Toshiba, CBMM is working on the development of applications for niobium alloy and oxides with universities, research centers and several other partners worldwide. “Many important companies are in this race,” the executive said.
At the same time, the company is shaping its production base in Araxá – today it has a production capacity of 150,000 tonnes of ferroniobium per year. It is enough to the level of 100,000 tonnes foreseen for this year – 90,000 tonnes of ferroniobium and 10,000 tonnes of other products.
The 2030 plan, however, considers one more expansion cycle, to be defined at 50,000 or 70,000 tonnes. If the market goes according to the projections, it will be around 210,000 tonnes of capacity, 35% of which, or 70,000 tonnes, will be for transformation into oxides. For steel tempering, there would be around 130,000 tonnes. “No growth is expected in the volume of steel produced, but there is room for greater use of niobium with an increase in steel for high-end applications with the decarbonization wave,” he said.
The new units, two or three of oxides, and one of ferroniobium are greenfield facilities, on their own sites, says Mr. Ribeiro. The company has space available in its 8,000-hectare area.
The new ferroniobium metallurgy will only be needed around 2028, with construction starting between 2025 and 2026. All in all, says the CEO, it is an investment package of R$9 billion until the end of the decade in the region – a prominent project is a new structure (dam) for the deposition of tailings called “n 9,” which will cost about R$2 billion.
“It’s been five years of studies, including studies in France and the U.S., to see with specialists the best technology for this structure,” says Mr. Ribeiro. The company is investing such a high amount of funds to have maximum security, the executive said, as the structure will be key in the company’s growth project.
Eletrobras’s capital increase encourages capital market
08/06/2022
Companies are slowly beginning to evaluate the possibility of resorting to the capital markets to finance their expansion. In the last two weeks, sanitation companies Corsan (Rio Grande do Sul) and BRK Ambiental (São Paulo) announced that they intend to go public after some months marked by a few IPOs.
Stimulated by the secondary offering of power giant Eletrobras, oil companies listed on the Brazilian stock exchange have also started to sound out investment banks to take the same path. PetroRecôncavo informed the market that it intends to raise up to R$2 billion. Sources told Valor that 3R Petroleum and PetroRio are considering doing the same, as well as power generation company Eneva.
If expectations are confirmed, sanitation companies BRK Ambiental and Corsan could launch the first IPOs of the year. China Tree Gorges (CTG) and oil company SeaCrest are also starting to sound out investors and may make initial stock offerings after the elections, sources say.
So far, there have been nine secondary offerings this year, raising R$13 billion. With the scenario of high interest rates and inflation both abroad and in the domestic market — compounded by uncertainties brought by the presidential elections in October — companies had given up on the capital markets. With Eletrobras’s capital increase, which could raise about R$30 billion, companies have begun to check and see if there is room for a restart. Eletrobras’s offering is expected to be priced Thursday.
But the atmosphere is not for euphoria. Gustavo Miranda, head of investment bank at Santander, sees the scenario as more favorable for secondary offerings than for IPOs. “Brazil, compared to other emerging countries, is even more attractive because of commodities.” He observes, however, that this factor is not enough for initial stock offerings to resume the pace of the last two years. Turbulence in the economy and strong market volatility continue to drive companies away from the market.
This is happening abroad as well. In the United States, the volume of stock offerings plummeted, Mr. Miranda said. From January to May, 157 companies debuted, raising $17.9 billion. In the same period last year, 628 companies went public, raising $192 billion, according to Dealogic.
According to him, the next windows for offerings are narrow. There is room for pricing until July. Then, with the summer holidays in the Northern Hemisphere, the opportunities for those seeking to go public after the elections will be between the end of November and December.
Last year, there were 76 IPOs and secondary offerings, which raised almost R$130 billion, compared to 51 in 2020, with R$117 billion raised. For 2022, preliminary estimates by investment banks show that the amount could reach a third of that negotiated in the past if Eletrobras manages to conclude its secondary offering.
In the financial market, there is still a lot of skepticism about the IPO plans of BRK and Corsan. According to a source, the two sanitation companies do not have a price reference for shares of competitors in the domestic market. Corsan’s offering would be the first privatization of a state-owned company in the sector. BRK would be the first private-sector company in the segment to go public — Iguá Saneamento has already tried, but did not reach an agreement on the price of the shares.
The situation is different for CTG and oil company SeaCrest, which have rivals in the exchange. Even so, if the political and economic turbulence persists, the offerings may be postponed until 2023.
A source familiar with Corsan says that the biggest difficulty will not be the market, but the setting up of the operation. One major obstacle is public spending watchdog TCE, a state agency, whose questionings were determinant for the postponement of the offering, in January. Since then, the company has been making adjustments to meet the agency’s demands. For example, in May, it disclosed new rules of governance applicable after the offering.
There is still no approval by the TCE, but an agreement is expected for the end of next week. Unlike the Federal Court of Accounts (TCU), which can bar privatizations, the state court would not have this power, but an unfavorable position would bring great risk to the offering.
Besides the TCE, there are dozens of requests for canceling the process, but, according to the source, about 80% of the requests have already failed, which shows that the process has been robust, he said.
In January, before opting for postponing, Corsan almost closed an anchor agreement with Aegea and Perfin for its IPO. Today, the perception is that “there should be no formal anchoring” for the offering, according to the source.
BRK’s offering, announced last week, was not so well seen at Corsan: on the one hand, it strengthens the idea that the basic sanitation industry stands out; on the other, the IPOs are seen as competing for the same investors.
According to a person familiar with the matter, BRK has already started sounding out investors to test the pricing of its shares. There is a consensus that state-owned bank Caixa, one of the company’s shareholders, wants to reduce its position. Brookfield, another shareholder, is not in such a hurry, sources say. The prospectus draft sent to the Securities and Exchange Commission of Brazil (CVM) foresees a primary offering, aiming to raise funds for auctions.
Bernardo Parnes — Foto: Ana Paula Paiva/Valor
For Bernardo Parnes, founding partner of the financial advisory firm Investment One Partners, the privatization of Eletrobras is positive for the capital market. “Just look at the examples of Vale and the Telebras system. In the case of Eletrobras, the offering will help unlock value in the company.”
Mr. Parnes does not see, however, a capital market recovery in the short term. “About 80% of the companies that carried out an IPO between 2020 and 2021 have undervalued shares now.”
According to him, several factors contribute to this diagnosis, such as high interest rates in Brazil and abroad, the Russia-Ukraine war, which affects logistics, and rising oil prices. Mr. Parnes sees a recovery of the global economy between the end of 2023 and the first half of 2024.
PetroRio said that the secondary offering is one possibility for funding, should it decide to go ahead with the operation. Eneva said it is considering some alternatives to finance recent acquisitions of the company, “always striving for the best allocation of funds and strong capital discipline. One possibility analyzed is a secondary offering, which is still under study.”
CTG and 3R Petroleum said they would not comment on market rumors. Caixa declined to comment, citing a quiet period. BRK, Brookfield, Corsan, Aegea and Perfin declined to comment. SeaCrest did not immediately reply to a request for comment.
Deforestation, trust in institutions among issues to be examined beforeadmission
06/07/2022
OECD’s building in Paris — Foto: Hervé Cortinat/OECD
The Organization for Economic Cooperation and Development (OECD) will examine from now Brazilian practices and policies in negotiations to evaluate the country’s admission to the organization. The assessment will range from trust in institutions to deforestation.
Valor found that the roadmap with the terms, conditions and process for Brazil’s ingress, has already received the green light from the OECD Council of Representatives, and will now be formally approved by the ministers of the 38 member countries on Thursday in Paris.
The way in is identical for the five membership candidates — Peru, Bulgaria, Croatia and Romania besides Brazil. Argentina had its invitation frozen as Alberto Fernández’s government did not commit to the organization’s values under the conditions the current members demand.
The list of core principles for technical evaluation in the different OECD committees is long and includes new recommendations approved recently by the entity.
A new subject for which Brazil and the other four candidates will be evaluated, in the field of governance, is people’s trust in their institutions. For the OECD, trust is the basis of the legitimacy of public institutions and of a functioning democratic system, and is crucial to maintaining political participation and social cohesion.
Trust is important for the success of a wide range of public policies that depend on behavioral responses from the public, such as respect for regulations and the tax system. In the long run, trust is considered necessary to address social challenges such as climate change, an aging population, and the automation of labor.
In the field of governance, the evaluation will also focus on issues such as the structure of governments, including separation of powers, and the integrity of the public sector, including the application of principles of high standards of behavior in public institutions.
Unsurprisingly, the environmental issue takes up more space on the roadmap for Brazil and the other candidates. Its policies and practices will be compared to OECD best practices. In fact, the environmental policy and chemicals committees have 40% of the OECD recommendations. The candidates will be examined based on at least 20 items on the environmental front, proportionally the largest number.
In the case of Brazil, the issue takes on a greater dimension because of the distrust with which the Bolsonaro administration is viewed on the environmental front. The map mentions the issue of deforestation in relation to the environment and agricultural production, according to a source.
The OECD wants to know what happens in the candidate country in line with the commitment made in Glasgow last year to “working collectively to halt and reverse forest loss and land degradation by 2030.”
The Environmental Policy Committee will also check how Brazil applies the principle that the polluter, rather than government subsidy, pays for prevention and control measures against pollution. It will also assess whether sectoral policies take into account the need to internalize environmental improvement. In the Agriculture Committee, one question is whether sectoral policies contribute to sustainability and improved environmental performance, and “green growth.”
In the discussion about the roadmap for Brazil, France was particularly active on environmental and agricultural issues, but without blocking the negotiation.
In the Fiscal Affairs Committee, the elimination of double taxation on income and capital will be examined, adopting the OECD convention model. On the financial front, the blockchain issue will also enter the evaluation, for example.
Economy Minister Paulo Guedes and Chief of Staff Ciro Nogueira will be at the OECD on Thursday for the approval of the roadmap.
From the 20th to the 24th of this month, a mission from the OECD, called the kick-off mission, will take part in the OECD/Brazil Forum with representatives from the Brazilian government, for the negotiations for the country to fit into the OECD standards.
Mathias Cormann, Secretary-General of the OECD, will be received by President Jair Bolsonaro on the 22nd in Brasília, symbolically launching the country’s admission process to the organization.
Oil, natural gas and iron ore will generate higher-than-expected collection, according to calculations by think tank Ibre/FGV
06/07/2022
Braulio Borges — Foto: Ana Paula Paiva/Valor
The federal gross collection of revenues related to extractive industries – especially oil, natural gas and iron ore – is seen as reaching an annual average of 2.11% of GDP between 2022 and 2030, more than double the average rate of 0.92% of GDP per year seen from 2011 to 2020. The calculation by economist Braulio Borges, a researcher at Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre), conservatively considers a barrel of oil traded at $65. The additional collection would total R$1.03 trillion at constant values from this year through 2030 compared to the previous decade.
Mr. Borges ponders that the scenario involves volatility and contingencies, such as those related to oil prices and the production curve. He also highlighted that these additional revenues have not yet been considered in the longer-term fiscal projections, whether internal or produced by international organizations.
According to his analysis, in 2021 the extractive industries will expand gross federal revenues by around 1% of the GDP. With that help, that federal revenue reached 22.3% of GDP, up from 21% on average from 2014 to 2019. In the 12 months through March 2022, he said, the total federal collection reached 23.2%, which indicates a new increase this year. The recent movement was driven by the high international prices of these commodities impacted by cyclical factors.
Even as prices expected for the next two years are adjusted, these items are expected to continue increasing tax collection until 2030, Mr. Borges said. In this longer term, the revenues from extractive industries will be based on the increase in production volume and driven by already defined taxes, which is expected to gain ground due to the increase in the share of oil and gas extraction under the sharing regime.
Experts warn that the high volume of revenue coming from this temporary change, although lasting and based on finite resources, should not be seen as a panacea. This additional revenue, they point out, requires careful allocation by the federal government.
According to Mr. Borges, even in a scenario of a lower oil price, of $45 a barrel of Brent, the federal gross revenue from the same activities would yield an annual average of 1.68% of GDP from 2022 to 2030, still more than 0.7 percentage points above the average annual rate seen between 2011 and 2020. Considering a barrel at $85, the federal revenue would be 2.6% of GDP on average annually.
Mr. Borges’s calculation shows that in 2021 the total revenue from royalties, special participations, dividends paid by Petrobras to the state and taxes paid by the extractive industries, except social security contributions, totaled 1.85% of GDP, higher than the average of 1.06% of GDP from 2018 to 2020 and 0.93 percentage point above the annual average from 2011 to 2020. The performance largely explained the jump in total federal gross revenues in 2021.
Revenues from royalties and special participations grew to 1.08% of GDP in 2021 from 0.76% the year before. Petrobras’s dividends reached 0.24%, the highest rate relative to GDP since 2001. Federal taxes complete the picture. Revenue from taxes and contributions from extractive industries, including oil, yielded 0.52% of GDP for the state in 2021, almost double the 0.27 percentage point seen in the previous year.
The revenue projection, Mr. Borges said, shows that the extractive industries will continue to increase the state’s gross revenue until the end of the decade. The expected increase in production, especially of oil, natural gas and iron ore, is expected to contribute to this. These three commodities represent virtually 89% of the royalties collected from natural resource exploration in Brazil. The projections are included in a study that is the subject of an article by economist Luiz Guilherme Schymura, to be published by Ibre in the magazine “Conjuntura Econômica.”
In the study, Mr. Borges considered the 10-Year Energy Expansion Plan 2031, in which Energy Research Company (EPE) projects growth of little more than 80% in the production of oil and gas by 2030, with an increase from pre-salt exploration. This comes in the wake of production growth of 50% in the last decade and expansion of 150% in 20 years. Iron ore production is expected to grow 30% by the end of the decade, considering mining giant Vale’s estimates.
Another factor that will contribute to revenue growth is the so-called “profit oil,” a still small collection for the state established when the sharing regime was created, in 2010. That meant an increase in taxation on the extraction of oil and natural gas, Mr. Borges said. As production subject to the sharing regime is expected to increase, the revenue from profit oil, almost insignificant until 2021, is likely to grow until 2030.
Based on data from PPSA, the state-owned company created to represent the state in the sharing contracts, Mr. Borges projected the impacts on revenue. “It is worth saying that two-thirds of Brazil’s oil extraction in 2030 is expected to be under the sharing regime.”
Royalties, special participations, Petrobras dividends and revenues from profit oil combined are expected to reach 1.7% of GDP between 2022 and 2030 on average. Last year, it was 1.33% of GDP. In the 10 previous years, the annual average was 0.7%. For 2030, the projection is 2.25% of GDP – considering, as previously mentioned, a barrel of Brent crude oil at $65. The collection of federal taxes paid by extractive industries is expected to add 0.4% to 0.45% of GDP on an annual average from 2022 to 2030, totaling 2.11% of GDP in this period.
The most recent rise in the contribution of extractive industries to the state’s gross revenue is due in large part to the surge in commodity prices, under the impact of the pandemic and, more recently, the shock of the Russia-Ukraine war. Because of this, Mr. Borges said, the expected adjustment in prices is likely to drive down tax collection linked to extractive industries over the following two years, with a minimum level projected for 2024 at 1.6% of GDP.
From 2025 on, with the increase in domestic production of oil and gas, these revenues are likely to rise again and reach 2.71% of GDP, considering the baseline scenario with Brent crude at $65 a barrel.
Even with the energy transition, Mr. Borges said, oil demand is expected to still be high for 15 to 20 years, and “Brazil is well-positioned to meet this demand.” At the same time, he says Brazil has the third-largest nickel reserves in the world, a production that can grow a lot if the energy transition accelerates and boost royalty collection. This was not included in the projection, he said.
Mr. Borges points out that this commodity windfall brings volatile revenues based on finite natural resources. “A number of factors can make oil extraction in Brazil grow more or less,” he said. “The additional revenue will apparently materialize between now and the end of the decade, but it is not necessarily eternal. The projections, in fact, are that in the decade following 2030 Brazilian oil production will start to fall.”
Agreement includes production, commercialization of gastroenterology product
06/07/2022
Omilton Visconde Junior and Rafael Suarez — Foto: Celso Doni/Valor
Brazil’s Cellera Farma has signed an agreement with the Swiss laboratory Ferring for the production and commercialization of an innovative medicine for gastroenterology healing, in the first step of a partnership that may be more comprehensive in the future.
For Cellera, whose controlling shareholders are businessman Omilton Visconde Júnior and private equity manager Principia Capital Partners, this first project represents technology transfer, occupation of the installed capacity of the Indaiatuba plant, in São Paulo, and a new jump in revenues, with the right of the first choice for commercializing the new drug.
Ferring, which is present in 56 countries, now has local production of one of its drugs and will use Cellera’s broad bases to take it to health professionals and pharmacies throughout the country. The biopharmaceutical company, specialized in fertility, gastroenterology and urology, has placed one of its 12 innovation centers in Brazil and wants to advance in research and development locally.
The new drug — a gel that combines two existing molecules to accelerate the healing process of anal fissures and control pain — was developed in the country, at Ferring’s center. In future projects, Cellera may even join the multinational at this stage.
The drug will enter phase 3 of clinical studies in 2023 and may reach the market in mid-2025. So far, investments in the product have reached between R$15 million and R$17 million, and more R$5 million are likely to be spent until registration at the health regulator Anvisa. In the launch phase (“go-to-market”), investments are estimated at R$50 million. “The product will be important for both companies,” said Rafael Suarez, Ferring’s CEO in Brazil and leader for Latin America.
According to the multinational, the choice of Cellera as a partner took into account the quality of its productive assets, which meet the requirements of international agencies, and the willingness to invest in innovation. Besides that, the proposal is that the drugs developed by the partnership can be internationalized without the need to repeat clinical studies abroad, said Renato Faro, head of R&D and regulatory affairs at Ferring.
Omilton Visconde Júnior, CEO of Cellera, says that the Brazilian pharmaceutical company bets on partnerships to grow, at the same time avoiding exposure to commoditized products, in line with what Ferring has to offer. With operations in the central nervous system (CNS) and gastroenterology fields, the pharmaceutical company has some participation in pediatrics and is evaluating the entrance into orthopedics. “Our focus is innovation,” he says.
Mr. Visconde Júnior became known for his sequential ventures in the health sector in the country. Among other moves, he sold Biosintetica to Aché in 2005 and, years later, he sold Segmenta, of hospital serums, to Eurofarma. In 2017, he and his private equity partner formed Cellera, the result of the purchase of Instituto Terapêutico Delta and the company MIP Brasil Farma.
For this year, the Brazilian pharmaceutical company is expected to reach R$500 million in revenues, 10 times more than in 2017. The plan, according to the businessman, is to seek an IPO when the company reaches the R$1 billion threshold, in three to four years.
Ferring, formed in 1950, belongs to a single owner and has been in Brazil since 1985. Worldwide, the group has revenues of $2 billion and invests 20% of its revenue per year in R&D, said Mr. Suarez.
May is second-busiest month since 2020 in Brazil, with 21 companies launching such programs
06/07/2022
São Paulo-based B3: stocks are going through strong correction in 2022 — Foto: Aloisio Mauricio/Agência O Globo
Faced with volatile markets that are sensitive to the global economic scenario, stocks are going through a strong correction in 2022 and companies in several industries, in Brazil and abroad, are launching share buybacks as a result.
In Brazil, share buyback announcements accelerated in May, with 21 companies starting buying back shares, almost four times the number seen in the same month of 2021. This reflects the Ibovespa – Brazil’s benchmark stock index saw the second-worst performance since the onset of the Covid-19 pandemic by falling 10.1% in April.
May was still the second month with the most open programs since March 2020, when the coronavirus triggered an unprecedented global crisis.
This year, 57 companies unveiled buyback programs, more than half of the entire 2021 volume of 108 announcements. The number is 63% higher than the number announced between January and May last year, which had most of the openings concentrated in the second half of the year.
If completely fulfilled, the buyback programs can total R$72 billion, taking into account the current price of the companies. The operations announced in the month alone cover a volume that may exceed R$17 billion if fully executed. Gerdau, CSN, Suzano, JBS, Bradesco, XP, Cosan and Hapvida are among the groups that started buyback programs in May.
This is not a local phenomenon. Share buybacks in the United States are expected to reach a record of $1 trillion in 2022, as companies see their shares depreciating between 15% and 30% in the year to date.
Guilherme Tiglia, a partner and analyst at Nord Research, cites escalating global inflation, the Russia-Ukraine war, the Covid-19 pandemic, and reduced growth in major economies such as the United States and China among factors driving buybacks.
“At times like this, when we see the [financial] market moving sideways and concerned about the global economy, a window of opportunity opens up for companies to do buybacks. It’s a market moment, with discounted stocks,” he said.
He points out that, in the local scenario, there is still the impact of the high interest rate, which reflects strongly on variable income due to the migration of investments to fixed income.
Besides the drop in stock prices, the strong cash reserves of some Brazilian companies — after higher revenues in 2021 — contributed to driving buyback programs last month, said Gabriela Joubert, chief analyst at Inter.
“Companies, especially those linked to commodities, which have revenues in dollars, have a cash surplus. They need to allocate this money. After so many [announcements and payments of] dividends, buyback is also an alternative,” Ms. Joubert said, stressing that stock buybacks are another way of returning profits to shareholders.
The analyst notes that, for the investor, the buyback plan contributes to containing share losses, at first. “We are entering a bear market, so it makes sense for companies to announce buybacks,” she said.
Vale, at the end of April, paved the way for more robust programs with the announcement of a buyback of up to 500 million shares — equivalent to more than R$40 billion — expected to continue until the second half of next year.
In a conference call with analysts held after the announcement of the program, the chief financial and investor relations officer, Gustavo Pimenta, said that the share buyback “is the best investment” the company has, adding that this does not mean the mining company will not pay extraordinary dividends.
“It will depend on the cash flow. We can do both [dividend and buyback], but the buyback has a great prospect,” the executive says.
Ms. Joubert says she disagreed with the buyback announced by the company in October last year, of up to 200 million shares — a program finished this month with the acquisition of all shares for the opening of the current buyback — since it could have been converted into dividends for shareholders.
According to her, Vale wanted to send a message of confidence in the company. “Companies continue to pay dividends, but they also buy shares, sending the message that they are investing in themselves. The message is unanimous. I have surplus cash, I will pay you dividends. But I will also buy shares of my company and do the same, shareholders,” the analyst with Inter said.
Mr. Tiglia, with Nord Research, considers that the share buyback is also a benefit and that, at that moment, it was an allocation of funds that made sense for the company’s strategy.
“There is no such thing as a better or worse proceed. I believe that, at that moment, Vale understood that its shares were cheap, which is consistent with the robustness of the program, and the buyback was the tool that made the most sense in that scenario,” the analyst said.
Daniel Sasson, a commodity analyst at Itaú BBA, said that the program is in line with Vale’s recent positioning, in which it sees no need for investments and expansion in the coming years.
“Therefore, the company is using this surplus by returning cash to shareholders. Another issue is that Vale shares are cheaper compared with its global peers. The company sees this, that stocks are cheap,” he said.
Mr. Tiglia says that Vale shares are at a level below what they could be, even with gains of more than 17% in the year.
Some programs launched in May, weeks after Vale, have the potential of reaching R$1 billion each, including Suzano, CSN and Gerdau.
Gerdau’s chief financial and investor relations officer, Rafael Japur, evaluated that the repurchases of the company and Metalúrgica Gerdau reflect the steelmakers’ cash generation capacity. “We understand that the shares are undervalued in recent months and that the discount is important concerning our peers in North America. That’s why we started the program,” Mr. Japur said.
Ms. Joubert, the executive with Inter, however, highlights the post-purchase and wonders about the company’s goal. “We need to pay attention to what the company will do with that number of shares it bought. Will it cancel it, will it keep it, or will it do a secondary offering to raise money again?”
Mr. Tiglia, the analyst with Nord, said that buybacks can reflect negatively on stock liquidity. “There are programs that don’t change, while others mess a lot with liquidity,” he said. “At the end of April, Vale, for example, had 305 million in treasury stock. The natural path is that it cancels those shares in the coming months and the market is already expecting this,” said Mr. Sasson, with Itaú BBA.
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