Pressure on coffee market grows amid low supply in Brazil

Conab reduces estimate for this year’s season to 50.4 million from 53.4 million bags

09/21/2022

Adverse weather in the 2021/22 season, with prolonged periods of drought and frost in some regions, continues to impact part of Brazil’s coffee crop in this 2022/23 cycle and increase fears about the effects of the shortfall in global supply.

On Monday, the National Supply Company (Conab) again reduced its estimates for the average yield and harvest for the season, and analysts believe that the pressure in the market, especially for arabica coffee, may still increase.

“Not even the resumption of rainfall at a good level in the first months of 2022 was enough to avoid the decrease in output potential,” said Conab in a report. The average yield is now estimated at 27.4 bags per hectare, compared to 29 bags per hectare forecast in May. Each bag weighs 60 kilos. The number is only 3.7% higher than in 2021/22, a negative year in the coffee’s biennial cycle, that is, a crop with lower productivity, and 22.2% lower than the average in 2020/21, in a positive biennial cycle, like the current one.

Thus, the production projection was reduced to 50.4 million bags from 53.4 million bags in May. Compared to the previous season, the volume represents an increase of 5.6%. “This increase between crops is due to a discrete expansion of 1.7% in the producing area and the better productivity achieved by conilon coffee,” Conab said in the text.

Arabica coffee production is now estimated at 32.4 million bags, 3.1% more than the last cycle but 9.4% less than estimated in the previous report. “The number is below expectations, since unfavorable weather conditions between June and September 2021, with drought and frost, in addition to excessive rainfall in Minas Gerais, between December 2021 and February 2022, were determinant for a decrease in expected production.”

Rabobank reiterated in a new report on the crop that August was a dry month and if the weather continues like this in the coming weeks, it could impact the yield of the next crop. “Lower-than-expected yields have been reported in the current crop, especially in the Cerrado Mineiro region,” says the report, mentioning the area of Brazilian savanna in the state of Minas Gerais. Rabobank has reduced its 2022/23 (current) arabica crop forecast to 40.1 million bags. The previous projection was 41.4 million bags, according to a report signed by analyst Guilherme Morya.

The global Arabica coffee market, of which Brazil is the top supplier, is already going through a delicate moment since the “fundamentals indicate a difficult picture for the global supply,” said Eduardo Carvalhaes, with coffee brokers Escritório Carvalhaes. According to him, the shortfall is greater than initially projected by agronomists, producers, and cooperatives.

Even so, he reiterates, since there is a lack of verifiable data, especially in relation to Brazilian stocks, the analysis is based more on “feelings rather than numbers.” Mr. Carvalhaes, who is in constant contact with coffee producers and buyers, said that there is a slow movement of new crop coffee arriving at the warehouses, which is unprecedented for this time of year, the end of harvest.

This week, Carlos Augusto Rodrigues de Melo, head of Cooxupé, the largest Arabica cooperative in the world, said it will receive about 15% less coffee from its members than what was projected at the beginning of the harvest, which should total about 4 million bags.

As for the country’s stocks, Conab’s latest data, from March, indicated 13.1 million bags – 11.4 million of arabica coffee and 1.7 million of the conilon variety, which is similar to the robusta variety. “The work of surveying private stocks, as a process of information gathering for knowledge generation and decision-making, needs continuous improvement,” Conab told Valor.

In the case of conilon coffee, Conab raised production estimates from 17.7 million bags to a record 18 million bags.

*By Fernanda Pressinott, Érica Polo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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FGV sees stronger growth this year, slower inflation in 2023

Concerns about fiscal policy going against monetary policy, however, remain in place and cast doubt on Central Bank’s ability to tame inflation

09/21/2022

Silvia Matos — Foto: Leo Pinheiro/Valor

Silvia Matos — Foto: Leo Pinheiro/Valor

Better-than-expected signs in July and August led to a significant revision of the economic projections by Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre). In the September edition of the Macro Bulletin, forecasts for activity in 2022 were revised upward, while inflation projections for this year and next were revised downward. Concerns about fiscal policy going against monetary policy, however, remain in place and cast doubt on the Central Bank’s ability to converge to the inflation target ahead.

The latest edition of the Macro bulletin points out that after the release of GDP data for the second quarter and the last two months, activity is still expected to slow down, but in a less intense way.

“In July, high-frequency indicators showed stability on the industry side, with positive momentum from services, and a drop in the retail sector. However, within the retail sector, the sale of fuels and lubricants stood out positively,” said economists Silvia Matos, Marina Garrido, and Mayara Santiago.

They point out that the services sector surprised to the upside, with a highlight for the transportation sector, which is today 20.2% above the pre-pandemic level. Based on high-frequency indicators for July, the manufacturing industry grew 0.4%, and remained flat in the year-over-year comparison. In the case of services, the expectation of growth of 5.5% year-over-year was overshadowed by the year-over-year increase of 6.3% and the monthly increase of 1.1%.

With the recent data and the perspective that services will continue to contribute positively to growth in the second half, FGV/Ibre now expects GDP growth of 0.4% in the third quarter, compared to the second quarter. The economists added that some measures passed by Congress are likely to drive growth in the third quarter. As a result, they revised the projection for GDP growth in 2022 to 2.5% from 1.7%.

Besides GDP projection, FGV revised upwards the 2022 forecasts for household consumption (to 3.5% from 2.4%), investment (to -0.4% from -3.5%), industry (to 1.7% from 0.5%), and transformation industry (to 0.2% from -1.3%). The numbers for electricity and others were also revised upwards (to 7.9% from 4.5%), as were construction (to 6.1% from 4.9%), and services (to 3.3% from 2.6%).

Forecasts for government consumption, exports and imports, agriculture, and extractive industry were revised downwards. So was the forecast for the GDP in 2023, now expected to contract 0.4%, compared with 0.3% before. This is explained by the delayed effects of the monetary policy, plus the need for less public spending and the decline in household consumption next year.

Silvia Matos, coordinator of the Macro Bulletin, points out that, besides the surprise in the transportation sector, which has been growing for 10 months, public services, energy, and agricultural production are expected to perform well this quarter.

“We foresee good growth in agriculture, which in the same quarter last year fell 9% because of the drought,” she said. “Public services should have a more relevant contribution in the quarter and may grow 2%. It would be a later normalization of this sector, which has a relevant impact on the GDP. Besides this, although energy has contracted, we are talking about a year-over-year variation of 10% after the thermal plants were turned on last year.”

The economist also argued that services provided to households, which did not grow that much in July, are 5.7% below the pre-pandemic level, which indicates some room for growth this quarter.

FGV/Ibre also revised its projections for inflation this year and next. In August, it expected inflation of 6.5% for 2022 and 5.1% for 2023. Now it expects 5.6% for this year and 4.7% for 2023. In the latest Focus, Central Bank’s survey with analysts, from Monday, the market’s outlook for inflation fell again, but is still less optimistic than that of the FGV/Ibre – it went to 6% from 6.4% in 2022 and to 5% from 5.1% in 2023.

In the bulletin’s inflation section, André Braz said that, whether due to the ICMS reduction or the risk of global recession, the prices of energy and important raw materials should remain lower for the next few months.

“And, in the same way energy products contributed to a broad-based inflation, their current behavior tends to contribute to price stability. Since energy and fuel are important costs for industrial activity and services, their current trajectory tends to reduce the need for transfers along the production chains,” Mr. Braz argued.

However, Ibre/FGV warned that the battle against inflation is not yet won and that a new cycle of monetary tightening could still be necessary.

Ms. Matos and Armando Castelar Pinheiro said that the scenario is of deceleration throughout this semester and next year in Brazil and in the rest of the world. Here, they said, the picture is more concerning because the fiscal policy has been very expansionary, which would be unsustainable from the standpoint of public debt and the fight against inflation.

They cited recent analysis from associate researcher Samuel Pessôa, published in FGV/Ibre’s blog, in which he argued that without fiscal adjustment it will be very difficult to get close to the inflation target.

Brazil’s president in the next four years, to be elected next month, will look at 2023 and see an economy at full employment with inflation well above the target. “The political cycle will speak louder in terms of spending,” Mr. Pessôa said. “We will have fiscal contraction in 2023. Otherwise, it will be very difficult for the Central Bank to deliver inflation on target in 2024.”

In this sense, Ms. Matos argues that if fiscal policy does not do its part, we may have higher interest rates or even more inflation. In her view, there is a “conflict” with tight monetary policy on one side and fiscal policy with continuous expansion of spending.

As for monetary policy, Ibre/FGV warned about a potential new cycle of interest rate hikes by the Central Bank, mainly because of the possibility of approval of a temporary suspension of fiscal rules to enable public spending that was not included in the federal budget for 2023.

“Depending on the fiscal policy choices next year, there is a risk that [this] will not help the Central Bank,” Ms. Matos said. “If expectations for 2023 and 2024 start to deteriorate, the Central Bank will have to raise interest rates more. And it will only lower interest rates if there is a clearer scenario from the fiscal policy standpoint. We depend on interest rates abroad and fiscal policy here. These two components are key to see how much real interest rates we are going to have.”

*By Marsílea Gombata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Norwegian fund’s climate plan increases pressure on Brazilian companies

It invests in 174 businesses, totaling $4.5bn; Vale, Eletrobras have been excluded from portfolio

09/21/2022

Norway’s sovereign wealth fund — the world’s largest, with $1.2 trillion in assets — announced on Tuesday a new action plan for all companies in which it invests to achieve net-zero greenhouse gas emissions by 2050, in line with the Paris Agreement.

The plan will have an impact in Brazil, where the Norwegian fund invests in 174 companies, totaling $4.5 billion, or 0.3% of all its assets. It has stakes in companies like Petrobras (1%), Suzano (2.1%), Cosan (2.2%), and Aliansce Sonae Shopping Centers (3.6%). In total, its investments in Brazil in 2021 reached about $6 billion, including fixed-income securities, equivalent to 0.4% of all its investments, compared to 0.9% in 2019. But the number of companies it invests in the country increased to 174 last year from 139 in 2019.

As Valor reported in March, last year Norges Bank, which manages the sovereign wealth fund, excluded 12 companies globally from the portfolio and placed three others under observation. One of these three is Brazil’s Marfrig Global Foods, which was set aside due to environmental issues. The fund had only $2 million invested in the company (0.08% of the shares).

The fund at the time also started talks with 11 companies that are among the biggest contributors to the equity portfolio’s carbon footprint, to understand their plans to reduce their greenhouse gas emissions. One is Petrobras.

In 2019, the fund had already excluded from the portfolio two Brazilian companies among 15 globally: Vale, for “severe environmental damage,” in the collapse of dams which have caused hundreds of deaths; and Eletrobras for “human rights violations” involving certain hydroelectric projects, such as the Belo Monte dam.

Globally, the fund invests in more than 9,000 companies in 70 countries. With the new plan, it wants to accelerate the decarbonization of its portfolio to avoid financial risks arising from delays in the environmental transition. “We will ask companies to undertake appropriate short-term actions to help mitigate global warming and reduce exposure to climate risk,” the fund says. “For selected industries, this might include significantly reducing methane emissions or eliminating deforestation impacts from their business activities and/or value chains.”

For the Norwegian fund, climate change is one of the biggest challenges of the century. “In addition to serious consequences for the world’s climate and living conditions for human beings, the changes will result in considerable risk for the global economy,” it says in a statement.

Analyses by the fund indicate that a delay in the climate transition is what constitutes the greatest financial risk to its investments. “Our goal is to be the world’s leading investor in terms of how climate risk is managed. Our long-term return will depend on how the companies in our portfolio manage the transition to a zero emissions society,” said Nicolai Tangen, CEO of Norges Bank Investment Management, in the statement.

The fund has been working on the climate issue for more than 15 years. But it says it will now do more. It will charge companies to develop transition plans, define their timelines and milestones, and report on their progress annually. Net emissions will be examined, meaning that any additional carbon emissions need to be fully offset by emissions taken out of the atmosphere, for example.

“We will examine the robustness of these plans, including governance structures, capital allocation frameworks, carbon price assumptions, and use of carbon offsets and their quality,” the institution says.

*By Assis Moreira — Geneva

Source: Valor International

https://valorinternational.globo.com/
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Pulp, paper industry ignores crisis and invests over R$63bn

Suzano, Klabin, CMPC and Arauco are sector’s heavyweights in investments

09/21/2022

Aires Galhardo — Foto: Silvia Costanti/Valor

Aires Galhardo — Foto: Silvia Costanti/Valor

Brazil’s pulp and paper industry continues to ride out global economic turbulence and increase investments. In addition to the R$60.4 billion already announced for expansion projects and new mills until 2028, including wood panels, Valor has learned that there are at least more R$3 billion planned for the current growth cycle, consolidating the sector among the largest private-sector investors today.

Among a dozen projects announced or under execution are heavyweights of the global industry, such as Suzano, Klabin, CMPC and Arauco. The largest of them is Suzano’s Cerrado, with a total capital expenditure of R$19.3 billion — of which R$14.7 billion on the industrial front.

In Ribas do Rio Pardo, Mato Grosso do Sul, the company is building the largest single pulp line in the world, with an output capacity of 2.55 million tonnes per year and economic and social development throughout the region.

“It is a transformational project, with wealth generation that goes beyond pulp production,” said Aires Galhardo, Suzano’s head of pulp operations, engineering, and energy. Located about 100 kilometers away from Campo Grande, the municipality has 25,000 inhabitants. When operational, the plant will employ about 3,000 workers, including third-party employees.

One investment not yet reflected in the official estimate of the Brazilian Tree Industry (Ibá) is the installation of four tissue paper machines supplied by Asian company RGE (Royal Golden Eagle) in the country. Bracell, the group’s pulp production arm, confirms the plans but does not reveal the size of the investment.

“In Brazil, the company will have four Andritz tissue machines, with an output capacity of 240,000 tonnes per year. This operation is expected to start as of the second quarter of 2024,” he said, in a note to Valor. According to a source from the sector, a tissue line of 60,000 tonnes per year should demand investments of more than $100 million.

RGE is also building two tissue projects in China. In all of them, it will use pulp produced in its plants in Brazil and Asia as raw materials.

Ibema’s likely investment in a new pulp (BCTMP) mill in Turvo, Paraná, was not incorporated into the official projection as well, since the paperboard manufacturer is still conducting feasibility studies. “Those projects are expected to get off the drawing board,” says an industry source.

Availability of area, short cycle for wood cutting, and favorable soil and weather conditions are among the factors that sustain the country’s inclination toward the forest-based industry. Although Brazil is naturally benefited by those conditions and by a large territory favorable to the activity, the sector also has its own merits, said Marcelo Schmid, managing partner of Index.

“We were able to improve tree genetics and productivity, the performance of operations throughout the production chain, and the management of the activity, with cost reduction, state-of-the-art technology, and respect for the most demanding sustainability standards. These factors together make Brazilian pulp the most competitive in the market and explain the sector’s great attractiveness,” says the specialist.

With operations scheduled to start in the second half of 2024, Suzano’s new mill will be self-sufficient in energy, from a renewable source, and export about 180 average megawatts to the power grid, enough to supply a city of 2.3 million inhabitants for a month.

According to Mr. Galhardo, the construction works of the Cerrado project is already 25% completed. Every day, 50 new workers are hired at the site, and 10,000 will be involved at its peak.

For 2022, Suzano projects disbursements of R$7.3 billion for the project. So far, according to the executive, there is no expectation of a revision of the budget (capex), despite the rise in commodity prices and the advance of inflation. “We managed to close the negotiation in euros. Some commodities became more expensive and had an impact. But, at the same time, the euro depreciated,” he said.

To ensure that logistical hurdles do not affect the on-time delivery of the contracted equipment, the company has a permanent team in China and another on the way to Europe. “The biggest fear was with the logistics issue, but we are managing to ship the equipment,” he added.

According to the executive, projects of this magnitude need to go beyond the plant to be successful: besides the counterparts agreed with the authorities, it is necessary to ensure everything from accommodation and food to health care and education, both during the construction period and after the start of operation.

On this front, for example, Suzano will build a new hospital in the region, which will be transferred to a private-sector operator. In addition, the company is already in talks with private schools to set up a new education center.

*By Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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China’s Oppo lowers smartphone price to debut in Brazil

Company, one of the largest manufacturers in the world, will launch three other models by the end of the year

09/20/2022

Jim Zhang — Foto: Silvia Zamboni/Valor

Jim Zhang — Foto: Silvia Zamboni/Valor

The Chinese cell phone maker Oppo, one of the largest in the world, is coming to Brazil with a model that will cost R$2,999 ($580). The original price of the Reno 7 model – the device chosen for the debut – was R$3,799, but the company decided to review the strategy and reduce the value to draw more consumers. The company will launch three other models by the end of the year, of the A series, which are cheaper than Reno, said Jim Zhang, CEO of Oppo in Brazil.

Sales are scheduled to start next week. Oppo’s devices will be sold online by Amazon and Telefônica’s Vivo in brick-and-mortar stores. At first, the products will be available in 10 Vivo stores in São Paulo.

Oppo’s arrival will be followed by several sales campaigns to arouse the public’s interest. A temporary store will be opened on Paulista Avenue, in São Paulo, so that the consumer can get to know the brand’s design and handle the device. The first buyers will be entitled to a five-year warranty period, free of charge.

Investing in Brazil is a natural step in Oppo’s globalization strategy, said Mr. Zhang. He was tasked with the mission in late 2020. “We have businesses on five continents, and Latin America was the last region we entered.” The effort began in Mexico in 2019. Since then, the company has moved into Colombia, Chile, Peru, and Guatemala. Brazil – the fifth-largest cell phone market in the world and the largest in Latin America – was an inevitable destination, the executive said. The company declined to reveal how much it invested to launch the Brazilian operation.

Oppo realized that the brand had been arousing the curiosity of Brazilians, who bought their handsets on transnational e-commerce websites, mainly Chinese. The number of sales in these stores reached 10,000 units annually, said Mr. Zhang, which provided the company with another reason to invest in the country: an advantageous initial user base.

Oppo is the fourth-largest cell phone maker in the world, according to several international rankings. The company accounted for 10% of global shipments in the second quarter, behind Samsung (21%), Apple (17%), and Xiaomi (14%), consultancy Canalys says. In China, the position is even more relevant. According to Counterpoint, Oppo held an 18% share of the Chinese market in the second quarter, behind Honor (once owned by Huawei) and Vivo (which is not related to the Brazilian phone carrier), and ahead of Xiaomi and Apple.

In Brazil, Oppo’s arrival takes place as the market shrinks. Sales in the country are expected to fall below 40 million units this year, down 12.7% from last year’s total of 45.8 million phones, according to consulting firm IDC. In 2021, sales had already been 6.1% lower in volume, although they have grown 9.5% in revenue – an indicator of increased sales of more expensive handsets.

Photography features are among the main attractions of Reno 7, Mr. Zhang said. The line was launched in 2019 and has sold more than 60 million units worldwide. The model arriving in Brazil has a 32MP front camera and 64MP rear camera. The screen is 6.43 inches and the RAM memory (used to store quick access files and run applications in the background) has 6 gigabytes. The device is compatible with 3G and 4G networks only, although the company already sells 5G phones in the same line abroad.

At first, all Oppo devices available in Brazil will be imported from China. The company has nine factories abroad, including countries like India, Indonesia, Turkey, and Pakistan. “Having local production in Brazil is our dream. We have thought about it since the day we decided to start an operation. But we need to better understand the rules of the game. The country has its own complexity, and we are still doing studies,” Mr. Zhang said. “It is a long-term goal.”

Import tariffs for cell phones, among other products such as notebooks, used to range from zero to 16% in Brazil but were reduced by the federal government this year to up to 14.4%. By reducing the tax burden, local production could reduce costs by up to 25%, Mr. Zhang said. The problem is the supply chain. The so-called Basic Productive Process (PPB) defines that companies must buy specific shares of components from local suppliers to ensure tax exemption, and many Oppo suppliers do not have local production, the CEO said.

Oppo was founded in Dongguan, China, in 2001, to produce Blu-ray players, amplifiers, and headsets. The brand’s first cell phone was launched in 2008. The company is part of BBK Electronics, a group founded by businessman Duan Yongping. In addition to Oppo, BBK controls other brands such as OnePlus, Realme, IQOO, and Vivo.

Despite being Oppo’s leader in Brazil, Jim Zhang is getting used to the country, where he will spend most of his time. “I like the general environment and the people. Brazilians are tolerant, cheerful, and kind,” he said. “In China, the concept of happiness is very complex. Here it is simpler. Brazilians feel happy for no specific reason.”

*By João Luiz Rosa — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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U.S. wants more access to critical minerals from Brazil

Lithium, cobalt, and niobium are essential for many modern technologies — and the country has plenty of them

09/20/2022

Niobium: Brasília believes that country has essential stocks of strategic commodities and can supply companies of different origins — Foto: Reprodução

Niobium: Brasília believes that country has essential stocks of strategic commodities and can supply companies of different origins — Foto: Reprodução

The United States has signaled to Brazil its interest in having preferential access to the Brazilian production of critical minerals amid growing rivalry with China, as it seeks to reduce dependence on strategic commodities.

Valor has learned that in meetings held in Washington in August, Brazilian representatives replied that the United States is welcome — including to make a difference in investments in this sector — but Brazil does not intend to grant privilege to partners.

The view in Brasília is that the country has essential stocks and can accommodate the presence of companies of different origins. While the U.S. talk about having preference, Brazilians reply that the government seeks to improve the business environment and equal competition conditions.

This message was given by diplomats and also by the Minister of Mines and Energy, Adolfo Sachsida, last month in Washington, sources say.

Critical minerals such as rare earth elements, lithium, cobalt, and niobium are essential for many modern technologies and for national and economic security. They are found in products from computers to home appliances. And they are key inputs in clean energy technologies such as batteries, electric vehicles, wind turbines, and solar panels.

A study by the European Union (EU) points to Brazil as the world’s largest producer of niobium — 92% of all. The product is used for high-technology applications (capacitors and supercomputers, among others). In addition, the country produces 13% of the world’s bauxite for aluminum production; 8% of natural graphite, used for batteries and material for steel production; and 9% of the world’s tantalum, which is used for superalloys and compensators for electronic devices, for example.

During the Trump administration, the U.S. defined a list of 35 ores considered critical to economic and national security. This year, the Biden administration took action to increase U.S. production.

A White House statement notes that as the world moves into a clean energy economy, global demand for those critical minerals is expected to skyrocket between 400% and 600% in the coming decades. For minerals such as lithium and graphite used in electric vehicle batteries, demand will increase even more — by about 4,000%.

The U.S. is increasingly dependent on foreign sources for many of the processed versions of those minerals, according to the White House. Globally, China controls most of the processing and refining market.

Last week, the European Union announced that it will make a Critical Raw Materials Act to build up “strategic reserves” and gain autonomy. European Commission President Ursula von der Leyen pointed out that lithium and rare earths “will soon be even more important than oil and gas.”

The only problem, Ms. Von der Leyen said, is that “one country dominates the processing” — that is, China. “We have to avoid falling into the same dependency as with oil and gas,” she said, adding that the EU seeks new partners to help strengthen the European economy and promote “our values.”

In the same meetings in Washington, Brazilian representatives insisted that the U.S. remove barriers to the entry of steel from the country into the U.S. market. The response was that, for the time being, this will not happen, especially in view of the U.S. legislative elections in November.

The Brazilian diplomacy replied that, at the same time, the U.S. imported from China and, before, from Russia. For these sources, the U.S. needs to have a clearer vision of what it wants in relation to Brazil and Latin America.

*By Assis Moreira — Geneva

Source: Valor International

https://valorinternational.globo.com/
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Vivo, TIM, Claro open battle against Oi

Companies demand R$1.73bn for sale of Oi Móvel

09/20/2022

The trio of phone carriers claims from Oi the payment of R$1.73 billion due to disagreements found in the contract for the purchase of the asset — Foto: Edilson Dantas/Agência O Globo

The trio of phone carriers claims from Oi the payment of R$1.73 billion due to disagreements found in the contract for the purchase of the asset — Foto: Edilson Dantas/Agência O Globo

Telefônica Brasil, owner of Vivo, TIM S/A and Claro Participações Monday began a dispute with Oi in relation to the closing price adjusted by the purchase of Oi’s mobile business. The trio of phone carriers claims from Oi the payment of R$1.73 billion due to disagreements found in the contract for the purchase of the asset. Oi reported that it has opened a period of 30 days to try to seek an amicable solution to the situation.

Sources familiar with the situation say they believe the case will not be resolved easily and is likely to end up in private arbitration. The sale of the asset was signed in 2020 and closed in a judicial sale in April this year for R$16.5 billion.

The discrepancies have now been identified by the auditing company KPMG, hired by Telefônica, TIM and Claro. In addition, the trio asks for compensation of R$353.27 million.

The total contract adjustment claimed by the telecom companies is R$3.18 billion. Of this total, R$1.44 billion had been retained by the three carriers as a guarantee when the deal was closed. The difference of R$1.73 billion is what they are now asking from Oi.

Every transaction of this type, with ample time between the deal and the closing, has clauses to prove that what was signed is what is being delivered, says another source that follows the case.

Valor found that documents submitted by Oi on the fulfillment of commitments were considered inefficient and confusing, and it is not possible to distinguish what is capital investment in the mobile service from landline phone investment, for example.

Valor has also learned that the result of KPMG’s verification would indicate to the telcos that Oi seems to have “thrown in the towel a little bit,” which would mean that, in a way, it had given up on reaching the goals, because it would have invested less than it had committed, and it didn’t meet the goals of net adds — the difference between incoming and outgoing customers —, it didn’t reach the working capital, it lost market, and it wouldn’t have made the investments assumed.

On the other hand, this price adjustment notification reveals a “move” by Telefônica, TIM and Claro, according to a person who works with the companies. This is because the three phone carriers had offered R$15 billion for Oi Móvel in 2020. As a competitor appeared, Highline, the companies, which did not want to lose the asset, were “forced” to raise to R$16.5 billion, in a binding offer that ended up successful via judicial sale in April this year. But this substantial increase “was never quite accepted by the three companies,” which considered themselves to be the only bidders, the source said. Thus, they expected to “come up with any kind of an excuse” at the right time to reduce the amount offered.

After Oi presents the documentation on the fulfillment of the goals, another period of 30 days for negotiation between the parties will be established. On Monday, in a notice of material fact, Oi rejected KPMG’s analysis, which “presents procedural and technical errors, with mistakes in methodology, criteria, assumptions, and approach,” according to the phone carrier.

After the negotiation deadline, if there is still no agreement on the value of the asset, a single independent auditor will be hired within five days. This auditor will have to do the accounting for the companies within 30 days. In this case, it will probably not be KPMG, which has already been “compromised” by doing the first survey on Oi for the telcos. The decision of the contracted auditor will be binding on all parties involved without the possibility of appealing.

In the last case, if with this single audit the three telcos and Oi do not reach a consensus, the arbitration will be necessary. There are no details yet, but it should be a private arbitration, with an audit company, since the National Telecommunications Agency (Anatel) and the antitrust regulator CADE have nothing to do with this phase of the process, as they told Valor.

“The obligations assumed by the companies, and which are monitored by CADE, are the main ones reviewed in the Agreement on Control of Concentrations (ACC). The private issues between the companies are not part of the scope,” explained the antitrust agency.

Speaking about its legal competence, involving the regulatory features of the operation, Anatel said that “the subject [values eventually due after adjustment] is restricted to the agreement signed by Oi, Claro, TIM and Vivo, applying, in this case, the specific contractual provisions, object of a free agreement between the parties.”

For a source familiar with the documentation process, KPMG asks Oi for a high level of detail, such as, for example, all the invoices (there would be tens of thousands) linked to an investment. In addition, since the deal was closed, there would not have been any sign of questioning to Oi about the data presented to the telecom companies.

Oi, TIM, Claro and KPMG declined to comment. The four telcoms released Monday a statement to the market on the subject.

(Felipe Laurence contributed to this story.)

*By Ivone Santana — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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DP World studies growth routes in Brazil

Container expansion and grain terminal are on the radar

09/19/2022

Fabio Siccherino — Foto: Marcelo Justo/Valor

Fabio Siccherino — Foto: Marcelo Justo/Valor

DP World is studying to expand operations in Brazil. The growth route is still under analysis, but there are some paths being studied, according to Fabio Siccherino, the company’s CEO for Brazil.

One possibility under evaluation is to expand the container terminal in Santos. The idea would be to increase capacity to 1.6 million TEUs (20-foot equivalent units of containers) from the current 1.2 million TEUs, and eventually, at a later stage, to up to 2 million TEUs. “It is a project under discussion. There should be a definition by the end of the year,” he said. If the expansion goes ahead, the construction work will take 18 months.

According to the executive, the company has been monitoring demand growth projections and capacity expansion projects of other terminals at the port to determine the right time to make the investment. “Our understanding is that this is the right time [to start the expansion]. We only cannot fail to meet this demand and allow it to go to another port. We believe that this is a good time to invest,” he said.

DP World, a Dubai-based global giant in the port sector, operates a Private Use Terminal (TUP) in Santos since 2013, where it handles containers and, more recently, pulp. This new operation, in partnership with Suzano, is the result of a business diversification strategy that may be extended to other types of cargo.

Another possibility for the company’s growth is to get a grain terminal off the drawing board in the same port. In November 2020, the company signed a letter of understanding with Rumo to study the implementation of the project in Santos. However, the agreement did not go ahead.

Now, the company is trying to resume the initiative with other partners, such as producers and grain traders. “We are sounding out the market and working on that again. Agribusiness is growing in Brazil, there is a lack of installed capacity at the Port of Santos to meet this demand, and we have an asset well positioned for this,” Mr. Siccherino said.

A third development route for the company, which is already underway, is door-to-door logistics. This is a global strategy of DP World, which sees the business as the main growth driver in the future.

“It is a business transformation process, in which the group is no longer just an operator but a major logistics player. Here in Brazil, we created the company from scratch, and we are growing organically,” he said.

Today, this branch still has a small weight in the Brazilian operation. “When we started to prioritize the business, the pandemic and all the logistical problems came up. Now we are signing agreements with shipping companies to guarantee space on the ships, so there should be growth.”

In 2021, DP World Santos posted net revenue of R$551.5 million, an increase of 35% compared to the previous year. However, the terminal still faced a R$178.5 million loss, compared to a R$389 million loss in 2020.

The company’s problem is financial since it has a large dollar debt. Last year, net debt totaled R$2.95 billion, up 6.7% year-over-year. In 2017, when the group bought Odebrecht’s stake in the business (then called Embraport), a debt restructuring was carried out. However, the difficult situation persists.

The executive expects that the 2022 results will show a greater advance and that the company is able to turn around.

The group’s long-term vision for Brazil remains positive, according to Mr. Siccherino. There is interest in expanding operations beyond the Port of Santos.

“Brazil has many opportunities, even though it has its problems, some issues of legal insecurity that persist, it is a giant market. I am asked by the group to find opportunities to grow more in the country. Some are being analyzed; whenever a bidding process is announced, we look into it. Not only containers, for example, but also grains. We haven’t seen any opportunity yet, but it is on the group’s radar.”

One project that DP World will certainly study is the privatization of the Santos Port Authority (SPA), the state-owned company that runs the port. “We have been looking into it. The company has made [similar] experiences outside Brazil. But the positioning will depend on the final model and the conditions of the bidding, which are still pending,” he said.

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Development Bank mulls forest concessions based on carbon credits

Model requires regulatory overhaul to be feasible

09/19/2022

The Brazilian Development Bank (BNDES) has started studies to enable forest concessions based on the sale of carbon credits. The state-owned bank already operates in environmental projects, with the bidding of parks for tourism and forests focused on sustainable management. The idea now, however, is to expand the ways of generating revenue from preservation, said Pedro Bruno Souza, head of social infrastructure partnerships and environmental services.

To make this model viable, it will be necessary to structure a regulatory and legal framework for the contracts since today there are restrictions – legislation forbids the sale of carbon credits in forest concessions, for example.

The initial stage is expected to be concluded by December so that specific initiatives can be structured starting in 2023. The bank’s initial estimate is to carry out three pilot projects with about 1.6 million hectares, which have not yet been defined yet.

“Brazil’s potential for this market is huge, but first it must guarantee legal security for the model,” Mr. Souza said.

He highlighted that carbon credits are only one potential source of revenue. “It is possible to generate credits for the conservation of a drainage basin, for the preservation of endemic species in the region. All of this has value. And there is a growing number of companies willing to pay for it. The question is how to price a guarantee of preservation.”

In parallel to these studies, the BNDES has moved forward with new forest concession projects based on sustainable management, that is, the extraction of timber and non-timber forest products in a controlled manner – something that is already a reality in Brazil.

The bank plans to launch later this year the public notice for Block 1 of national forests, with three assets in the South region. The project is under analysis by the Federal Court of Accounts (TCU), but the auction would only be feasible in 2023.

There are still two other lots of Amazon forests being structured by the bank, but in a less advanced stage. The projects are being carried out in partnership with the Ministry of Environment, and federal regulation is up to the Brazilian Forestry Service.

The idea of concessions is that concessionaires make investments to support inspections – which remain the responsibility of public authorities – with the construction of infrastructure and purchase of equipment, including guard posts and monitoring equipment.

In addition, the concessions must allocate resources and support the communities that live in the areas. “There is no point in telling illegal loggers they can’t do that anymore. You have to create a way for this person to migrate to preservation activity. So technical assistance for agroforests, to teach that planting certain products will yield more, is one obligation.”

None of the projects under analysis by the BNDES includes indigenous territories.

The forest concessions model, authorized by law in 2006, has been well regarded as a way to stimulate preservation, said Leonardo Sobral, with the forest chains and restoration team at Imaflora, a non-profit organization.

“It is proven that the model serves as a barrier to deforestation. If an area has no use, the chance of it being invaded is greater. From the moment the concession is established, there is a series of actions that prevent the problem from increasing,” he said. In his view, concessions could have advanced more in the past few years. “This agenda must be strengthened.”

In relation to the carbon credit model, Mr. Sobral believes that it can be an interesting way to expand the viability of the concessions if done well. He highlights, however, that it is necessary to guarantee a good execution of the project, with an adequate mapping of the traditional communities in the area and an adequate calculation of the benefits generated.

“In an area that is under deforestation pressure, additionality is relevant. But if it is a region with difficult access, which is not under pressure, there is no additionality,” he said. He is referring to cases in which the project would not have any positive impact from the preservation standpoint. “This regulation will have to be discussed.”

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Granado expands mix, opens stores in Europe

Owner of brand Phebo expects to gross R$1bn this year

09/19/2022

Christopher Freeman and Sissi Freeman — Foto: Leo Pinheiro/Valor

Christopher Freeman and Sissi Freeman — Foto: Leo Pinheiro/Valor

One of the oldest companies in Brazil, Granado has optimistic plans for the coming years after getting through the pandemic without any problems. The Rio de Janeiro-based personal care brand plans to double production by 2030, open new company-owned stores, and consolidate its recent presence abroad.

With revenues estimated at R$1 billion in 2022, the company controlled by Christopher Freeman grew 23% from January to August year-on-year. The revenue in these eight months, R$590 million, was even higher than the R$350 million obtained between January and August 2019, before the pandemic.

Created in 1870 by Portuguese citizen José Antônio Coxito Granado as a kind of pharmacy, the company was bought by Mr. Freeman in 1994. Ten years later, in 2004, the English businessman acquired the Phebo brand from Procter & Gamble. Today, Phebo’s traditional glycerine soaps represent the group’s main business. Together with Phebo, Granado commercializes around 800 products.

Besides the soaps, other items are consolidated in the market, such as the antiseptic powder (whose registry was approved by doctor Oswaldo Cruz in 1903), and the liquid soap for children, which has 40% of the segment’s sales. More recently, the company has bet on new niches, such as perfumes and household items, and has launched a pet line.

“The moment is very positive. Brazil is a huge market because Brazilians take more baths than the world average and it is still a bar soap country, unlike Europe. In fragrances I also always saw a niche, although the competition with foreigners has grown,” says Mr. Freeman.

About 70% of Granado’s revenue comes from wholesale sales, where the beauty and personal care sector is led by global brands such as Palmolive, Dove, Nivea and Lux, according to Kantar data for 2021. The remainder corresponds to sales in own stores – in Brazil and abroad – and via website. The configuration allowed the company to go through the pandemic without major mishaps. In 2020, Granado expected to grow 15% and to gross R$670 million, and grossed R$617 million even with the social isolation measures.

“Retail is a small part of our revenue. In this sense, we benefited in the pandemic because we didn’t lose sales share in supermarkets and pharmacies, which didn’t have to close,” says Sissi Freeman, Granado’s head of sales and marketing.

She acknowledges that, despite growing, sales through the website were not able to fully absorb the losses in the stores during the pandemic. Today the site’s sales are comparable to those of four physical stores. The most popular items are room diffusers, gift kits, and perfumes.

“We have never sold so much perfume online before. Generally, people want to smell the scent. But in the last three months, Époque Tropical represented 28% of sales on the site,” says Ms. Freeman.

Launched at the end of 2021, the perfume sold out a few times after going viral on social networks. A TikTok user compared Époque Tropical to a fragrance from the London brand Joe Malone. Ms. Freeman assures, laughing, that the marketing was spontaneous.

Right hand of her father, Sissi Freeman is responsible for Granado’s repositioning, expanding the portfolio without losing sight of the brand’s values. Since the inauguration of the first concept-store, in 2006, in downtown Rio de Janeiro, the entrepreneurs have gradually increased the pace and will end 2022 with 90 unities in the country, five of them dedicated to brand Phebo.

A new store in Lisbon, planned for the end of October, is not included. The Portuguese branch will be added to the other three units in Europe, all in Paris, where the international distribution center is installed. The company is also present in department stores in France, England and is preparing to arrive in Belgium. The international sales are still shy, representing around 1%, but the growth perspective already influences the perfumes development, main bet on the external market.

As most of the raw material is imported, production suffered with lockdowns in China and the war in Ukraine, which raised freight prices. For the first time, product prices were increased twice in the year: 10% in January and 5% in July. “A lot of what we buy is paid in dollar. We believe so much in the international strategy because we see the importance of having revenue in foreign currency,” explains Ms. Freeman.

Despite the difficulties, father and daughter say that the profit margin is at 15% and project it over 20% for 2023. Contributing to the optimism is the payment of a debt generated by the construction of the factory in Japeri, State of Rio de Janeiro, opened in 2015. The investment estimated between R$400 million and R$1 billion, eroded the company’s profit, destined for the payment of creditors. The balance, according to Christopher Freeman, was “strengthened” with the purchase of 35% of the shares by Puig, a Spanish company that owns brands such as Carolina Herrera and Paco Rabanne, in 2016.

*By Paula Martini — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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