Biodiesel policy puts Petrobras, government again at odds

Oil giant disagrees with increasing biodiesel share in diesel blend as defended by the Lula administration

03/20/2024

Jean Paul Prates — Foto: Lula Marques/ Agência Brasil

Jean Paul Prates — Foto: Lula Marques/ Agência Brasil

After the crisis generated by Petrobras’s decision to put the payment of extraordinary dividends on hold, a bill aimed at encouraging the production of more environmentally friendly fuels is putting the oil giant’s management board and the Lula administration again at odds.

Approved by a large majority in the Chamber of Deputies (Lower House) thanks to an agreement with the government last week, the so-called Fuel of the Future bill reaches the Senate facing pressure by Petrobras for changes to the text, especially in the chapter regarding biodiesel.

Defended by the agribusiness caucus, the definition of targets for the percentage of biodiesel to be blended with diesel was not in the government’s first draft. It was included by the lawmakers after an agreement with the Chief of Staff Office and the Ministry of Mines and Energy. Under the agreement, the minimum percentage would increase to 15% in 2025, from the current 6%, with a gradual increase of 1 percentage point per year until 2030, when it would reach 20%.

According to the text, the goals’ feasibility will be assessed by the National Energy Policy Council (CNPE). The body will set the mandatory percentage of biodiesel addition, which could range from 13% to 25%, depending on market conditions. Although the program is seen by the government as the most concrete step taken so far toward energy transition, the effort faces strong resistance from Petrobras.

During the proceedings in the Lower House, the oil company highlighted the increase in costs—and prices—expected to come along with the increase in the blend. The company also argued that it would lose market share in diesel soon after announcing relevant refining investments. One of the main projects is the second train of Abreu e Lima, the refinery located in the state of Pernambuco, expected to process up to 130,000 barrels of oil per day and cost up to R$8 billion.

Petrobras has also tried, unsuccessfully, to include co-processed diesel in the bill. This less-polluting fuel category is processed in the refinery together with plant-based oils and fossil diesel. The company’s management board wanted to keep the green percentage of the co-processed product, at around 5%, to be used as a reference to meet the biodiesel targets, but the lawmakers did not accept it.

The Lower House also rejected Petrobras’s position against the targets for incorporating biomethane in the sale of natural gas and for the acceptance of an alternative model of sustainable aviation kerosene. These topics will have a second chance in the Senate.

Until the end of last week, Senator Vanderlan Cardoso, head of the Economic Affairs Committee, was expected to be chosen as rapporteur of the “Fuel of the Future” bill in the Senate. Valor learned that he had previously agreed to maintain the text’s main points that came from the Lower House, especially the issue involving biodiesel and biomethane.

However, after negotiations led by Petrobras CEO Jean Paul Prates with the support of the Ministry of Finance, Senate President Rodrigo Pacheco was convinced to appoint another rapporteur: Veneziano Vital do Rêgo, who replaced Mr. Prates as head of the Parliamentary Front for Renewable Energy—Mr. Prates was a senator before assuming Petrobras.

Petrobras executives’ reading is that Mr. Veneziano, who is also the Senate’s vice-president, will be more willing to listen to all parties’ arguments and to “stretch the dialogue.” The company understands that the government had to give in to the interests of the Lower House to gain political momentum to approve top-priority bills.

On Tuesday (19), at an oil sector event in the United States, Mr. Prates confirmed that Petrobras would defend a mandate for co-processed diesel in the Senate and praised Mr. Veneziano. “That’s why bicameralism is good, we need calibration,” he said. Petrobras did not immediately reply to Valor’s request for comment.

Last week, the company saw its market capitalization shrink by more than R$50 billion on the B3 stock exchange following the announcement that extraordinary dividends for the fourth quarter of 2023 would not be distributed. The decision by the majority of the board of directors was supported by a technical opinion—and by President Lula.

(Caetano Tonet contributed reporting.)

*Por Murillo Camarotto — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Kuwait’s PIC starts due diligence as Braskem seeks buyer

KPC’s subsidiary is analyzing assets of petrochemical company owned by Novonor and Petrobras

03/20/2024

Roberto Bischoff — Foto: Leo Pinheiro/Valor

Roberto Bischoff — Foto: Leo Pinheiro/Valor

Two Arab groups interested in acquiring Braskem are conducting due diligence on the petrochemical company and a third one decided not to proceed with the deal, Valor has learned.

Petrochemical Industries Company (PIC), a subsidiary of Kuwait Petroleum Corporation (KPC), has recently started due diligence on the Brazilian company. Another Arab company, Abu Dhabi National Oil Company (ADNOC), is the only one to have submitted a proposal so far. SABIC, the chemicals arm of Saudi Aramco, approached Novonor (formerly Odebrecht) and Petrobras but did not enter the competition.

PIC’s interest emerges as Petrobras, Braskem’s second-largest shareholder, forges closer ties with oil companies in the Middle East. In February, Petrobras CEO Jean Paul Prates held several meetings during a trip to the region and shared on social media the news of potential “future partnerships” with local companies, specifically mentioning PIC by name.

At that time, Mr. Prates noted that the Arab company had shown interest in Braskem but had not made an offer. Novonor declined to comment on the matter. Braskem’s management team mentioned in a conference call with analysts to discuss fourth-quarter results that, besides ADNOC and Petrobras, another company was conducting due diligence.

According to Braskem’s chief financial and investor relations officer, Pedro Freitas, “in general terms,” Petrobras, Braskem’s second-largest shareholder, has completed its due diligence. ADNOC’s audit is still ongoing, and that of a third company, not identified by the executive, is more recent. Sources familiar with the talks told Valor that the third company is PIC.

In recent weeks, there has been speculation among investors that ADNOC is nearing the submission of a binding offer for Braskem. However, such a move has not yet materialized. While Novonor awaits an improved proposal from the potential buyer, ADNOC is still finalizing its due diligence. That includes addressing the complex situation in Alagoas—environmental and structural damage attributed to Braskem’s salt rock mining—before submitting an “adjusted” offer.

The need for adjustments stems partly from the consequences of Mine 18’s collapse at the end of last year. This event forced Braskem to reevaluate the funds allocated for addressing soil sinking in five Maceió neighborhoods, a situation linked to the company’s salt rock mining. The financial toll, including earmarked and already allocated funds, has climbed to R$15.5 billion—the company increased the tally by R$1 billion, according to its latest quarterly financial report.

To date, Braskem has recorded nearly R$11 billion in payments and outstanding obligations on its balance sheet related to this issue. The balance of provisions stands at about R$5.2 billion, with half of that expected to be disbursed in 2024, according to Mr. Freitas.

In terms of compensating the families needing relocation due to the soil sinking, Braskem has presented over 19,000 compensation offers, covering roughly 99.8% of the anticipated total, with a 98% acceptance rate and 95% of compensations paid. The company has disbursed R$4.5 billion within the compensation program, with R$1.4 billion yet to be paid.

Thus, most of the provisions today refer to the decommissioning program of the rock salt mine, which was altered after the collapse of Mine 18, and compliance with other agreements signed by the petrochemical company. According to Mr. Freitas, while Mine 18 will no longer need to be closed with sand filling, six others have been included in this package, which postponed the complete decommissioning of the mine to 2026 from the end of 2024.

The problems in Alagoas and the worst global petrochemical downturn in decades have impacted Braskem’s balance sheet in 2023. Net revenue was 27% lower, at R$70.6 billion, while recurring EBITDA fell 65% to R$3.7 billion. Net loss reached R$4.6 billion, more than 13 times greater than in 2022.

The petrochemical industry is expected to start emerging from the downturn cycle this year, with greater stability in spreads (the difference between the cost of raw materials and final prices) and a full recovery from 2025 onwards. Braskem CEO Roberto Bischoff said the government is aware of the “accelerated” deindustrialization process seen in Brazil and understands the need to adopt initiatives in search of an industrial policy. “There are several initiatives underway,” he said.

One of the government’s points of attention, according to Mr. Bischoff, is the price of natural gas, used as an energy source in petrochemical plants. “The price of gas in Brazil compared to the rest of the world has been a focus of the government, which is trying to make access to gas more affordable,” he said.

On another front, efforts are aimed at enabling the growth of Brazil’s production utilizing pre-salt ethane, which would bring more favorable conditions for competition. “There is a predisposition on the part of the government to seek initiatives that contribute to the sector’s competitiveness and make new investments viable,” he added.

*Por Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Government seeks to direct congressional earmarks for investment

The idea is to use half the money to comply with the fiscal framework requirements

03/20/2024

Vilma Pinto — Foto: Wenderson Araujo/Valor

Vilma Pinto — Foto: Wenderson Araujo/Valor

The government wants up to half of the amount designated for congressional earmarks in the budget to be used to comply with the mandatory investment floor created by the new fiscal framework. Valor has learned that the forecast should be included in the 2025 Budget Guidelines Bill (PLDO), to be sent to Congress on April 15. The idea is already in the primary text being worked on by the Ministry of Finance.

The section included states that “a maximum of half of the amounts earmarked for the reserves provided for in paragraph 5 (individual and caucus earmarks) may be considered for complying with article 10 (investment floor) of Supplementary Law 200/2023 (new framework) when drafting the 2025 Budget Guidelines Bill.”

That is a novelty compared to this year’s budget, which also included a floor for investments but without designating part of the amount of the earmarks.

According to a government analyst, the proposal is similar to a provision that already exists in the current Budget Guidelines Act for the minimum health spending requirement, in which up to half of the amount of the earmarks can be considered to meet the constitutional minimum in this area. Under the Constitution, legislators are obliged to allocate half of their individual earmarks to health.

In the case of the minimum investment requirement, the government argues that congressional earmarks are intended to finance public works and projects; hence, the suggestion is to include in the PLDO the use of part of the amount to comply with the minimum.

The measure will make room for the government to provide more resources for other discretionary spending in the Annual Budget Act (LOA).

“I believe that the measure could help the government to comply with the rule of setting the minimum for investments in the budget, which is different from spending. It is probably a palliative found to deal with the increasingly limited space for discretionary spending, given the percentage of budget rigidity and, it is worth saying, the increase in congressional earmarks,” said Felipe Salto, chief economist at Warren Investimentos and former secretary of Finance and Planning for the State of São Paulo.

Vilma Pinto, director of the Independent Fiscal Institution (IFI), a public accounts monitoring body linked to the Senate, believes that the measure will help predict the allocation of budget resources. “It is a way of opening up space in the budget by overriding the obligation of some expenses, such as the health spending minimum and the mandatory earmarks,” she explained.

The total to be set aside for investment in 2025 will depend on the GDP figure in the budget since the fiscal framework stipulates that the minimum investment requirement cannot be less than 0.6% of GDP. Mr. Warren predicts a nominal GDP of R$12.238 trillion, which would give a minimum investment of R$73.4 billion. The exact amount will only be defined when the Annual Budget Act is submitted.

Rafaela Vitória, chief economist at Banco Inter, points out that “one of the problems is that spending on congressional earmarks does not necessarily follow the planning that one needs to have for investments, which are multi-annual expenditures with a long-term focus, while earmarks are dispersed and focus on shorter-term electoral benefits.”

“The capacity for public investment continues to be limited both by the space in the budget and by the lack of management,” she said. She believes that by linking earmarks to the minimum investment spending requirement, the Executive branch avoids the burden of freezing spending.

The Ministry of Planning and Budget declined to comment on the matter.

*Por Jéssica Sant’Ana, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Agricultural technology is Brazil’s trump card at the G20

Country’s expertise can support leadership of global hunger alliance

03/19/2024

Knowledge of tropical agriculture is expected to be one of Brazil’s main contributions to the global alliance against hunger and poverty that the country coordinates within the G20 agenda. One bastion of expertise that Brazil intends to present is the Brazilian Agricultural Research Corporation (EMBRAPA), which has become an international reference in the area for 50 years.

Among the axes of action are technical training for the transfer of food production technologies in Latin American, Caribbean, and African countries. The idea is to establish cooperation to expand food production and contribute to the elaboration of national food guides.

Saulo Ceolin, general coordinator of food and nutritional security of Brazil’s Foreign Ministry, said that there is a history of South-South or multilateral cooperation in agriculture. Brazil typically provides knowledge to assist other countries, while a third group of nations contributes resources.

He rejected the notion that this policy could potentially damage Brazil’s commercial interests by creating competitors. “The countries with which Brazil cooperates in agriculture are among those with the highest rates of hunger and poverty,” said Mr. Ceolin. “In the past, this cooperation did not lead to competition. Instead, it created opportunities in several markets for [Brazilian] fertilizers and machinery.”

Brazil intends to leverage EMBRAPA, the agency linked to Brazil’s Ministry of Agriculture to develop the technological basis of a tropical agriculture model, to reach Haiti and Panama. Countries that make up the Central American Dry Corridor—a tropical dry forest region along the Pacific coast covering Costa Rica, Nicaragua, Honduras, El Salvador, and Guatemala—are also seen as targets.

This year, with the G20, EMBRAPA will coordinate the “Macs – Meeting of Agriculture Chief Scientists,” one of the events in the agriculture working group. “Brazil has amassed deep knowledge in tropical agriculture and there is huge demand from countries in Africa, the Americas, and even Pacific islands for Brazil to export knowledge besides commodities,” said Marcelo Morandi, head of Embrapa International.

EMBRAPA’s internationalization agenda began by seeking developed countries to absorb the knowledge that could be adapted and applied to tropical climates, then sharing it with other countries through a joint action with the Foreign Ministry’s Brazilian Cooperation Agency.

“In several countries in Africa we brought cotton with system improvements because it was important to increase income and generate jobs. This also happened in countries in the Americas, such as Colombia and Bolivia. We also had a very interesting experience in Africa of groundwater dams for the use of rainwater, to create a reserve for the cultivation of several crops,” said Mr. Morandi. EMBRAPA has already had physical representation in Ghana and Panama, which no longer exist. Yet, the Brazilian agency is expected to set up a headquarters in Ethiopia by the second half of the year as part of a representation in the African Union.

Professor Mariangela Hungria, a member of the Brazilian Academy of Science (ABC), believes that combating hunger requires “urgent” support from science. “All areas need to talk to find solutions that meet the largest number of sectors. EMBRAPA has become a leader in tropical agriculture and this can be shared. The Brazilian Cerrado is similar to the savannas of Africa. This is what we researchers love, to see knowledge circulating,” said Ms. Hungria, who is also a researcher at EMBRAPA and coordinator of a book on the role of Brazilian science in combating hunger.

Brazil went off the FAO Hunger Map between 2014 and 2021 and returned to it in 2022. President Lula made reducing food insecurity a priority not only of his administration, but of the agenda he chairs in the group that brings together 19 major economies in the world, plus the European Union and the African Union (G20). The president believes that cooperation between different areas is the way to go.

In addition to knowledge transfer, the alliance to combat hunger is based on two other pillars: financial and autonomous, with proposals in which Brazil also seeks to replicate national experiences deemed successful by the government. Among them are conditional income transfer policies, along the lines of Bolsa Família, and school meals. The countries that join the global alliance will have to commit to implementing at least one of the policies of this basket under construction.

*Por Victoria Netto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Public spending watchdog experts critique government’s budget proposal

Opposition takes place amid pressure from wings of the government to increase spending; court has no date scheduled for decision

03/19/2024

Jhonatan de Jesus — Foto: Divulgação/TCU

Jhonatan de Jesus — Foto: Divulgação/TCU

The technical department of the Federal Accounting Court (TCU) concluded that the government’s proposal to limit budget resources’ maximum contingency to R$25.9 billion in 2024 could constitute a violation of the Fiscal Responsibility Act and public finance law and that the public officials in charge of it could face penalties.

This conclusion is included in the consultation opened by the Ministry of Planning and Financial Budgeting. Justice Jhonatan de Jesus, the rapporteur of the case, may or may not agree with the technical area’s conclusion. The plenary session has not yet been scheduled.

In the consultation, the government argues that a section in the 2024 Budget Guidelines Act exempts from contingency the expenses necessary to guarantee a real growth of 0.6% in spending—the minimum required by the new fiscal framework. This was one of the conditions set by President Lula to maintain this year’s primary target at zero.

Thus, the maximum amount of locked resources would decrease from R$56 billion to R$25.9 billion in 2024. This “restriction” occurs when it is necessary to curb spending to ensure compliance with the fiscal target.

According to TCU auditors, the section included in the Budget Guidelines Act undermines the Fiscal Responsibility Act’s mandate for spending freeze. An excerpt from the opinion obtained by Valor indicates that by allowing the government to enact a restriction that fails to meet the fiscal result target, the provision undermines the “binding power of fiscal law”—in other words, it effectively allows a breach of the Fiscal Responsibility Act.

They further note that the Budget Guidelines Act is an ordinary law and thus cannot modify the rule set forth in the Fiscal Responsibility Act—a supplementary law that remains effective and fully operative, they emphasized.

Moreover, the experts state that the restriction should only cover the essential expenses necessary for the operation of the public administration, as outlined in the new fiscal framework, not a broader set of expenses to ensure a minimum real growth of 0.6%.

“The provision mentioned in the 2024 Budget Guidelines Act does not create an expenditure condition, but a value condition, which contradicts the Fiscal Responsibility Act’s stipulations, thereby establishing a new maximum level of restriction to replace the one provided in Supplementary Law 200/2023,” one of the technical area’s opinions further explained.

The opposition comes amid government pressure to increase spending. Earlier this month, President Lula suggested that higher-than-expected revenue is an opportunity to review spending limits in Congress. Since last year, the president and parts of the government have advocated for expanding spending as a means to stimulate growth, a stance criticized by analysts.

On Monday (18), Chief of Staff Rui Costa stated that this debate on spending “is not on the table” within the government. According to him, any discussion in this regard will take place after the release of the bimonthly revenue and expenditure assessment report, scheduled for Friday (22).

“This is not on the table at the moment, and we will only discuss this issue and any others related to budget execution and planning after the report for the two-month period expected next week,” said Mr. Costa, following a cabinet meeting at the Planalto Palace.

The evaluation of the spending freeze limit also requires analysis by the plenary body of the Federal Accounting Court. Speaking to Valor, Chief Justice Bruno Dantas notes that the court has decision-making governance that “ensures multiple opinions are exposed and considered,” but he emphasizes that the court “only issues decisions through its plenary body.” “Opinions, however respectable and well-founded they may be, are only opinions. Only the plenary of ministers has the constitutional competence to decide,” he stated.

*Por Murillo Camarotto, Jéssica Sant’Ana, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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New investment boosts Pirelli’s prominence in Brazil

R$200m plan for laboratory and logistics center adds to purchase of natural rubber producer

18/03/2024

Cesar Alarcon — Foto: Gabriel Reis/Valor

Cesar Alarcon — Foto: Gabriel Reis/Valor

Carmakers have been in the news in recent weeks after announcing local investments, but they are not the only ones interested in Brazil: Pirelli also announced a R$200 million program on Wednesday. The acquisition adds to the recent purchase of a Brazilian company, which means a combined disbursement of R$350 million in three months. The plans take the local operation to a new level within the Italian tire manufacturer.

While investment announcements in the automotive industry tend to focus on plans, Pirelli’s were made when the project was almost half complete. Part of the money has been used to build a modern laboratory, which was inaugurated on Wednesday. The rest will be used to build a logistics center in 14 months.

Both buildings will be located on the same site as the factory in Campinas, which Pirelli bought 54 years ago. This plant and another one in Feira de Santana, Bahia, produce the tires sold on the national and international markets.

One third of the country’s production is exported, including tires for electric cars produced in the United States. “We even make snow tires in Bahia,” said Cesar Alarcon, the 45-year-old Argentinean executive who has led Latin American operations for five years after an already long international journey within Pirelli.

Considering the Argentinean plant, the group has 8,000 employees in the region, which accounts for 20% of the company’s global production.

With the new lab, the company now has an important research and development center in Campinas, “comparable to those in Germany or Italy,” according to the executive.

The quality tests conducted by the team of engineers trained for the new center, he added, will be able to meet the group’s needs in other countries. The project will also allow the group to forge closer links with the academic and scientific community in the region.

One advantage of the second part of the new investment is the proximity of the storage area, both for raw materials and tires, to the production line. As well as reducing costs, Mr. Alarcon said this proximity will bring environmental benefits by saving 5,000 freight journeys a year.

The group’s strategy to develop the region was completed with the recent acquisition of Hevea-Tec, a 25-year-old family business in Jaci, São Paulo, that produces natural rubber from latex lumps.

The agreement for the R$150 million acquisition was signed in the second half of 2023 and approved by Brazil’s antitrust watchdog CADE earlier this year.

By increasing Pirelli’s natural rubber share in Latin America, Mr. Alarcon said, the Latin American business will become more relevant to the group’s global sustainability agenda, which has set a target of reducing carbon emissions to zero by 2040. “We’ll be able to process and export this product, or we’ll be able to export the tires made of natural rubber,” he said.

“Brazil is strategically important for Pirelli,” said Mr. Alarcon. According to him, the group’s investments in Brazil amount to R$2 billion over 10 years.

“We have to invest before carmakers do,” he said. Mr. Alarcon said the company is in a comfortable position to cater for the future production of electric cars in the country, for example, because it already produces tires for this type of vehicle for export.

He added that the tire for a fully electric model is different because it needs to be made of lighter materials—these vehicles weigh more because of their big batteries—to reduce energy consumption and help with autonomy. “The car is silent, which requires materials with less noise; these are unique characteristics,” he said.

At the same time, Mr. Alarcon praises the carmakers’ plan to produce hybrid models in Brazil that can run on ethanol. “It was the right decision for the transition to fully electric cars.”

With his extensive international experience at Pirelli since 2007, including five years in China, Mr. Alarcon has an optimistic view regarding the potential for China’s BYD to become a future customer. Notably, BYD’s plant is close Pirelli’s Bahia unit. “Pirelli already supplies BYD in China; it’s reasonable to expect that the Camaçari plant will also opt for our tires,” he said.

The executive is excited about the expansion of sales of high-end cars in Brazil, which consequently require tires with wider rims. This means more sales for the company. “Today, Latin America accounts for 20% of global volume, but revenue is lower. In the United States, most cars boast 18-inch rims, here 85% of cars use 16-inch tires,” he said.

On the other hand, he complained about foreign products that are strong competitors in the replacement market. Mr. Alarcon is one of those who have taken to the government the industry’s complaints about the product, which comes mainly from Asia. He accused these rival brands of “dumping” and said that in addition to lower prices, they are companies that are not committed to the country’s environmental cause.

In Campinas, water from the factory is reused, and waste is no longer sent to landfills. “We even recycle tires that come from other countries. It’s necessary to have equality in a country where the industry’s share of GDP has been declining,” he said, commenting that if it weren’t for “unfair competition,” Pirelli wouldn’t have to have 400 employees currently on temporary leave with suspended employment contracts.

The country’s macroeconomic environment, on the other hand, does excite him to some extent. “I often tell people in the government that, as an Argentinian, I feel a certain jealousy,” he said. “Brazil’s economy is healthy and growing, despite the changes in government.”

The executive’s complaints relate to the country’s loss of international competitiveness, which he said is due to excessive costs that put the country at a disadvantage compared to nearby countries such as Mexico.

The tax overhaul, he said, has brought about a positive simplification. “But that is not enough. We need to create the conditions for efficiency.”

*Por Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank expected to cut key rate to 10.75% per year

Market sees monetary authority cutting Selic by 50 basis points this week

18/03/2024

Eduardo Jarra — Foto: Silvia Zamboni/Valor

Eduardo Jarra — Foto: Silvia Zamboni/Valor

The market is eagerly awaiting this week’s decision by the Central Bank’s Monetary Policy Committee (COPOM). Unlike January, when there were no surprises, this Wednesday’s decision is being closely watched by agents. At a time when the collegiate body is still defending the need for a contractionary stance to tackle inflationary pressures, the debate on the appropriate level of restriction is gaining momentum in the market, increasing anxiety about the COPOM’s announcement.

Valor consulted 135 financial institutions and consultancies and the consensus is that the key interest rate Selic will be cut by 50 basis points this week, to 10.75% from 11.25% per year. In the longer term, the median of the estimates points to a base rate of 9% at the end of this year and 8.5% in December 2025.

Despite the stagnation in central expectations, the context of this week’s COPOM meeting points to a more complex macroeconomic environment. Since the January meeting, there have been significant upside surprises in economic activity; current inflation has been much higher than expected by the market—and by the Central Bank itself—in recent months, with pressures on the services side; and the market has once again postponed expectations for the start of interest rate cuts in the United States.

In Valor’s monitoring of Central Bank forecasts for the Selic rate at the end of the cycle, 16 institutions have raised their estimates since January. In some cases, the revisions were more modest, such as Itaú Unibanco and Quantitas, which raised their forecasts by only 25 basis points. On the other hand, some financial firms made more significant revisions, such as Genoa Capital (to 9.25% from 8.5%) and Opportunity (to 9% from 8.25%).

On the other hand, 20 firms lowered their interest rate forecasts at the end of the year. Most of them had forecast a more restrictive monetary policy at the end of the cycle in their scenarios and are now closer to the market consensus. This was the case for Ativa Investimentos (to 9.5% from 10.5%), Morgan Stanley (to 9% from 10%), and MCM Consultores (to 9.5% from 10%).

“There is a sequence of data that points towards stronger activity, with a more heated labor market, with low unemployment and rising wages. The latest data puts an upward bias on our growth forecast for this year, which is 1.7%,” said Eduardo Jarra, chief economist at Santander Asset Management. “However, we haven’t seen any cyclical event that would force the COPOM to change its communication.”

The Santander fund manager cut his estimate for the Selic rate at the end of this year to 8.5% from 9.5% at the turn of the month. “We were hoping for more confidence in the disinflation process,” said Mr. Jarra, who now sees Brazil’s official inflation index IPCA at 3.6% per year at the end of 2024. “There is a benefit to the Central Bank proceeding cautiously, taking measured steps at a prudent pace. They can stretch it out a bit more,” said the economist.

Given that inflation is expected to fall, that core measures will continue a gradual process of disinflation, and that there have been no relevant changes in either the external scenario or the information on the conduct of fiscal policy from the Central Bank’s point of view, Mr. Jarra believes that the great interest of this week’s meeting will be focused on the “forward guidance” that the Central Bank has been using to guide economic agents regarding the next steps in interest rates.

Since the beginning of the cycle, in August 2023, the COPOM has indicated in its statements that its members “foresee a reduction of the same magnitude in the coming meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process.” If this view is now maintained, the market would understand that the Selic rate may fall to at least 9.75% per year. However, if the guidance is removed or softened, the committee would be sending a more hawkish message.

“This issue has been frequently raised during the period between the meetings, and based on what Central Bank leaders have said, it will be addressed. There will certainly be a discussion at the meeting, but I’m not sure about what will happen, whether they will keep the plural or adopt the singular. None of these scenarios would surprise me,” said Mr. Jarra.

*Por Victor Rezende, Augusto Decker — São Paulo

https://valorinternational.globo.com/

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Nadir targets U.S. market with large glassware

Glassware manufacturer holds less than 1% market share in the U.S.

03/11/2024

“Copo americano," or "American glass cup” is one of the company’s hallmark products in Brazil — Foto: Divulgação

“Copo americano,” or “American glass cup” is one of the company’s hallmark products in Brazil — Foto: Divulgação

A leader in the Brazilian glass household utensils market, the century-old company Nadir—formerly known as Nadir Figueiredo, which dropped its founder’s surname two years ago—is aiming to boost its exports to the United States following the expansion of its plant in Colombia.

As a potential candidate for an IPO on B3 and currently under the ownership of the private equity fund HIG, the owner of the Duralex and Marinex brands and the maker of Brazil’s traditional copo americano (“American glass cup”) holds less than 1% market share in the U.S. However, it is optimistic about increasing that to 3% by 2025 through adjustments to meet customer preferences.

In Brazil, one of the company’s hallmark products, the “American glass cup”—which, despite its moniker, is Brazilian and was launched in 1947 by Nadir Figueiredo designed for the tropical climate with a 190 ml capacity, crafted to keep beer chilled—is not expected to be the main export to the U.S. “Americans prefer larger glasses since everything is served in bigger portions there,” stated CEO Patrício Figueiredo, a descendant of the founding family, who is no longer a shareholder following the sale to HIG.

A key strategy for expanding in the U.S. market is leveraging its operations in Colombia. By acquiring Colombian Cristar in 2021, a glassware company previously part of the American O-I Glass group, Nadir has taken advantage of tax benefits for exports to North America through bilateral treaties. “In Brazil, the export tariff to the American market is 28%, but it’s zero from Colombia,” Mr. Figueiredo explained.

Colombia represented 22% of Nadir’s revenue last year, with approximately 70% of its Colombian production now destined for international markets. The country’s geographical advantage of access to the Pacific Ocean and the Caribbean Sea is also beneficial. “We have added two more production lines at the Colombian facility, which should boost the furnace’s capacity by 17%.”

Exports constitute 25% of Nadir’s sales, a figure expected to rise given the U.S.’s consumption potential. The company’s revenue reached R$2 billion last year, marking a 2% increase from the previous year. Nadir caters to both end consumers and the B2B market, being one of the top producers of curd cups, for instance.

In Brazil, the focus for 2024 is on enhancing online sales, which currently account for 0.5% of total sales, especially after the launch of its own e-commerce platform in January for direct consumer sales. “We previously had an e-commerce operation through a marketplace with partners, but we’ve now chosen to bring the operation in-house,” Mr. Figueiredo said.

The company, celebrating its 112th anniversary this year, had previously gone public but delisted in 2020. In 2021, Nadir filed for an IPO but withdrew due to deteriorating market conditions. Now, it is among the firms considering a return to the stock exchange after a two-year hiatus with no new listings on B3.

*Por Silvia Rosa — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Energy investment cycle in Brazil requires R$225bn by 2026

Investments aim generation expansion and transmission auctions; most of the funds will be in the Northeast region

03/11/2024

Amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar — Foto: Pixabay

Amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar — Foto: Pixabay

After attracting $35 billion (R$ 175 billion) in already contracted investments for decarbonization in 2023, Brazil is preparing for a new cycle of multi-billion-dollar investments between this year and 2026. The electricity industry will require around R$225 billion in new investments to enable the expansion of generation and transmission networks to deliver power to all regions of the country.

The study was carried out by energy research company Empresa de Pesquisa Energética (EPE), linked to the Ministry of Mines and Energy, which mapped the main investments announced and planned to meet Brazil’s electricity needs.

To enable the expansion of generation in the Ten-Year Energy Expansion Plan (PDE) reference scenario, until the year 2031, R$192 billion should be raised by the end of 2026.

The amount corresponds to investment in large generation plants, of which 34% are related to renewable sources, such as wind and solar, currently the drivers of the Brazilian electricity sector growth. The capital expenditure should be made, primarily, in the free energy market, a segment in which consumers can choose a supplier and sign agreements according to source, term, or price.

The other 66% encompasses technologies such as the mandatory implementation of natural gas thermal plants with mandatory power generation 70% of the time, on average (which does not allow flexibility), according to Law 14,182, which authorized the privatization of Eletrobras.

Additionally, they include other plants with the ability to adapt to energy demand, which plays a key role in meeting demand at peak times, designed to support the use of intermittent sources such as wind and solar. This support aims to ensure the continuous supply of energy from renewable sources, meeting electricity demand at any time of the day or night.

In this context, electricity transmission infrastructure plays a pivotal role in increasing the flow margin of renewable generation to consumer centers, improving regional service in the states, and improving reliability and continuity in energy supply to the different regions of the country. In 2023 alone, Brazil contracted R$37.5 billion in projects through two auctions.

For future projects, EPE has pointed to works to be authorized in auctions expected to result in R$32 billion in investments by 2026 for the construction of 9,000 kilometers, in addition to substations. Most of this total, equivalent to R$23 billion (or 72%), is planned to be allocated in bids scheduled for March and September 2024.

The Northeast region accounts for almost half of the planned investments, reaching R$ 15 billion, 49% of the total. The allocation of such funds aims to expand the capacity to transport surplus energy and improvements in the Southeast region, the country’s largest consumer center.

The study was coordinated by Thiago Prado, president of EPE, jointly with Renata Carvalho, advisor for EPE’s Electric Energy Studies Department. According to them, the plan outlines guidelines for public policies aiming to explore integration in the system expansion as demand grows.

“Given the expected auctions for contracting transmission networks, the maturing of the capacity market that adds energy security and the adoption of new technologies, as well as the continued expansion of renewable energies and the growing interest in hydrogen, Brazil continues to be a reference in renewables and new projects in the world,” Mr. Prado said.

“The integration of power generation and transmission planning is a key element for the renewability of the Brazilian electrical mix, providing safety and reliability, at the lowest cost for consumers,” Ms. Carvalho added.

On the other hand, Luiz Barroso, CEO of PSR consultancy, notes that the thermal electric plants included in the Eletrobras privatization law are considered riders—provisions added to a bill having little connection with the subject matter—that could be costly to Brazilians.

“The amount of investment is substantial, which shows Brazil is a great country to receive direct capital flow,” he said. “On the consumer side, every investment increases the electricity bill, and investments that are not economically proven from a planning perspective will end up increasing the cost of energy for consumers.”

Companies are already preparing to get projects off the ground. The most recent announcement was made by energy company Casa dos Ventos, with more than R$12 billion to be allocated by the end of 2026 to support its business expansion cycle. The company’s plans also include approving the first solar projects, which should total around 1 gigawatt of installed capacity.

Chinese money is expected to flow to Brazil from state-owned companies, especially State Grid, which won 80% of the last transmission auction. The agreement is expected to be signed in April, with investments exceeding R$18 billion.

Brazilian state-owned Petrobras is looking for ready-made renewable energy projects to “buy time” in the energy transition. The oil giant is currently studying 45 memorandums of understanding. The company recently signed a partnership with equipment manufacturer WEG for the development of the wind production chain in Brazil.

Alexandre Silveira, minister of Mines and Energy, said that in March 2024 the department will carry out another mega-auction, which, added to the competitions held in 2023, should total more than R$60 billion in the expansion of the transmission network. According to the ministry’s calculations, each real injected into this infrastructure should result in R$3 in investments in renewable generation, especially in the Northeast.

“We will bring more dynamism to the investment environment in the coming years. Brazil is one of the most attractive markets to invest in the energy transition, given the quality of its energy resources, and also thanks to its regulatory stability and legal security,” Mr. Silveira said.

The financial viability of projects brings uncertainties, as it is a capital-intensive industry. Therefore, development banks should play a pivotal role. Luciana Costa, director of Infrastructure and Climate Change at the Brazilian Development Bank (BNDES), emphasizes that the bank is the main global supporter of renewable energy projects, with expertise in the sector, being committed to support initiatives. In this context, the bank’s main funding route will remain focused on renewable energy for the free energy market.

“The transmission sector is mature, proven, and capable of obtaining funding on its own at competitive costs. However, Brazil is a volatile country and sees the capital market constantly opening and closing. Therefore, the bank is preparing to provide funding. In 2023, BNDES approved R$20 billion in operations encompassing energy transmission, distribution, and generation, including gas thermal plants. The exception is coal projects,” she said.

Another issue is that many institutions require projects to have long-term agreements as a guarantee, while the BNDES does not include such a condition. The bank has adopted capital market instruments, helping to attract private investment, and chooses to co-finance projects to share risks. “At times when the market is closed, as we saw in the first half of 2023, we enter and make a large funding with our own funds,” Ms. Costa adds.

According to James Ellis, the head of research for Latin America at BloombergNEF, Brazil accounted for 82% of total new investments in clean energy in Latin America in 2023, attracting $25.4 billion. This combination of investments is focused on renewable energy and electrical network infrastructure (transmission and distribution). Thanks to the substantial volume of investments, the country has an extensive pipeline of renewable projects backed until 2030.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazilian pulp exports to China at all-time high in 2023

China accounted for 49% of shipments, Ibá industry association’s study reveals

03/11/2024

Paulo Hartung — Foto: Gladstone Campos/Divulgação

Paulo Hartung — Foto: Gladstone Campos/Divulgação

The largest pulp exporter in the world, Brazil continues to post record highs in the planted forest sector. Last year, the country exported 18 million tonnes, considering all types of raw material, with almost half, or 49%, shipped to China. It was the largest purchase of Brazilian pulp ever made by the Chinese, both in volume and revenue.

In volume, Brazilian pulp shipments to China reached 8.9 million tonnes last year, generating $3.8 billion in foreign exchange. Of the total amount of fiber exported by Brazil, another 24% was shipped to Europe—which once was the largest market for the Brazilian product—and 14% to North America. The data was released by the Brazilian Tree Industry (Ibá), the association representing the planted tree production chain, in a bulletin with statistics for both the fourth quarter and consolidated year 2023.

According to Ibá, Brazilian pulp exports have doubled in the last 10 years and the sector currently accounts for the fifth item in the agribusiness export balance. “We have the challenge of maintaining and opening new markets. In addition, coordinating a new cycle of productivity growth for our planted trees,” said Paulo Hartung, Ibá’s executive president.

Brazil is expected to continue posting record highs in the industry in the coming years, in the wake of a robust portfolio of expansion projects not only in the pulp market but also in paper, wood panels, and forest planting. In the second half of the year, the sector had an investment portfolio of R$61.9 billion until 2028, of which R$22.2 billion was related to Suzano’s Cerrado project.

With 2.55 million tonnes of installed capacity, the company’s new plant, located in Ribas do Rio Pardo, Mato Grosso do Sul, will enter into operation by the end of June. The Cerrado project is expected to produce 900,000 tonnes this year, with sales of 700,000 tonnes. The volume will be exported, mainly to China.

Chilean company Arauco is also investing in the sector in Brazil. Its first pulp plant in Brazil, in the city of Inocência, Mato Grosso do Sul, will receive R$15 billion in investments and could produce 2.5 million tonnes per year. The start of operations is expected for the first quarter of 2028, with a second stage of the project expected in the future.

Another Chilean company, CMPC, has just concluded an allocation of R$2.75 billion in the Guaíba plant, in the Porto Alegre Metropolitan Region, marking the second-largest private-sector investment ever in the state of Rio Grande do Sul. The BioCMPC project is aimed at updating the plant, expanding its production capacity, and making it more sustainable. In addition to the 18% expansion in pulp production capacity, or an additional 350,000 tonnes from 2024 onwards, the project will result in reducing costs and cutting greenhouse gas emissions.

In 2023, according to Ibá, Brazilian pulp production reached 24.3 million tonnes, slightly below the volume produced in the previous year. The drop was due to adverse market conditions, especially in the first half of the year, when international prices for eucalyptus pulp reached record lows.

In this scenario, Suzano, the largest pulp producer in the world, announced in June it would reduce its production volume by 4% relative to its production capacity—10.9 million tonnes of pulp by the end of 2022.

From January to September, the Brazilian fiber production totaled 18.1 million tonnes, down 2.8% year-over-year. Exports were 13.7 million tonnes, 3.6% lower, with apparent national consumption stable at 4.5 million tonnes.

*Por Stella Fontes — São Paulo

Source: Valor Intrnational

https://valorinternational.globo.com/
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