Plant to be built in Naviraí is essential to cooperative’s plans to reach its goal of R$10bn in annual sales by 2026
09/29/2023
Gervásio Kamitani — Foto: Divulgação
With an investment of R$1.4 billion, Mato Grosso do Sul-based agricultural cooperative Copasul will begin work in 2024 on its first industrial soybean processing plant in Naviraí, 360 kilometers from the state’s capital city Campo Grande. The project is expected to be operational in 2026.
The soybean processing plant is considered an essential part of the cooperative’s plan to reach its goal of R$10 billion in annual sales by 2026, and should account for 30% of this total, according to Gervásio Kamitani, president of Copasul.
Already this year, the group expects to reach R$6.2 billion in sales, an increase of about 42% from R$4.4 billion in 2022.
“The crushing plant is our big dream, after the spinning mill and the starch factory,” said Mr. Kamitani. Copasul, which is based in Naviraí, already has two industrial units – a cotton spinning mill and a manioc starch factory – installed in 1996 and 2012, respectively.
The new unit will have the capacity to process 3,000 tonnes or 50,000 bags of soybeans per day and store 150,000 tonnes of soybeans, 70,000 tonnes of soybean meal, 10,000 tonnes of crude degummed oil, and 3,600 tonnes of hulls. The estimated production of the new plant is 944,230 tonnes per year, including oil, soybean meal, and hull pellets.
According to the cooperative, the project is expected to generate 150 direct jobs and 1,900 indirect jobs.
According to Copasul’s management team, the funds for the investment will come from at least five financial institutions – the sources and specific credit lines have yet to be confirmed.
The plant to be built by the cooperative should represent a 20% increase in soybean processing capacity in the state of Mato Grosso do Sul, from the current 14,500 tonnes to 17,500 tonnes per day, according to Copasul. Soybean production in the state reached a record 15 million tonnes in the 2022/23 harvest.
The new unit will be built next to the cooperative’s starch factory, by the side of the BR-163 highway. The processing unit will occupy 42 hectares of a total area of 115 hectares.
At the time of the cooperative’s first agro-industrial project – the cotton spinning mill – the investment was around R$9 million and the cooperative’s turnover was less than R$10 million, according to Gervásio Kamitani. “It was much more daring to do the spinning mill. Today, the scenario is different, we already have enough soy and the structure for the processing unit,” he compared.
According to Mr. Kamitani, the processing unit project is expected to affect about 20% of Copasul’s annual sales over the next few years. Nevertheless, it will contribute to the growth targets set for 2026.
According to Copasul, one of the unit’s distinguishing features will be its zero-effluent concept. This will be achieved by controlling waste generation and by planting 1,000 hectares of eucalyptus per year to produce its own wood, which will be used in the soybean crushing processes.
In addition to the investment in the new plant, Copasul is investing another R$300 million in other units this year. These investments are mainly aimed at structuring the grain receiving units to improve efficiency and meet the increased demand for storage.
The reporter’s travel costs were covered by the Brazilian Confederation of Agriculture (CNA).
*Por Carolina Mainardes — Naviraí (Mato Grosso do Sul)
Austria has purchased a Brazilian-built freighter, and plane maker expects new deals
09/29/2023
Joao Bosco Costa Júnior — Foto: Divulgação
The recent selection of the C-390 Millennium by the Austrian Ministry of Defense is a strategic step in Embraer’s internationalization project in the defense sector. It is on its way to becoming the fourth European country to operate the Brazilian company’s multi-mission cargo aircraft, displacing its main competitor, Lockheed Martin’s C-130 Hercules, in markets considered key and opinion leaders, aerospace and defense experts say.
With sales campaigns in different countries, Embraer expects to announce new contracts in 2023, the CEO of the company’s defense and security division, João Bosco Costa Junior, told Valor. “The C-390 is experiencing a special moment not only in Europe, but in all continents,” he said. “[The aircraft] entered service at a very opportune time and stood alone in this market.”
Currently, there are advanced negotiations with other European countries and ongoing sales campaigns on various continents–Embraer is in the running for a contract to supply freighters in South Korea, which could reach 16 units, and is participating in the competition launched by India to buy 40 to 80 freighters.
“Europe has embraced the product, creating a group of operators in the region. But our interest is global,” said Mr. Bosco. In total, the aircraft has already received 26 firm orders, including 19 from the Brazilian Air Force (FAB), and there are another nine units on the way to being contracted by countries that have selected the model.
The C-390, which becomes the KC-390 when equipped with an in-flight refueling system, is competing in a market estimated at $60 billion or 488 aircraft over 20 years. As the only 26-tonne capacity tactical transport aircraft powered by two new-generation engines, it has proven to be more cost effective than its competitors and is on the radar of major air forces.
Versatile, the C-390 is also effective in humanitarian missions. At the height of the Covid-19 pandemic, FAB aircraft delivered tonnes of oxygen, protective masks, gloves, and hand sanitizer, among other supplies, to areas in the north of the country facing shortages of critical products.
Austria, whose defense ministry is considered strong, announced last week that it intends to buy four C-390s to replace its fleet of C-130K Hercules cargo planes that have been in service for 20 years.
Previously, the Netherlands, a member of the North Atlantic Treaty Organization (NATO), had selected the Embraer model to replace its C-130H Hercules, which is due to enter service in 2026. The contract, which includes five aircraft and two simulators, is expected to be signed later this year. On a trip to Europe this week, the executive said he had discussions in the country that reaffirmed the commitment to conclude the contract in the shortest possible time.
Luiz Aguiar, former head of Embraer Defense & Security, said Brazil has developed and is exporting a product that “goes beyond the missions that a competent freighter like the KC can perform.” According to Mr. Aguiar, the founder and CEO of LA Estratégia, “It is a product that projects Brazil into the heavy game of world geopolitics.”
The C-390’s gateway to the European market, or launch customer in aeronautical jargon, was Portugal, with an order for five aircraft. The country, a NATO member, will enter service in 2023. Hungary, also a member of the military alliance, ordered two C-390s, which will enter service in 2026.
The Czech Republic is also said to be in talks with Embraer, and Sweden is said to be a strong candidate to operate the model in the region. This week, Brazil’s Defense Minister José Múcio told reporters that he would be making a trip to Sweden to negotiate the C-390. The Scandinavian nation is interested in three or four aircraft.
“The government and the defense minister have been strong supporters of the C-390 and the Brazilian defense industrial base,” said Mr. Bosco. According to the executive, Embraer wants to be the “home” of Brazilian defense, but its strategic pillar is to seek internationalization, avoiding a high dependence on the fluctuating national budget. “The strategy is sustainable and relevant growth, based on the C-390 platform and internationalization. Embraer Defense & Security is investing heavily to be a relevant player in the world,” he said.
From a business point of view, BTG Pactual analysts Lucas Marquiori and Fernanda Recchia believe that the C-390 should be the main driver of revenue growth for Embraer’s defense division. Assuming the model captures 10% of the projected market over the next 20 years and sells at an average price of $110 million, the bank estimates that annual net revenues from this program alone could reach $240 million.
The government received R$30.3bn from January to August from state-owned companies
09/29/2023
Rogério Ceron — Foto: Washington Costa/MF
In a period marked by declining managed revenues, the Lula administration concurrently notes a consistent decline in the collection of dividends and shares in state-owned enterprises, which are not under the oversight of the Federal Revenue Service. From January to August of this year, R$30.3 billion from government-controlled companies failed to enter the federal coffers, marking a 44.4% drop compared to the same period in 2022.
The information was unveiled Thursday (28) in the release of August’s National Treasury Result (RTN in its Portuguese acronym). During this time, the government’s public accounts recorded a substantial deficit of R$26.3 billion. This outcome is noted as the fourth worst result for the month since the initiation of the historical series in 1997. This figure was significantly influenced by a 7.1% real drop in the federal government’s net revenues last month.
The accumulated deficit from January to August stands at R$104.5 billion, a figure swayed by a real increase of 4.5% in total expenses and a 5.5% decrease in net revenues. The Lula administration is confronting the worst result for its initial year in office since 1999—the inaugural year the Treasury started its data recordings. Per the latest official figures unveiled last week, the government projects a deficit of R$141.4 billion.
National Treasury Secretary Rogério Ceron offered a measured perspective regarding the descent in revenue from dividends and government stakes in state-owned enterprises. In response to inquiries about the profitability of these entities under the Lula administration, he contended that the year 2022 stands as an anomaly. He cited instances of corporations such as Petrobras, which reported record results.
“In 2022, Petrobras saw an extraordinary distribution of dividends, a situation that transcended its results, generating cash in a year that starkly contrasts with the historical series,” asserted the Secretary of the Treasury. He attributed this to an “atypical year” concerning oil and fuel prices at the pumps, which translated into substantial results for the company.
He emphasized the importance of historical and transparent comparison rather than juxtaposing it against the previous year. In August alone, revenue from dividends fell by 66.3% to R$4.3 billion, compared to R$14.3 billion in the same month last year.
Since the beginning of the year, President Luiz Inácio Lula da Silva has voiced concerns over Petrobras’ soaring profits, advocating for their channeling into investments. In the preceding quarter, the company posted a profit of R$28.8 billion, a figure that marks a 47% decline from the same period last year. This downturn contributes to elucidating the diminished transfers to the federal government.
Further data unveiled by the Treasury highlights that the federal government’s investments in August reached R$7.8 billion, marking a real surge of 160.4% compared to August 2022. For 2023, investments have amassed R$37.2 billion, reflecting a real increase of 32.8% compared to the corresponding period in 2022.
Mr. Ceron also informed reporters Thursday that the government remains in the process of evaluating potential avenues and timing for the reinstatement of the constitutional health floor this year, alongside the conclusion of the spending ceiling.
Should the floor indeed be implemented, he said that the impact on public accounts is anticipated to be less than the R$20 billion figure reported last week by the Ministry of Planning and Budget.
Company gives priority to areas in Rio Grande do Norte because of hindrances to license wells in Amazon estuary
09/29/2023
Jean Paul Prates — Foto: Leo Pinheiro/Valor
Petrobras, together with Brazil’s environmental protection agency Ibama, is seeking a plan B to explore areas in the so-called Equatorial Margin — a multi-basin area that spreads for over 650,000 square kilometers from the mouth of the Amazon River to Sergipe state, including Pará, Maranhão, Rio Grando do Norte and Ceará, on the northeast coast. The decision is the result of the company’s difficulty in obtaining the environmental licenses to drill an oil well in the basin at the mouth of the Amazon River.
A document obtained by Valor shows that the state-owned company asked Ibama to prioritize the licensing of two blocks in the Potiguar basin, in Rio Grande do Norte, where the company has production. Petrobras CEO Jean Paul Prates said on Thursday that Ibama has the final say. “Who defines the priority between the basins is the environmental agency,” he said.
In the 2023-2027 strategic plan, Petrobras foresees investments of $6 billion for exploration campaigns, of which about $3 billion in the Equatorial Margin alone. This region is made up of five sedimentary basins: the Amazon estuary, Pará-Maranhão, Barreirinhas, Ceará, and Potiguar. The area is considered essential to replenish the company’s oil reserves and to maintain the current level of oil and gas activity in the country in the medium and long term. In the case of the Amazon estuary basin, the interest is due to the high potential identified in neighboring countries, especially Guyana and Suriname.
Petrobras’ initiative to look for options to explore the Equatorial Margin is the result of an impasse that emerged in the government this year, pitting the company and the Ministry of Mines and Energy (MME), on the one hand, in favor of activity on the region, and on the other the Ministry of the Environment (MMA) and Ibama — which presented restrictions on the development of oil industry work in the mouth of the river, a region that is more sensitive from an environmental point of view.
On another front, the federal government is trying to unlock the licensing of exploration areas belonging to Petrobras in the five basins of the Equatorial Margin, and not only in the basin of the mouth of the Amazon River. The negotiations have been led by Chief of Staff Rui Costa and involve MME, MMA, and Ibama, in addition to Petrobras. The negotiations have intensified in the last week, with several meetings. In one of them, according to the participants, it was assured that Petrobras would comply with all the conditions of Ibama.
The Petrobras CEO said the company is doing its part in the discussion. “We are fulfilling what Ibama is asking for and the commitment to drill that we have with the ANP [National Petroleum Agency], and we are waiting for the license to come out. If the [Brazilian] state had said there would be no exploration in the Amazon estuary, the problem would be over, we would have been barred. But that didn’t happen.” Last week, Petrobras carried out a pre-operational assessment (APO) in the Potiguar Basin. This is one of the final steps before the license is issued.
The test lasted for three days, involved 50 boats, and included the rescue of wildlife and people. “But we’re also ready to do [the APO] in the estuary. Ibama is the one that said in which of the basins of the Margin we can proceed in each stage. Suddenly Ibama came and said that we could do the APO in Potiguar. The well didn’t have to go there, it was a spill simulation. It was grade 10,” he said. “Where the probe goes is up to Ibama. We can go to the Potiguar basin and drill for four or five months and then go to the mouth of the Amazon, or vice versa. There’s no license anywhere, it’s a queue. But the APO is one of the phases, it’s like the final test. And it’s already in Potiguar. It would be the same probe for all the basins.”
Mr. Prates denied that the choice of the Potiguar basin was linked to the fact that it is located in the state for which he was a senator until 2022. “There is no political connection, they tried to say it was because I come from Rio Grande do Norte.”
In May, Ibama denied Petrobras the environmental license to drill in the FZA-M-59 block, at the mouth of the Amazon, and the company asked the environmental agency to reconsider. Valor had access to the licensing process for the block. In a letter sent by Joelson Mendes, Petrobras’ chief officer of Exploration and Production, to the president of Ibama, Rodrigo Agostinho, on September 1 of this year, the oil company stated that the drill ship hired for the campaign in the Equatorial Margin planned as its first activity to drill the well at the mouth of the Amazon River, located 540 kilometers away from the continent and about 180 kilometers from Oiapoque (Amapá state). Then came the two wells in the Potiguar Basin, called Pitu and Anhangá.
The Equatorial Margin has already been explored by the oil industry. Exploration areas were awarded in auctions held by the ANP in the 2000s, some of them allegedly successful. In the Margin, 37 blocks are in the exploration phase. This is the first phase of the contracts in which companies carry out studies and activities, such as seismic and well drilling, to determine the presence or absence of oil and gas and to assess whether or not the discoveries can be commercially explored.
Once the discovery evaluation plan has been fulfilled, the company decides whether to return the block to the ANP or to develop it and begin the production phase. According to ANP, Petrobras owns 17 of the 37 exploration blocks granted in the Margin. In the production phase, there are only six small producing fields in shallow waters, all in the Potiguar Basin. However, there are no deep-water discoveries and therefore no producing fields in the new frontier areas, similar to the areas of Guyana, Suriname, and the West African Margin (there are sedimentary basins with the same characteristics in Africa). Shallow water refers to deposits at depths of zero to 300 meters, and deep water, up to 1,500 meters.
An oil industry executive said that Petrobras has drilled in shallow waters in the Potiguar Basin and that there is onshore production in the state, which opens up the prospect of deepwater reserves. He believes the Potiguar Basin can be a complementary production area: “What you have [reserves] in shallow waters, you also have in deep waters?” asks the executive, for whom the great potential is in Amapá, where the mouth of the Amazon River is located.
In the document to Ibama, Petrobras said that the denial of the license for the FZA-M-59 led the company to request a license to drill in the Potiguar Basin while awaiting the evaluation of the company’s request for reconsideration. Ibama told Valor that Petrobras asked it to prioritize the licensing of two blocks in the Potiguar Basin (POT-17 and POT 162). The state-owned oil company confirmed the request.
Upon request by Valor, Petrobras said in a statement: “All projects approved in the strategic plan of Petrobras are considered priorities. The execution schedule takes into account the ability of regulators to meet the demand for analysis and also the capacity of the supplier market to meet. The regulators and licensors themselves require the company to signal its schedule of activities and projects to manage its service capacity.”
Petrobras’ exploration campaign also includes drilling in the Barreirinhas basin, in Maranhão state. According to Ibama, the company filed for a license to drill two wells in the area. The application was denied, and the company has filed an appeal: “Due to the company’s prioritization of other projects, Ibama did not initiate an evaluation [of Barreirinhas].” A third block in the region even received a preliminary permit in 2008, renewed in 2011, but after successive postponements by the company, the case was shelved. These blocks in Barreirinhas belonged to the U.S. company Devon and were sold to Petrobras in 2010. With the transfer, the environmental licensing process in Ibama was restarted and is ongoing.
Claudio Jorge de Souza, director of the ANP, said it makes sense to look for new areas in the two basins — Potiguar and Barreirinhas — where natural gas has been found in shallow waters. Mr. Souza met this week with the governor of Maranhão, Carlos Orleans Brandão Junior, to discuss the scenario of hydrocarbon reserves in the state. The ANP director stated that new drilling is needed in the region to confirm the presence of oil: “It’s necessary to drill more to determine the size of the deposits.”
Ibama’s argument for denying Petrobras the license to drill a well in FZA-M-59, at the mouth of the Amazon, was based on the lack of studies on the potential impacts on indigenous communities. Risks to the local population included overflights between the Oiapoque airfield and the drilling site. The environmental agency also cited a lack of analysis of response times and services for fauna in case of oil spills. At the same time, Ibama saw the need to present an Environmental Assessment of the Sedimentary Area (AAAS), which would help in the analysis of the project.
The AAAS is a strategic study that evaluates the compatibility between the oil industry and the socio-environmental situation of the region. It scales the impacts and consequences of oil projects, which supports decision-making and policymaking. The Interministerial Ordinance 198/2012, signed by the MME and the MMA, requires the implementation of the AAAS and determines that both ministries are responsible for the preparation of the analysis. The studies can be carried out by the ministries or by third parties, such as the Energy Research Company (EPE).
“It is known that the performance of such assessments, such as the Environmental Assessment of the Sedimentary Area, the AAAS, would allow to draw conclusions on the suitability of the productive chain of the oil industry, the context in which the analyzed project is inserted, which would bring technical and legal certainty to the licensing process, even reducing the possibility of litigation,” said the opinion of Ibama.
Suely Araújo, former president of Ibama and senior policy expert at the Climate Observatory, said the AAAS is a government obligation and that such assessments should have already been made in the five basins that make up the Margin. “If the government doesn’t do the AAAS, it’s shooting itself in the foot. Because if it did, the best thing would be to do it before the public offering, the blocks would come out with more legal certainty that there would be no problem later, in the licensing, which is a later stage,” Ms. Araújo said.
The Federal Attorney General’s Office (AGU) released an opinion saying that the AAAS is not required. In the licensing discussion, the AGU cannot represent Petrobras, since the company is a legal entity of private law, even if the federal government is the main shareholder. It was the MME that prompted the panel to discuss the issue. In response, the AGU understood that the legal process for oil exploration was respected in the 11th bidding round, when the block that Petrobras is trying to drill in the estuary was auctioned. At that time, the block belonged to a consortium formed by Petrobras, Total, and BP. Years later, the state-owned company bought the partners’ shares.
In the 11th round, the government offered 289 blocks in 11 sedimentary basins, including the one at the mouth of the Amazon River. The auction took place on May 14, 2013. Before the event, the areas were analyzed for environmental sensitivity. The working group, made up of specialists from MMA, Ibama, and the Chico Mendes Institute for Biodiversity Conservation (ICMBio), did not see any restrictions for the Amazon estuary blocks, since they were far from the coast. However, the group did see “particular challenges” for environmental permits, given the difficulty of accessing the region and the lack of information on the local ecosystem.
“In general, these challenges stem from the fact that the region is relatively inaccessible, both at sea and on land, with large gaps in knowledge about the bioecology of marine communities, and is located close to the border with French Guiana,” the working group commented. Petrobras has repeatedly stated that it is in constant contact with the authorities of neighboring countries to address the issue.
The AGU also opened a conciliation process in the Mediation and Conciliation Chamber of the Federal Public Administration (CCAF), with the expectation of participation of Ibama, Petrobras, MME, and MMA. “The consensual solution eventually produced in the CCAF in the case can be, in the end, formalized in the Conciliation Term, which, after the validation processes, becomes an extrajudicial enforceable title,” the AGU said.
In the letter to Ibama, Petrobras states that the rejection of the license for block FZA-M-59, in Amapá, was based on arguments that were not known by the company until then, and that were difficult to solve at that time, such as the absence of AAAS.
Petrobras told Valor that it may collaborate with MME and MMA in the preparation of the AAAS. The company also said that it is making every effort to obtain the license and that it is willing to cooperate with the conciliation in the CCAF. “The company also points out that all the studies and requirements requested by Ibama, within the scope of environmental licensing, have been met and that it is ready to incorporate new requests that may be necessary.”
In the request for Ibama to reconsider the licensing of the FZA-M-59, Petrobras said it had drilled about 700 wells in shallow water in the Equatorial Margin and that it had proposed changes to the route and altitude of aircraft to reduce impacts on indigenous lands. It also said that it will make available twice as many vessels for the protection of fauna in case of oil leakage in the drilling. MME and MMA did not immediately reply to Valor’s requests for comment.
BNDES is currently financing 28 aircraft produced by Brazilian plane maker in 2023
09/27/2023
Aloizio Mercadante — Foto: Tomaz Silva/Agência Brasil
The Brazilian Development Bank (BNDES) has approved an additional R$2.4 billion to fund exports of Embraer aircraft. Of this amount, approximately R$1.4 billion will be used for the sale of 14 E-175 aircraft to the U.S. airline Republic Airways. The announcement was made during a seminar on the defense industry at the BNDES headquarters in Rio de Janeiro.
The operation will be carried out through the Exim post-shipment line, which is intended for the export of goods and services of Brazilian companies. In this modality, the disbursement is made by BNDES in Brazil, in reais, for Embraer. The foreign company assumes the debt and is responsible for paying the financing in dollars, with interest and fees, to BNDES.
From January to September, BNDES disbursements to the Brazilian aviation company totaled $778 million. For the whole of 2022, the amount was $326 million. According to the bank, the credit approved for Republic Airways will cover only a portion of the total purchase price of the 14 aircraft. The aircraft are expected to be delivered between 2023 and 2024.
Republic Airways operates exclusively with Brazilian aircraft and is one of the largest regional operators of Embraer aircraft. The airline operates 900 daily flights to nearly 80 cities in the United States, Canada, and the Caribbean under the brands American Eagle, Delta Connection, and United Express in partnership with American Airlines, Delta Air Lines, and United Airlines.
The 14 aircraft are part of the fleet of 28 Embraer aircraft that BNDES will finance through 2023. Since January, the bank has approved the financing of three aircraft for Egypt’s CIAF and 11 more for Alaska, also from the United States.
At the same event, the development bank announced a credit operation of approximately R$1 billion for Embraer to produce new aircraft for export. The funds will be used by the company to produce commercial aircraft.
According to the bank’s president, Aloizio Mercadante, BNDES financing has enabled Embraer to make progress in recent years. According to him, 1,287 exported aircraft have been financed by BNDES since 1997.
“Twenty seven years ago, when no one believed it, BNDES was there to invest and finance not only commercial Embraer but also Embraer’s defense business, which is a triumphant reality,” he said.
According to data released by the BNDES, its support for Embraer has represented an average of 39.8% of the aircraft produced by the Brazilian manufacturer since 2004. The company did not disclose the share that the development institution represents in comparison to the total sources of financing. However, it said he expects to deliver between 65 and 70 aircraft this year — of which 28, or about 40%, financed by BNDES. Last year, Embraer said, the bank financed nine units out of a total of 57 aircraft produced.
BNDES’ current management team considers the aeronautics sector to be strategic because it employs skilled workforce and generates innovation, in addition to being important for the country’s sovereignty due to its relationship with the defense sector.
In addition to Mr. Mercadante, the event was attended by José Múcio, Minister of Defense, and Marcos Antonio Amaro dos Santos, head of the Institutional Security Office (GSI). Last week, the BNDES announced in a note that it is discussing alternatives to support the defense industrial complex, using public and private-sector resources, and through the future “Eximbank,” a bank focused on exports, which is being studied by the federal government.
The National Council for Industrial Development (CNDI), chaired by Vice President Geraldo Alckmin, lists the defense sector as one of the government’s priorities. The government’s new Growth Acceleration Program (PAC), launched in August, allocates about R$53 billion to the sector.
Despite uncertainties surrounding revenue projection, government has chosen to include full R$35 billion
09/27/2023
Marcos Mendes — Foto: Gesival Nogueira/Valor
Brazil’s federal government has disregarded a stark warning issued by its Federal Revenue Service’s technical experts regarding the 2024 Budget. Despite the uncertainties surrounding the revenue projection, the government has chosen to include the full R$35 billion forecasted from Provisional Executive Order (MP) 1185, casting doubts on its fiscal prudence. MP 1185 is designed to alter tax incentives for the Tax on the Circulation of Goods and Services (ICMS) and recalibrate the cost and investment subsidies.
However, this decision appears at odds with the economic team’s commitment to including only conservative revenue forecasts in the budget. Skeptical experts in public finance have raised concerns that these revenue estimates may be overly optimistic.
The Center for Tax and Customs Studies (Cetad), a division within Brazil’s Revenue Department, has projected that MP 1185, colloquially known as the “MP for subsidies,” could potentially generate a substantial R$35.347 billion in revenue by 2024 through the recomposition of the corporate income tax (IRPJ), social contribution on net income (CSLL), and social taxes (PIS/Cofins) calculation base.
Nevertheless, these estimates carry a significant “degree of uncertainty,” as cautioned by experts in a technical note obtained by Valor through the Access to Information Act. They contend that the actual collection of these taxes hinges on various “future and uncertain events,” urging the government to exercise prudence in its utilization of these estimates to account for the potential of revenue shortfalls.
The tax authorities have strongly recommended that, “tax policymakers exercise caution when relying on such estimates, considering the possibility of revenue shortfalls resulting from the measures under analysis.” This advisory note is endorsed by Claudemir Malaquias, head of CETAD, Roberto Name Ribeiro, studies coordinator, and Filipe Nogueira, manager, all of whom are tax auditors. The document was formally submitted to Revenue Secretary Robinson Barreirinhas.
One pivotal factor contributing to the uncertainty in these revenue projections, according to CETAD, is its inability to accurately gauge the response of taxpayers to heightened tax obligations. Tax experts have previously raised alarms over the likelihood of taxpayers employing various strategies to mitigate their tax burdens in response to these changes.
CETAD emphasizes that the estimates provided exclusively capture the anticipated impact of the proposed modifications on the tax assessment process itself. “Notably, no comprehensive evaluation has been conducted to assess the potential repercussions on taxpayer behavior. Individuals may proactively seek avenues to mitigate their fiscal burden when confronted with heightened tax obligations. This can take shape through lawful avenues, such as legal challenges and adjustments to tax strategies, or even illicit routes, including a surge in tax evasion or avoidance,” says CETAD.
Therefore, the Revenue Department’s technical experts have made a strategic decision to implement a precautionary measure. This measure involves the application of a “generic reduction percentage” to the calculated resources in the base recomposition process. The specific percentage, however, has not been disclosed in the accompanying technical note.
Regarding the tax credits that some companies may claim, the Revenue Service anticipates that, “25% of the observed volume of current exclusions from the calculation base will correspond to the volume of resources that can be used to calculate the tax credit.”
PM 1185 represents one of the government’s primary strategies to eliminate the deficit by the following year, along with the reinstatement of the casting vote in the Administrative Council of Tax Appeals (CARF) and tax settlements. Altogether, the government aims to secure an additional R$168.5 billion in revenue to fulfill this pledge, with these three measures accounting for 79% of the total.
Economist Marcos Mendes, an associate researcher at Insper, contends that the government’s revenue projections in the 2024 budget bill are “excessively optimistic.” He notes that the budget envisions a revenue increase of R$343 billion, nearly half of which (R$168.5 billion) relies on the approval of orders, including MP 1185, that face potential legal challenges and resistance in Brazil’s Congress. “That order is susceptible to judicialization and strong congressional opposition,” he cautions.
Tax lawyer Luiz Gustavo Bichara, a partner at Bichara Advogados Law Firm, criticizes the government’s reliance on the revenue estimate from MP 1185 as “irresponsible at best.” He asserts, “We are grappling with a nascent issue that will not be resolved without significant challenges. The Revenue Service itself acknowledges that the bill is akin to cabalistic numerology.”
Mr. Bichara deems it “impossible” for tax authorities to collect the estimated R$35 billion, as taxpayers interpret Brazil’s Superior Court of Justice’s decision differently from the Treasury, leading to litigation.
The Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, predicts that the MP will only yield R$3.5 billion in 2024, a mere 10% of the government’s expectations. This discrepancy arises primarily from the prospect of legal disputes. Economists Alexandre Andrade and Marcus Pestana, the authors of the IFI’s technical note, note that “the rule [the MP] could increase legal uncertainty on the subject, reinforcing the potential for continued disputes between the Federal Government and taxpayers.”
They further challenge the “optimism” of the revenue projections in the budget proposal. “Beyond the potential alterations to the existing legislative proposals, there looms the specter of legal arguments coming under scrutiny and persistent disputes in the courts between taxpayers and the federal government concerning the collection of federal taxes. This inherent risk underscores the imperative for prudence in formulating tax revenue projections,” they contend.
The government has taken action by issuing MP 1,185 in response to the STJ’s decision regarding the taxation of ICMS subsidies. In broad terms, this measure addresses the discrepancy in federal taxation treatment between costing and investment subsidies. Notably, it introduces a provision for income tax credits specifically for investment subsidies. Consequently, companies benefiting from costing and investment subsidies will no longer be able to offset them when calculating their federal tax liabilities. However, those receiving state investment incentives will now be eligible for income tax credits equal to the value of these incentives.
Regarding the allocation of responsibilities in the budget formulation process, the Ministry of Planning and Budget emphasized that, “revenue projections fall within the purview of the Ministry of Finance.” The Ministry of Finance, on the other hand, declined to provide any comments on the matter.
Amid concerns about inflation risks, Monetary Policy Committee reaffirmed intention to cut interest rates by 50 basis points in next meetings
09/27/2023
Committee reaffirmed intention to maintain pace of 50-basis-point cuts in key interest rate “in the next meetings” — Foto: Raphael Ribeiro/BCB
Amid concerns about inflationary expectations, the Central Bank’s Monetary Policy Committee (Copom) defended “firm action” to lower economic agents’ forecasts in the minutes of its latest meeting, released Tuesday. In addition, the committee reaffirmed its intention to maintain a pace of 50-basis-point cuts in the key interest rate (Selic) “in the next meetings,” stressing that an intensification would require “substantial positive surprises” in the scenario.
In recent months, inflation expectations collected by Focus, a weekly survey with analysts, have been at 3.5% for 2025 and 2026, above the target set by the National Monetary Council (CMN) of 3% with a tolerance of 1.5 percentage points more or less. The Central Bank has called this difference between the target and the market projections a “partial re-anchoring,” because the projections were stuck at 4% in the first half of this year after debates about a possible increase in the target, and fell to 3.5% when the CMN kept the percentage at 3% in the long term.
Last Wednesday, the Central Bank cut interest rates for the second time by 50 basis points to 12.75% per year. The “Copom assesses that the reduction of expectations will come through a firm conduct, in line with the goal of strengthening the credibility and the reputation of both institutions and economic frameworks.”
The document showed divergence among directors on many topics, such as the international scenario, the impact of the El Niño phenomenon on inflation, expectations, and the labor market, and discussed hypotheses for the resilience of economic activity. “Some members” were particularly concerned about the possibility of de-anchored projections over a long period.
“Some members emphasized in particular the recent benign composition of inflation and the decrease in services inflation, while others stressed that the underlying fundamentals for the dynamics of services inflation, particularly the resilience of economic activity and the labor market, do not yet allow for a convincing extrapolation of the recent benign behavior,” the minuted said.
On the activity side, four possibilities for the “more resilient” economic growth in recent quarters were raised. One is that the good results in agriculture have had an indirect effect on other sectors of the economy, which would not justify the size of the surprise; another is that disposable income for consumption has increased. The committee hypothesized a neutral rate higher than the current 4.5%, but decided to leave the estimate unchanged, noting that the level would have less impact in the near term.
In addition, the committee discussed whether potential GDP, which is how much the economy can grow without raising prices, would be higher. “Although judging premature to reevaluate at this moment the potential growth, the Copom argues that the persistence of a resilient growth over the next quarters with no inflationary impact might, in the future, lead to the reevaluation of the potential growth.”
According to the document, each of the four possibilities has different implications for the conduct of monetary policy. The Committee also noted a reduction in the degree of slack in the economy “at the margin” due to the greater resilience of economic activity.
The minutes also reiterated the message that the policy rate will need to remain in a contractionary level. The Central Bank also stressed that the uncertainty in the markets about fiscal policy is now linked to the implementation of the targets for achieving the expected primary result for the public sector. Previously, this uncertainty was triggered by discussions on the fiscal framework.
“Given the importance of the implementation of the fiscal targets already set for anchoring inflation expectations and, consequently, for the conduct of monetary policy, the committee reiterates the importance of pursuing these targets with determination,” it said.
Turning to the international scenario, the Copom pointed to global growth, which has been marked by the resilience of activity and the labor market in the United States, “in contrast to the lower growth projected for the Chinese economy.”
*Por Larissa Garcia, Alex Ribeiro — Brasília and São Paulo
The month’s result was below the median of the 36 projections made by analysts from consultancies and financial firms heard by Valor Data
09/26/2023
The Broad National Consumer Price Index -15 (IPCA-15), seen as the preview of official inflation in the country, rose 0.35% in September after advancing 0.28% in August, the national statistics agency IBGE reported on Tuesday. In September 2022, the IPCA-15 fell by 0.37%.
The latest result was below the median of the 36 projections made by analysts from consultancies and financial firms approached by Valor Data, which estimated an increase of 0.38% in September. The estimates ranged from a rise of 0.23% to 0.51%.
Gasoline was the main factor behind the IPCA-15 result in September, rising by 5.18%, with a 25 basis-point impact on the 0.35% rate.
With September data, the IPCA-15 accumulates an increase of 5% in 12 months. Until August, the 12-month result was 4.24%. The accumulated in 2023 corresponded to a 3.74% increase.
The so-called IPCA-E, which is the IPCA-15 accumulated in the quarter, had a 0.56% increase, compared to a drop of 0.97% in the same period of 2022.
The result in 12 months was also below the median of the 36 estimates collected by Valor Data, which was 5.03%, with a range between 4.87% and 5.17%. The inflation target pursued by the Central Bank for 2023 is 3.25%, with a tolerance of 150 basis points downwards or upwards.
The IPCA-15 is a preview of the IPCA, calculated based on a typical consumption basket of households with monthly income between R$1.320 and R$52.800. The indicator covers nine metropolitan areas (Rio de Janeiro, Porto Alegre, Belo Horizonte, Recife, São Paulo, Belém, Fortaleza, Salvador, and Curitiba) in addition to the cities of Brasília and Goiânia. The difference from the full IPCA is the collection period and geographic coverage.
Diffusion
In the first half of September, the preview of official Brazilian inflation spread less across the items that comprise the IPCA-15. The so-called Diffusion Index, which measures the proportion of goods and services that saw price increases in the period, fell to 41.7% this month from 51% in the August preview. It is the lowest percentage in the historical series by Valor Data, which started in February 2012.
Disregarding food, one of the most volatile groups, the indicator also showed a smaller scope of price increases, from 58.5% to 46.8%, the lowest since June 2020, when it stood at 42%.
Cores
According to calculations by MCM Consultores, the average of the five IPCA-15 cores monitored in the index slowed down to 0.27% in September after standing at 0.34% in August.
In 12 months, the average of the five cores also fell to 5.1% from 5.3%.
Durable goods orders are slightly higher than a year ago, and fashion sales are declining less, but uncertainty still weighs
09/26/2023
Belmiro Gomes — Foto: Silvia Zamboni/Valor
The expectation that the country will experience a less tense political environment at the end of this year, the process of recovering consumer confidence, in addition to the fall in inflation and interest rates, may lead consumer industries and retailers to have a slightly better end of the year compared to 2022. However, it will be a discreet and gradual resumption, still with difficulties in the sale of products that require credit, and that depends on the success of commercial actions on Black Friday and Christmas to be able to unlock more sales.
Retail order volumes in the fourth quarter were higher than last year, with growth of 1% to 5%, according to executives and consultants surveyed. Black Friday promotions are expected to start as early as the end of October, and year-end sales strategies are focusing more on items with tickets between R$200 and R$1,000, and monthly installments below R$100.
In the same period last year, retail was growing — it was up 1.4% in November and 0.4% in December 2022, according to statistics agency IBGE’s monthly trade survey — but on a weak base of comparison, with negative rates. If volume growth comes at the end of this year, even at timid rates, it will be expansion upon expansion, something that has not happened since 2020.
Surveys obtained by Valor show a smaller decline in the flow of customers in street stores and malls in recent weeks, especially in the fashion sector. Sales of durable goods may be “leaving the rock bottom,” according to research firm GfK.
“I had a meeting today [Monday] with 250 store managers to generate enthusiasm, so that it spreads from the stores to the consumer. Today we see more positive factors than negative for fourth-quarter sales,” said José Guimarães, CEO of consumer durables retailer Novo Mundo. “We will not have the political turmoil of the elections at the end of 2022, and I am a little more excited about the prospect of lower interest rates to affect our results,” said Belmiro Gomes, CEO of cash and carry chain Assaí.
In Mr. Gomes’ assessment, the consumer is not likely to feel so quickly the fall of the key interest rate Selic, because this takes some time, but companies will have lower financial expenses, which opens a scenario for future investments.
According to the executive and consultants consulted, the slowdown of inflation in 2023 gradually reduces the commitment of the population’s income, gradually increasing funds available for spending. This helps in a gradual change of consumer sentiment. Today, the commitment is still high — 30% of income.
The consumer confidence index of the business school FGV shows a sequential improvement from May to August — the highest level since February 2014. As for the real average income, for the first time the total (R$2,924) in the second quarter exceeded that verified in 2019, before the pandemic, said government-led research institute Ipea.
In addition, inflation is on track to close the year at 4.93%, according to the latest Central Bank’s Focus survey, which collects market expectations. The index closed at 5.8% in 2022. Delinquency, still at a high level, showed signs of slight improvement in July, according to credit research firm Serasa, reflecting the federal government’s debt renegotiation program Desenrola Brasil.
A report by the consulting firm Virtual Gate shows that the decline in the flow of customers into stores has lost momentum, although it continues to be negative. It went from a decline of 5.8% from April to June to a decline of 1.7% from July to September, compared to 2022 (including a preview of September’s results).
“We had a better third quarter than the second, partly because July was good, better than May, Mother’s Day month. We have summer weather in September, which has a lot of impact on handheld sales, such as fans, as well as beverages and fashion. But it remains to be seen if this high spreads more or if it is concentrated in certain categories,” said Heloísa Cranchi, head of Virtual Gate.
The executive dismisses the possibility that the fourth quarter will reverse the year-to-date flow indicator, which fell 2.7% through August. “We may have a smaller pullback, but still a little negative.” Information from 2,700 brick-and-mortar stores was analyzed, most of them fashion shops, obtained directly from the company’s partner stores through a flow counting system.
Based on a plan with measures set for the end of the year, the durable retailer Novo Mundo, with about 150 stores, placed orders with a volume on average 5% higher than last year, when sales rose 12%. The rate can be higher, depending on demand. “May was an okay month, June and July were bad, but September was better. We designed a plan with some measures not only to create more sales but also to bring results,” said the CEO.
“For example, customers who have a good profile but are in arrears, whether for water or electricity, may have some credit. For those who are in the most difficult situation, we have asked for a larger downpayment and more installments. It is necessary to look for ways to negotiate.”
Trying to resume sales while preserving the margin has been a recurring discourse in the consumer durables sector, as well as better exploring sales in the range of R$200 to R$1,000 — which includes handheld appliances, which are among the targets of Novo Mundo this holiday season.
Magazine Luiza, when releasing its numbers for the second quarter in August, mentioned initiatives also aimed at increasing demand in this range — which represents half of the current online sales market — as a strategy for the coming years.
From April to June, according to data from GfK Brasil, the volume of handhelds sold in brick-and-mortar retail stores grew by 2.2%, up from 0.6% from January to March. Taking into account all durable segments (telephony, computers, and so on), there was a decline of 4.9% from April to June, against a decline of 3.6% in the first quarter.
For Fernando Baialuna, Gfkconsult’s head for Latin America, an improvement in these indices is expected. “What we have today is better predictability in companies, due to the positive effect of exchange rate stability. Clients tell us that there is still political uncertainty, but they can plan better. So, the rock bottom, which everything indicates, has already passed [in the retail of consumer durables], despite this scenario of still falling and the search for recovery,” he said.
The fourth quarter is expected to be better in sales than a year earlier, including Black Friday, he said. In an optimistic scenario, the company projects a 1% to 2% increase in volume sold, and, in a more pessimistic scenario, a decline of 1% to 2%.
Despite these more positive expectations compared to last year, there are warning signs that the market should remain cautious.
This is partly due to the slow pass-through of the reduction in interest rates to the consumer — even retail did not lower its rates after the Selic cut — and the level of overdue bills, although there was a slight improvement in delinquency in June (the first decrease in the number of delinquents this year, said Serasa).
A report released by the team of analysts of Goldman Sachs on Monday noted that investors remain relatively negative for the retail sector, “with concerns ranging from leverage and cash flow dynamics to overleveraged households.”
In food retailing, the Hirota group, which owns the Hirota Food chain, has been running “bold promotions,” according to the board, to attract more traffic and boost sales despite the impact on margins.
This is necessary because with the fall in food inflation, despite the positive effect on income, stores lose nominal revenue. “We have already started with some Christmas products, and the industry is expecting more promotions on this day. We want to create a positive environment now,” said Helio Freddi Filho, head of Hirota. The chain launched a TV campaign and created a one-year free purchase promotion. “We want to continue that this year because TV brings new streams.”
Largest acquisition in Brazilian manufacturer’s history focuses on industrial electric motor, generator businesses
09/26/2023
Harry Schmelzer Jr. — Foto: Julio Bittencourt/Valor
The news that equipment manufacturer WEG has acquired the industrial electric motor and generator business of U.S.-based Regal Rexnord Corporation has been interpreted by the market as a move that will pave the way for the company’s presence on the international market. The acquisition consolidates the company as the world’s second largest manufacturer of electric motors and generators.
The largest acquisition in the company’s history is expected to be worth $400 million (approximately R$2 billion) and will open up space in strategic markets such as North America and Asia-Pacific, where the company is gaining strength, especially in China and India.
The transaction focuses on the industrial electric motor and generator businesses of Marathon, Cemp and Rotor, and the industrial systems business of Regal Rexnord, which are considered strong niche brands.
With the new acquisition, the company will integrate a team of approximately 2,800 employees operating in 10 factories in seven countries (United States, Mexico, China, India, Italy, the Netherlands and Canada) and commercial offices in eleven countries, WEG CEO Harry Schmelzer Jr. told valor. The net operating income of these businesses in 2022 will be $541.5 million, with an adjusted EBITDA margin of 9.5%.
“They [the plants] have specific product lines for markets that WEG doesn’t have. In addition to increasing market share in general, it brings product lines that strengthen WEG’s offering in some segments,” he said.
The acquisition represents nearly 19% of sales outside Brazil by 2022. The company’s international business was already slightly larger than its domestic business and now accounts for 55% of WEG’s revenue, which comes from the Americas, mainly the United States, Canada, and Mexico, while another 32% comes from the Asia-Pacific region. An additional 13% comes from other regions, including Europe.
The company already has a strong position with factories in all the countries where it is acquiring the new ones, but the plants are already running at high capacity and the latest acquisition opens up space for growth and niche markets, which is why the brands need to be maintained.
According to Alberto Kuba, WEG Motors’ managing director, although these are markets where the company already has the products, growth is slow because they depend on many local approvals. Regal made this move years ago and won these hard-to-penetrate markets. According to the executive, the new plants have unused capacity and are capable of doubling their production volume.
“During our visits, we saw that most of the plants were running at 50% of capacity and with only one assembly shift. WEG is running continuously in virtually all of our plants. Theoretically, we could double the production volume with the existing structure,” he said.
Another important point is the ability to achieve economies of scale, since one of the characteristics of the company is that it is a vertical business, meaning that it manufactures a number of components that are used in electric motors. Regal Rexnord’s units have a non-verticalized model, so the goal is for WEG’s operations to be able to supply components to the acquired factories.
“There’s a very important synergy point here, because the operations we are acquiring have a very high level of component outsourcing, and WEG also has a high level of verticalization. So we were able to create a mix of training for our operations and the new ones to move into new markets,” said Mr. Kuba.
The company plans to start a full second shift. Investments in foundries in Mexico and recent investments in China, for example, will be able to supply the new operations.
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