Brazil manufacturers’ confidence falls to lowest since pandemic

Industrial sentiment deteriorates further as concerns over global tensions and potential U.S. tariffs weigh on expectations

 

 

 

Brazilian manufacturers grew even more pessimistic this month as current business conditions and expectations for the next six months continued to deteriorate. According to the National Confederation of Industry (CNI), its Industrial Entrepreneur Confidence Index fell from 46.7 points in June to 44.4 in July, the lowest reading since June 2020, during the Covid-19 pandemic.

The index has remained below the 50-point threshold—which separates optimism from pessimism—for 19 consecutive months. According to the CNI, that is the second-longest stretch of pessimism on record, surpassed only by the 2015–16 recession.

“When pessimism persists for such a long period, it tends to translate into fewer jobs, lower production and even the cancellation of productive investment,” Marcelo Azevedo, the CNI’s economic analysis manager, said.

The Current Conditions Index fell 0.7 point to 41.6 in July, moving even further below the neutral 50-point mark. Manufacturers said both business conditions and the broader economy are worse than they were six months ago.

Meanwhile, the Expectations Index dropped 3.1 points to 45.8, its steepest decline since November 2022, when it fell 10.8 points. The latest reading indicates weakening confidence in companies’ own prospects and growing pessimism about the economy.

“The deterioration in expectations is likely linked to growing uncertainty over the external environment, including the escalation of the conflict in the Middle East earlier this month and the possible return of U.S. tariffs on Brazilian products,” Azevedo said.

*By Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil’s oil industry weighs fresh legal challenge to export tax

Producers argue government’s decision to extend levy reinforces concerns that it is aimed at raising revenue rather than addressing fuel market disruptions

 

 

 

Brazil’s oil industry is considering a fresh legal challenge after the government renewed its controversial export tax on crude, according to people familiar with the matter. Producers argue the extension undercuts Brasília’s claim that the levy was introduced to cushion the domestic impact of the Middle East conflict, instead reinforcing the view that it is primarily a revenue-raising measure.

According to the sources, extending the tax through an administrative act gave it a regulatory character and weakened the government’s argument that it needed additional revenue to offset fuel subsidies. Data from the Ministry of Finance show the tax generated R$1.05 billion in revenue between March and May. June figures have not yet been released.

Last week, the government issued a decree under which the Foreign Trade Chamber (Camex), part of the Ministry of Development, Industry, and Trade (MDIC), extended the tax for another two months, just before the provisional presidential decree (MP) 1,340/2026 was due to expire. The measure had imposed a 12% levy on gross revenue from crude oil exports. Because Congress failed to convert the provisional decree into law, it lapsed. Without a new decision, the tax would have ceased to apply as of Friday (10).

When the government first issued the decree in March, several companies filed lawsuits challenging the tax and expected it to expire without congressional approval. Those cases remain pending. With the extension now in place, additional lawsuits are expected.

According to the sources, about a week before MP 1,340 was set to expire, there were indications the government intended to keep the export tax through a legal instrument viewed as weaker than a provisional presidential decree. “If this were the appropriate legal instrument [to maintain the tax], why didn’t they use it from the outset instead of issuing a provisional decree, which requires subsequent approval by Congress?” one source questioned.

Industry representatives also point to another factor supporting the view that the government’s main objective is to increase tax revenue from exports. Brazil’s refining capacity is operating close to its limit, while domestic fuel demand still requires imports. Because crude oil production far exceeds refining capacity, exporting the surplus is unavoidable, the sources said. In their view, this undermines the government’s claim that the measure is necessary to prevent domestic fuel shortages.

The legal fragility of the extension has also heightened concerns over regulatory instability. “The decision deepens concerns over the use of the Export Tax and raises important questions about legal certainty, regulatory predictability, and respect for due legislative process,” the Brazilian Association of Independent Oil and Gas Producers (Abpip) said in a statement.

Francisco “Chicão” Bulhões, founder and president of the Brazilian Institute for the Regulatory Environment and Freedom (Barla) and former Rio de Janeiro secretary for economic development, said taxing crude exports through administrative acts not only increases legal uncertainty but also makes corporate planning more difficult and the investment environment less predictable.

In his view, the tax will not reduce fuel prices at the pump and may have consequences beyond the government’s fiscal position. “When tax measures become instruments for raising short-term revenue, it hurts the competitiveness of the Brazilian economy,” Bulhões said.

Alexandre Chequer, global head of energy, oil and gas at Tauil & Chequer Advogados in association with Mayer Brown, said companies with projects already underway—or those evaluating assets to enter Brazil—have postponed investment plans because of the tax. He noted that the measure was adopted only months before a presidential election and argued that even if companies ultimately succeed in overturning the extension in court, the damage has already been done.

“These are highly capital-intensive investments. Companies invest billions to develop an oil field, and suddenly a 12% export cost is imposed. The damage this causes to the country in the short, medium, and long term is enormous,” Chequer said.

*By Fábio Couto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/

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Brazil becomes Shell’s largest oil-producing country

After 28 years with Shell, CEO Cristiano Pinto da Costa will leave to lead expansion of Abu Dhabi-based XRG

 

 

Four years after taking over as CEO of Shell Brasil, Cristiano Pinto da Costa is leaving the company, having doubled its oil asset portfolio since he assumed the role in 2022. At the time, Shell held interests in about 30 oil blocks in Brazil; today, it operates in nearly 70. Those assets produce around 500,000 barrels of oil per day, making Shell the country’s second-largest oil producer, behind only Petrobras. In 2025, the company invested R$12.5 billion in Brazil.

“Shell has never invested as much in Brazil as it did in 2025. The country has become the group’s largest oil-producing operation worldwide,” Costa said. Among the key investments made during his tenure was the development of the Orca project (formerly Gato do Mato) in the Santos Basin pre-salt region. Shell also acquired acreage in licensing rounds covering the southern portion of the Santos Basin and the Pelotas Basin, between the states of Rio Grande do Sul and Santa Catarina, in partnership with Petrobras.

After 28 years with Shell, Costa will leave the company on July 31 to lead the expansion of XRG, a company created in 2024 by Abu Dhabi’s state-owned oil company Adnoc. The focus, he said, will be on petrochemicals, low-carbon businesses, and natural gas, backed by investments of between $100 billion and $150 billion through 2030. XRG plans to diversify its investments beyond the Middle East.

Beginning August 1, Costa will be succeeded by Portuguese executive João Santos Rosa, who most recently led Shell’s operations in Italy. According to Costa, XRG’s offer came just as he was planning to return to an international role. The opportunity aligned with XRG’s growth strategy, which includes expanding across the Americas, from Canada to Argentina. “I spent nearly 20 years of my career outside Brazil, and although I was very happy to return, I felt it was time to go back to the international market and take on a global role.”

In his view, Brazil offers opportunities that could become part of XRG’s future projects. At a time when geopolitics has increasingly shaped global energy markets, Brazil has gained strategic importance alongside the U.S. and Canada. Since the outbreak of the war in Ukraine in 2022, the pace of the global energy transition has slowed as countries prioritized energy security.

Brazil has emerged as a key player both in oil and gas and in the energy transition, thanks to its vast oil reserves, “fantastic” hydropower resources, strong wind and solar generation potential, and abundant feedstock for biofuels, particularly ethanol produced from sugarcane and corn, Costa said.

He expects the growing adoption of electric vehicles in Brazil to allow ethanol currently used in passenger cars to be redirected over the coming decades toward transportation segments that are harder to decarbonize, such as heavy-duty vehicles, shipping, and aviation. Shell, he added, is already testing ethanol blends in offshore support vessels by mixing the biofuel with conventional marine fuel to reduce carbon emissions.

Beyond its strong biofuels potential, Brazil has also become a major global oil exporter, driven by the development of the pre-salt fields over the past 15 years. According to Costa, Brazilian crude does not need to pass through any “complicated” shipping routes to reach key markets such as China and Europe.

Another positive development, he said, was the resumption of annual oil licensing rounds starting in 2021. “Brazil can become a major destination in the new global reallocation of investment capital if we get competitiveness, environmental licensing, and regulatory, legal, and fiscal stability right,” he said.

On that front, Costa argued that the government’s recent decision to extend the oil export tax effectively reopens existing contracts and increases the tax burden on an industry that already allocates two out of every three barrels produced to taxes, special participation payments, and royalties. That, he said, could leave Brazil at a disadvantage relative to competing oil frontiers such as Guyana, Argentina, and Namibia. In other producing countries, he noted, the tax burden typically rises when oil prices increase and falls when prices decline.

“Exploration and production concession models vary around the world. One reason Brazil has been attractive compared with other jurisdictions is that its model is independent of oil prices. You decide to take the risk. If prices rise, you earn more; if they fall, you bear the losses yourself,” he explained.

Costa continued, “It turns out that countries are choosing one contractual model, but then are adjusting it throughout the life of the contract depending on short-term needs. That also creates legal uncertainty—it changes the terms of the contract.”

According to Costa, his successor will inherit an organization whose commitment to Brazil is recognized within the Shell Group as stronger than that of most other countries. He said João Santos Rosa’s move to Italy was planned with an eye toward his eventual succession in Brazil. Although Italy is a smaller operation, he said, the two countries share similarities that should ease the transition. “I hope he will be as happy leading Shell Brasil as I was.”

*By Fábio Couto and Kariny Leal — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/

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Brazil transport group warns of R$12bn hit from workweek reform

Industry association says proposed changes to 6×1 work schedule would raise costs, worsen labor shortages, increase freight, transit fares

 

 

 

The National Confederation of Transport (CNT) estimates that a proposal to amend the Constitution (PEC) to abolish Brazil’s six-days-on, one-day-off (6×1) work schedule would have a direct annual cost of nearly R$12 billion for the transportation sector, driven by higher operating expenses across all modes. In an interview with Valor, CNT President Vander Costa warned that the proposal would also worsen labor shortages at a time when the industry is already struggling to recruit workers, while encouraging informality.

The proposal could also affect urban public transportation beyond higher operating costs, with repercussions for services provided to commuters. According to Costa, companies in the sector are assessing the potential impacts of the change and evaluating possible responses. He called on the Senate to hold a broad debate before voting on the measure.

As an alternative, the CNT argues that working schedules should be determined through collective bargaining rather than a constitutional amendment. “We do not believe working hours should be locked into the Constitution,” Costa said. He added that consumers would ultimately bear the measure’s costs through higher public transit fares and freight charges.

At the same time, the CNT is monitoring other legislation moving through Congress, including the Freight Measure (MP do Frete), a provisional presidential decree that would tighten rules and penalties for failing to comply with Brazil’s minimum freight rate. The measure, which expires on Thursday (16), was approved by the Chamber of Deputies with amendments that the confederation considers difficult to implement, including the creation of a minimum wage for long-haul truck drivers.

Asked about the timeline for the Senate vote and the possibility of a truckers’ strike, Costa downplayed the risk. “Only those who are not in the industry fear a strike,” he said.

Below are key excerpts from the interview:

6×1 work schedule

“We estimate an annual impact of nearly R$12 billion, but what concerns us most is not the financial cost, because that will eventually be passed on through prices and generate inflation. The biggest concern is the labor shortage. Today, transportation employs 2.5 million workers, and several segments are already facing shortages. We are running simulations to determine what can be done, while continuing to work in the Senate to ensure the debate is conducted more transparently. We hope the final decision reflects what is best for society as a whole, not for a single group.”

Urban transportation

“The smallest impact would be higher costs. If operators need to hire more drivers or pay overtime, municipalities will face higher expenses, diverting resources from other priorities into public transportation. One alternative some operators are already evaluating is reducing the number of trips, especially on weekends. What would happen then? Workers on their days off would end up waiting longer for buses. Another option is increasing bus capacity with bi-articulated vehicles, but that is a long-term solution.”

CNT’s proposal

“We believe progress should come through collective bargaining, which has worked well in Brazil. The Constitution sets a maximum workweek of 44 hours, while the national average is 38 hours. That shows sectors that can offer more time off are already doing so. But we cannot impose the same rule on transportation, where some operations require seven-day coverage.”

Transition period

“If the change has to happen, we support a longer transition period. It is much easier for companies to absorb higher labor costs if working hours are reduced gradually—for example, one hour per year rather than two hours every two months. If businesses have time to adapt, alternatives can be developed to prevent consumers from bearing the cost through inflation.”

Freight Measure

“The Lower House introduced changes that are almost impossible to implement, such as a minimum wage for long-haul drivers. That provision has nothing to do with the original measure. Another concern involves driver registration. To reduce cargo theft, the industry has invested heavily in risk management, and these companies often refuse cargo assignments for several reasons, including financial delinquency, since indebted drivers are considered more vulnerable to criminal recruitment. The revised text says drivers can only be rejected if they have a final criminal conviction. We believe that could increase cargo theft.”

Risk of a strike

“It is very unlikely the industry will react that way. Only people outside the sector fear a strike. Even if isolated protests occur, as long as the police guarantee both the right to demonstrate and the public’s freedom of movement, there is no realistic prospect of a strike.”

Fuel subsidies

“With renewed attacks [in the Middle East], everything could change. It may be better to wait. Worse than expensive diesel is having no diesel at all. I see the government making a strong effort to minimize the impact on pump prices, but fiscal responsibility must also be preserved. To improve the situation in the long run, Brazil needs to expand its refining capacity so it is no longer dependent on imports.”

Interest rates

“Interest rates are high in Brazil because government spending remains elevated. Once we begin generating sustained fiscal surpluses, rates will come down. High interest rates may be even more damaging than high diesel prices. For our sector, they reduce investment in fleet renewal. Lowering the Selic rate is essential to reduce financing costs.”

Proposals for presidential candidates

“We intend to present proposals to encourage public transportation and expand investment in transport infrastructure. We are particularly concerned about improving intermodal transportation. We support more investment, but with fiscal responsibility.”

Extreme weather events

“We have invested in areas affected by climate-related disruptions, but it is still far from enough. Most companies remain focused on fleet renewal and on studying alternative fuels.”

El Niño

“Whenever there are heavy rains, there is a risk that Brazilian highways will suffer damage that disrupts transportation, requiring alternative routes. But our greatest concern today is the possibility of river transportation being interrupted because waterways become unnavigable.”

Organized crime

“When it comes to cargo theft, which has often been used as a way to launder money, we have invested heavily in preventive security. Once a crime occurs, however, it becomes a matter for law enforcement. Risk management is essential. Earlier this year, Congress approved a law allowing authorities to suspend the corporate taxpayer registration (CNPJ) of companies found in possession of stolen goods, and we want to see that measure effectively enforced. The goal is to make it clear that buying stolen cargo is not good business.”

*By Marlla Sabino — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Rio Bravo partner rebukes Treasury push to revisit tax-exempt securities

Change would deal further blow to credit market already grappling with restructuring cases, says Evandro Buccini

 

 

 

The National Treasury’s push to revisit the tax treatment of tax-exempt securities comes at a particularly delicate moment for the credit market, and stands to hurt a segment already facing greater caution from banks and investors, says Evandro Buccini, partner and head of credit and multi-asset management at Rio Bravo Investimentos.

In his view, the proposal amounts to “an attempt to pin problems that belong to the government on others,” and would do little to solve the Treasury’s real difficulty: placing NTN-B inflation-linked bonds in the market.

Speaking to Intraday, Valor’s financial markets blog, Buccini says that after a strong credit expansion cycle, Brazil is likely headed for a “prolonged digestion” of recent problems. “If the economy does slow down, it could become a critical moment for the credit market. And if the Central Bank has no room to cut rates, it could be the worst of both worlds,” he says. Even so, he stops short of predicting a “credit crunch.” Below are the main excerpts from the interview:

Valor: Is a renewed escalation of the conflict between the U.S. and Iran on your radar?

Evandro Buccini: We saw the attacks last week, but the market reaction wasn’t especially strong this time. Brent crude jumped 8% early in the week, then largely recovered without another sharp swing, even with no ship traffic through the Strait of Hormuz. It’s clearly an issue that worries the market a great deal, and we don’t seem close to a lasting resolution. It will keep driving volatility and uncertainty in prices, and central banks will need to factor it into monetary policy decisions.

Valor: We’ve even seen the correlation between oil prices and market interest rates come back…

Buccini: That’s right. Markets had become somewhat decoupled, partly because we haven’t yet seen the full fallout from higher oil prices. It’s not just about price—it’s also about the supply of oil and refined products. On top of that, countries’ reserves are low, and that’s likely to remain an issue for some time. We’re seeing Japan and Europe raise interest rates in response to inflationary pressure that isn’t being driven by oil alone. In the U.S., though, where large-scale oil and gas production is an advantage, the Fed may be slower to act, especially given its mandate’s focus on core inflation, which buys the central bank a bit more time. The big development at the Fed has been its new chair, Kevin Warsh. His appointment came as something of a surprise, since many expected him to lean more dovish, favoring lower rates. My sense is that nothing will change at the next few meetings, and rates will hold steady.

Valor: Does that point to a scenario of higher long-term interest rates globally and a stronger dollar?

Buccini: On the rates side, yes, that’s the trend—especially with economies, the U.S. in particular, still running strong. Rates are likely to stay higher for longer. On foreign exchange, it’s more complicated. Higher rates usually mean a stronger currency, but every developed economy is moving in the same direction at once. There are also U.S. policies aimed at weakening the dollar through other channels. And the war itself is widening the U.S. fiscal deficit. So, it’s not obvious to me that the dollar strengthens from here. For Brazil, the picture is neither good nor bad. We’re a major oil producer with very high interest rates. Against the dollar, the real could hold roughly where it is, maybe even see some marginal appreciation. The catch is that what actually weighs on the real right now is Brazil itself—our fiscal problems and the coming election.

Valor: Is there still room for further Selic rate cuts?

Buccini: We’re in a very sensitive cycle built on fragile foundations. Everything hinges on the exchange rate and commodity prices. And while the prevailing view is that the economy will slow eventually, there’s no concrete sign of that yet. It’s a fragile cycle that will keep depending heavily on volatile factors, which is far from ideal. There’s still a long stretch before the Monetary Policy Committee’s August meeting, so I can’t say whether there’ll be room for another cut. If the decision were made today—with the exchange rate fairly stable and June’s IPCA reading coming in softer—there might be room for one more cut. But by August, honestly, I couldn’t say.

Valor: We’ve seen considerable volatility in the sovereign bond market…

Buccini: Yes. We’re seeing some opportunities in NTN-Bs, but we’re keeping positions relatively small since there’s no clear sign the volatility will ease. Current levels are attractive, and break-even inflation is quite high, so we do see some opportunities there. That said, there are concerns. Government auctions hadn’t been going well, though the latest one was somewhat better, and there’s still a shortage of buyers for long-dated paper. The real issue: pension funds aren’t buying, and foreign investors aren’t showing up. I prefer intermediate maturities, just past 2030, since they offer more manageable duration for hedging—or choosing not to hedge—against tax-exempt infrastructure debentures.

Valor: The market has pointed to a worsening fiscal outlook to explain this…

Buccini: You have to look at everything that’s happened over the past four or five years. Since the end of the Bolsonaro administration, growth in public spending has been a major concern. And the first half of this year was rough. That’s not entirely surprising, given that we’re in an election year and a spending acceleration was entirely predictable. The problem is that it pressures government bonds and pushes interest rates higher—there’s no getting around that. Gross government debt has climbed roughly 10 percentage points of GDP over this period. That’s extraordinary. And frankly, I have little confidence that will change. There’s talk that some targeted fiscal adjustment could happen even under the current administration after the election, but that’s hard to believe. Economists have long expected the economy to slow, and it never has. But it does look like that could finally materialize over the next few years. If growth slows, that could open room for rate cuts, but it would be a negative from a fiscal standpoint—it’s hard to cut spending when the economy is growing slowly, or even contracting.

Valor: Is the election a concern?

Buccini: The only real way out of this would be a confidence shock, but it doesn’t look like the election will produce a candidate capable of inspiring that kind of confidence. For us, the key will be gauging how the election affects the broader economic outlook. Regardless of who wins, we’re skeptical that a confidence shock materializes.

Valor: We’ve seen a significant widening in spreads on tax-exempt infrastructure debentures. Has the worst passed?

Buccini: I think we’re nearing the bottom of the widening in infrastructure spreads relative to NTN-Bs. The past few months have been very tough, with heavy fund redemptions. But looking at secondary-market activity and funding, we may start to see some spread tightening ahead.

Valor: The Treasury has signaled interest in revisiting tax exemptions on certain securities…

Buccini: That would hurt the tax-exempt securities market. To me, this is an attempt to pin problems that belong to the government on others. Tax-exempt infrastructure debentures do create some competition for government bond issuance, but that’s far from the main problem—I doubt their impact is all that significant. Sure, one or two auctions with very large issuances worth several billion reais could have some effect, but that doesn’t look like the main driver of pressure on NTN-Bs. We’ve already seen five or six formal proposals to change these tax exemptions, and Congress has rejected every one. Nothing stops the government from trying again, but is it really worth the political capital? As it did with CRIs and CRAs, the National Monetary Council could instead change the collateral rules—limiting issuance size, for instance.

Valor: Several major credit events have surfaced in recent months. Is that a concern?

Buccini: Yes. Interest rates are very high and are even catching up with companies that weren’t especially leveraged. No one expected rates to stay at these levels for this long, particularly given that the previous cycle started with rates at 2%. And of course, there are important sector-specific issues at play.

Valor: Such as?

Buccini: Agribusiness, for one. It’s an important, complex sector going through a significant leverage cycle, and it’s also been hit by opportunistic behavior in some judicial restructuring cases that will leave lasting scars on the industry. With Banco do Brasil lending less, or taking a tougher line, capital markets will be far more cautious than before—just as they were making their first serious push to build closer ties with agriculture. We’re also seeing a lot happening in the energy sector, largely because the government has shown little appetite for organizing the industry and has let Congress do as it pleases. It’s a sector that matters a great deal to capital markets, and it’s now facing numerous restructurings.

Valor: And this comes after a boom in the credit market…

Buccini: Particularly among retail investors. Infrastructure matters a lot to them, and we’re now seeing the country’s largest out-of-court debt restructuring, with Raízen. It’s affected a huge number of people. Distributing credit assets to retail investors became much easier, which allowed for broad dispersion that’s now causing headaches. Even a single restructuring is a real challenge for asset managers and changes our day-to-day work. Multiply that across a large, dispersed base of retail investors, and it gets even more complicated—and that dents the sector’s overall appetite for credit. If the economy does slow, it could become a critical moment for the credit market. And if the Central Bank has no room to cut rates, it could be the worst of both worlds. We’re currently at a Selic rate of 14.25%, with the economy still growing. If GDP growth drops below the current 1.5%-to-2% range and rates can’t come down, the outlook could get considerably tougher.

Valor: Is a credit crunch on your radar?

Buccini: I don’t think “bubble” is the right word, and I’m not expecting a severe credit crunch, especially given that Brazil is a relatively low-leverage country. But we may be in for a more prolonged adjustment. Credit growth through the capital markets has been very strong, and banks have already stepped up provisions for potential losses. What seems most likely to me is a longer stretch of digesting credit problems, spread over several quarters. Both the supply of and demand for credit could decline, and it may take several quarters before capital markets and banks resume expanding their loan books. I think that’s a highly likely scenario.

*By Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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El Niño raises inflation risks, Morgan Stanley says

Bank estimates a 0.84-percentage-point impact on inflation in its baseline scenario but warns the effect could double to 1.68 percentage points

 

 

Morgan Stanley economists are increasingly concerned about the potential impact of El Niño on Brazil’s economy, particularly on inflation. The U.S. bank’s baseline scenario assumes a moderate climate pattern but already points to significant effects on the country’s consumer price index. A stronger El Niño, however, could amplify those pressures and make it more difficult for Brazil’s Central Bank to follow its usual strategy of looking through weather-related inflation shocks.

Under Morgan Stanley’s baseline scenario, El Niño would add a cumulative 0.84 percentage point to Brazil’s official consumer price index (IPCA), with 0.34 percentage point in 2026 and 0.50 percentage point in 2027. Economists Thiago Machado and Ana Madeira expect the climate pattern to peak in the fourth quarter of this year.

Based on that scenario, the bank forecasts inflation at 5% at the end of this year and 4% in 2027, assuming food inflation of 7.2% in 2026 and 5.2% next year.

“In a strong El Niño scenario, more severe droughts and floods could significantly reduce agricultural productivity, increase transportation costs, and trigger sharp rises in food prices—particularly for coffee, sugar, grains, and perishable products—potentially adding 1.26 percentage points to the IPCA,” the Morgan Stanley economists wrote.

The bank also outlined a third scenario involving a very strong El Niño. Under those conditions, a sharp acceleration in food prices could add as much as 1.68 percentage points to headline inflation, “well above the range historically observed during strong El Niño episodes,” the economists said.

The bank’s assessment underscores heightened concern about the inflation outlook and its implications for monetary policy. Even so, Machado and Madeira believe the bar for further increases in the Selic policy interest rate remains high, even under a strong El Niño scenario.

“Past episodes suggest the Central Bank does not respond mechanically to El Niño-driven food inflation, and the current disinflation in oil prices should provide some short-term relief for inflation,” the Morgan Stanley economists said.

They cautioned, however, that the current environment already favors a more hawkish monetary policy stance because of inflation risks stemming from unanchored inflation expectations, resilient economic activity supported by fiscal measures, and expectations of higher global interest rates.

That combination of factors, they argued, “reduces the room for the Central Bank to simply look through an El Niño episode, especially if it proves to be strong or extreme.”

As a result, Morgan Stanley sees a risk that the monetary authority may be unable to resume its monetary easing cycle by December.

*By Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil urges U.S. to drop proposed 12.5% tariff

Lula administration says punitive trade measures would cause unnecessary economic damage and warns against unilateral actions

 

 

 

 

President Luiz Inácio Lula da Silva’s administration filed on Monday (6) a response to the findings of an investigation conducted by the Office of the United States Trade Representative (USTR) under Section 301.

In the document, the Workers’ Party government asks the U.S. to drop its proposal to impose an additional 12.5% tariff on imports of several Brazilian products, arguing that the measure would cause unnecessary economic damage and that Brazil should not be targeted by any tariff of a “punitive nature.”

The 13-page document is signed by Foreign Minister Mauro Vieira. It says that refraining from imposing the tariff would preserve the spirit of cooperation that has characterized U.S. and Brazilian efforts on the matter.

Throughout the document, the Brazilian government rebuts the USTR’s accusations and says the agency’s findings cannot be “arbitrary.” The U.S. justification for imposing the 12.5% tariff on Brazil is that the country, along with 59 others, failed to ban or monitor imports of goods produced with child or forced labor.

According to Vieira, tariffs on Brazilian products would not advance the goal of eradicating forced labor, would not make Brazil’s existing measures more effective, and would not encourage “additional reforms.” He also says the issues raised in the investigation would be better addressed through international cooperation and engagement rather than punitive trade measures.

Terrorism designation

In a separate effort to respond to U.S. accusations, Brazil’s Foreign Ministry sent a letter to the Lower House saying there is a possibility that the U.S. government could use military force in Brazil if the Comando Vermelho (CV) and Primeiro Comando da Capital (PCC) criminal groups are classified as foreign terrorist organizations.

The letter was sent on July 1 in response to a request for information from Congressman Evair Melo (Republicans Party). In it, Itamaraty, as Brazil’s Foreign Ministry is known, describes the U.S. move as “unilateral,” says the country was not formally notified of Washington’s intention, and warns that the measure could create an opening for the use of military force.

“The unilateral designation in question could be invoked as justification for extraterritorial actions against Brazilian institutions, particularly in the financial, migration, and criminal spheres. There is also a risk of U.S. military force being used against national territory,” says the text signed by Vieira.

The Brazilian government says it has repeatedly stated that such a designation would bring no concrete benefits to the fight against organized crime. Itamaraty says the measure could have significant consequences both economically and for national sovereignty.

The letter argues that the designation could be used by U.S. authorities to apply unilateral and extraterritorial administrative and judicial measures against Brazilian individuals, companies, or organizations. The Foreign Ministry also stresses that Brazil and the United States already have international cooperation mechanisms considered effective in fighting transnational criminal organizations.

Melo, who filed the request for information, said he considered Itamaraty’s answers “insufficient.” According to the congressman, Vieira did not say whether his assessments of the potential impacts were based on technical opinions, diplomatic notes, specialized studies, or other official documents.

*By Sofia Aguiar, Beatriz Roscoe and Ruan Amorim — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Police suspect mining entrepreneur used Reag funds to hide assets

Investigation says Lucas Kallas may have used fund structures to launder money from alleged mining fraud

 

 

Brazil’s Federal Police suspect that mining entrepreneur Lucas Kallas, who has been indicted for environmental crimes and unauthorized mining, may also have used Reag’s investment fund structure to hide assets and launder money from his alleged fraud in the sector.

It is the first time the Federal Police have raised suspicions involving the use of funds managed by asset manager Reag in connection with the mining industry. According to information obtained by Valor, the investigation is expected to move forward on that front.

Reag was liquidated by Brazil’s Central Bank in January this year after the Federal Police said it was allegedly being used to launder money and hide assets belonging to criminal organizations and Daniel Vorcaro, who was the controlling shareholder of Banco Master.

The suspicion was raised in the Federal Police’s final report on Operation Parcours, which became public over the weekend and indicted Kallas and 16 other people for allegedly taking part in a scheme that illegally exploited a mine in a protected heritage area of Belo Horizonte.

According to investigators, after Kallas entered the business, a plan originally intended to restore the area was improperly used to expand mining activity without authorization, causing losses of R$832 million.

References to Reag

The Federal Police came across references to an investment fund at two different points in the investigation. In the first, investigators identified messages mentioning Reag after obtaining access to the e-mail account of the entrepreneur’s father. The inbox contained a message from an executive at Cedro Mineração, a company owned by Kallas, asking an asset manager to register the entrepreneur’s sister in a Reag fund.

Investigators were struck by the fact that the sister was not included in the e-mail exchange and that most of the assets declared in her registration form came from a company whose CEO is the same Cedro executive who had sent the e-mail.

According to the Federal Police, Kallas’s sister declared assets of R$204 million in the registration form, of which R$200 million referred to a stake in Monte Líbano Participações, whose CEO is a Cedro executive. The form also indicated that more than R$10 million would be invested. “The form also indicated that Francine [Kallas, the entrepreneur’s sister] would be willing to invest more than R$10 million, with the possibility of allocating up to 50% of that amount to Reag itself,” the Federal Police said in the report.

Mining asset dispute

The Federal Police also took testimony from an engineer–whose name was not disclosed– at Flapa, a company in the mining sector that operated at a mine belonging to Kallas’s group and that is at the center of Operation Parcours: the Granja Corumi mine.

In her testimony, she said Flapa was in court disputing two other mineral exploration areas with Kallas’s group and that one of those areas, known as Serra do Lessa, in the municipality of Itabirito, Minas Gerais, had been partially acquired by the Motezuma fund, managed by Reag.

For investigators, these elements indicate the need to expand the probe into the use of Reag’s fund structure by Kallas’s business group and his relatives. In the Parcours report, the Federal Police itself acknowledged that the registration of Kallas’s sister in the Reag fund does not allow it to state, “in isolation, that resources from the Granja Corumi mine were directed to Reag.”

“However, it reinforces the need to deepen the line of investigation into a possible parallel asset structure, use of a straw person, concealment of the ultimate beneficiary and money laundering within the economic group linked to Lucas Prado Kallas, especially given the interest in mining assets,” the report says.

What the parties say

In a statement, Lucas Kallas’s press office said it has full confidence that his innocence will be demonstrated, “because the indictment rehashes old facts that had already been investigated and shelved by the courts.” It also said Cedro has a shareholder structure that is known and declared to all authorities.

“Investment in funds is an ordinary practice in the financial system, using private funds declared to all oversight bodies. In the case of Flapa, there is a commercial dispute between the parties that was taken to court and in which Cedro prevailed at all levels, including higher courts,” the statement said.

Reag said Lucas Kallas “was never a Reag client,” as can be verified on the website of Brazil’s Securities and Exchange Commission (CVM). It also said the Motezuma fund was “administered by Planner and managed by Latache,” the same asset manager to which the entrepreneur’s sister’s registration form was sent.

Reag did not say whether Kallas’s father or sister held stakes in Reag funds. The other people mentioned could not be reached.

*By Mateus Coutinho and Isadora Peron — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Alcoa to buy South32’s alumina and bauxite assets for $4.1bn

Deal spans Australia, South Africa, Brazil, including stakes in MRN, Alumar, with synergies estimated at $900m

 

 

 

Alcoa announced on Tuesday (30) a final agreement to acquire South32’s interests in bauxite, alumina, and aluminum assets for approximately $4.1 billion in a cash-and-stock transaction.

The deal covers operations in Australia, South Africa, and Brazil—including stakes in Mineração Rio do Norte (MRN) and the Alumar industrial complex—as well as a contingent payment of up to $750 million tied to future alumina and aluminum prices.

Alcoa will acquire South32’s interests in the Boddington bauxite mine and Worsley alumina refinery in Western Australia; the Hillside aluminum smelter and Bayside asset in South Africa; and the Mineração Rio do Norte (MRN) bauxite mine and the Alumar complex—comprising an alumina refinery and aluminum smelter—in Brazil. The Mozal operation in Mozambique is not included in the transaction.

Operating in Maranhão state since 1980, Alumar is an industrial complex that includes an alumina refinery, aluminum smelter, port, and environmental reserve. The alumina refinery is owned by a consortium comprising Alcoa (54%), South32 (36%), and Rio Tinto (10%). The aluminum smelter is owned by Alcoa (60%) and South32 (40%).

MRN, Brazil’s largest bauxite producer, is jointly owned by Glencore (44%), South32 (33%), and Rio Tinto (22%).

According to Alcoa, the acquisition is expected to generate approximately $900 million in synergies and immediately improve key financial metrics, including earnings per share and free cash flow.

Alcoa will pay $3.1 billion in cash and issue approximately 17 million new common shares to South32, valued at about $1 billion, bringing the total transaction value to $4.1 billion. The new shares will represent roughly 6% of Alcoa’s outstanding share capital following issuance.

The company has secured financing through a $3.1 billion bridge commitment from Goldman Sachs and plans to replace it with cash on hand and long-term debt before closing.

According to Alcoa, the acquisition will add a portfolio of high-quality, low-cost, globally diversified mining, refining, and smelting assets, further strengthening its integrated “mine-to-metal” platform.

“This is the type of opportunity Alcoa is prepared to execute,” Alcoa CEO William F. Oplinger said in a statement. “These high-quality, globally relevant assets are an excellent fit with our portfolio and align with our strengths as a leading upstream aluminum producer. With our proven operating model and global capabilities, we are well positioned to enhance performance, unlock value, and support the long-term success of these assets within Alcoa.”

The transaction is expected to close in the first half of 2027, subject to approval by South32 shareholders, regulatory clearances, and other customary closing requirements.

*By Victor Meneses, Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Oil drop gives little room for more Selic cuts

Even with crude below policymakers’ forecasts, markets see rates staying high amid fiscal concerns and unanchored expectations

 

 

 

The sharp drop in international oil prices, now hovering near levels seen before the start of the war in Iran, may not translate into much more room for monetary easing. Across the interest-rate market, Monetary Policy Committee (Copom) digital options, and economists’ forecasts at major financial institutions, the prevailing view is that the Selic base rate is unlikely to fall much below 14% this year.

Since mid-May, the link between oil prices and short-term interest rates has weakened. As investors reassess the Selic’s path, other factors have gained weight as potential obstacles to deeper rate cuts: unanchored inflation expectations, still-high services inflation, and a more expansionary fiscal and credit policy backdrop, which has worsened perceptions of risk.

That explains why short-term rates have remained elevated even after oil fell from more than $100 a barrel to $75. Crude is now below the Central Bank’s own assumptions. In its Monetary Policy Report, the bank said it expected oil prices at $85 in the first quarter of 2027.

“The relationship between the yield curve and oil was very strong, and then suddenly it started to break down. The curve shifted higher, and I think that reflects broader concern about the fiscal impulse. The market is very likely pricing in a significant impulse, which should not allow for many more cuts,” said Fernando Gonçalves, head of economic research at Itaú Unibanco. He noted that the monetary authority included consumer stimulus in its balance of risks, which now has an upside asymmetry for inflation.

In an outlook update published in late June, Itaú made a marginal change to its interest-rate forecasts and now expects only one more 25-basis-point cut in the Selic, which would end the year at 14%. “We saw a substantial drop in oil, but Copom itself shifted to a tougher tone on inflation, which suggests very limited room for cuts,” Gonçalves said.

Gonçalves raises another point: the fall in oil helps reverse part of the currency appreciation seen earlier, offsetting some of the disinflationary effect. “When oil prices rose, Brazil’s trade outlook improved, with more foreign currency entering the country, and the exchange rate appreciated. Now, as that move reverses, the expectation is that the trade balance will not be as strong as previously thought, and that pushes the dollar higher. There is some compensation, even if it is not complete.”

In practice, Gonçalves said, “there is less room for rate cuts.”

Limited easing

The Copom digital options market tells a similar story. At Friday (3)’s close, the probability of a 25-basis-point Selic cut in August stood at 72%. But the likelihood that the easing cycle will continue beyond August is far from a consensus, despite the relief from oil prices. The probability of rates being held in September ended the week at 57%.

The decline in oil may lead some market participants to revise their IPCA inflation forecasts, said Santander economist, Marco Antonio Caruso. “This is a debate that is gaining traction and could create a downside bias in the short term. We, for example, lowered our IPCA forecast for the year to 5% from 5.2%, partly because of oil,” he said. Santander expects two more Selic cuts, in August and September, taking the benchmark rate to 13.75% by year-end.

Beyond oil prices, Caruso said, Copom’s latest communications suggest the committee sees monetary policy as already highly restrictive.

“All this engineering around alternative Selic scenarios suggests to me that this is a Central Bank that, in fact, sees the degree of monetary tightening as much greater than the average analyst does. If that is true, there is a cushion. Even using some conservative assumptions, such as worsening [Central Bank’s survey] Focus expectations and exchange-rate deterioration, it is possible to reach the Central Bank’s 3.2% projection for the first quarter of 2028 [released in the Monetary Policy Report] with the Selic at 13.75%,” Caruso said.

Central Bank communication

The monetary authority’s communication since the latest Copom decision continues to draw criticism from market participants, who see an implicit greater concern with activity than with inflation.

“Looking at what is written in the statement, the entire first section is consistent with a rate hike, not a cut. Even so, the Central Bank cuts the Selic… At the end of the day, the justification for the cut was very weak. Looking at the first quarter of 2028 because the model would indicate very abrupt volatility in macroeconomic variables… We are not talking about raising rates, but about keeping them unchanged. It left a very bad impression that, technically, the Central Bank brought elements that argued against cutting rates and still went ahead and cut,” said Marcos De Marchi, chief economist at Oriz Partners.

De Marchi said that, if oil continues to fall, part of the market may see room for the easing cycle to continue in August. “But since the start of the conflict, the government has tried to soften the pass-through from oil to consumers as much as possible. For that reason too, our inflation gain does not seem likely to be that significant, especially compared with what happens in the U.S., where pass-through is almost automatic,” he said.

Oriz still expects the Selic to remain at 14.25%. De Marchi also highlighted the widening “alligator mouth” between oil and short-term rates. “That is because of fiscal issues. There is no way around it.”

De Marchi pointed to recent developments he sees as negative, suggesting there is little room for risk premiums at the short end of the yield curve to ease. In addition to bills moving through Congress that point to higher spending, De Marchi mentioned the Federal Court of Accounts’ validation of public-policy operations outside the budget, which further weakens the Fiscal Responsibility Law, and Rio de Janeiro’s debt renegotiation with the federal government.

“The flow of news on public accounts is very poor. My scenario is still for the Selic at 14.25%, although the chance of one more adjustment has increased because of oil,” he said. “We are in a dilemma: should I base my cycle forecast on what I think needs to be done, or on what the Central Bank indicates it would like to do? I prefer to keep a cautious stance.”

Long-term expectations

At Itaú, Gonçalves does expect some relief in short-term expectations because of oil, but he does not see that spreading to longer horizons. “The impact of oil on 2028 inflation tends to be smaller. When I look at the unanchoring of 2028 expectations, I see Focus trying to assess how credible it is that the Central Bank will reach the target. The fact that there has been a recent increase is a sign that the market sees it as less credible that inflation will get close to the target.”

For Gonçalves, a credibility issue has emerged “and it has to do with the perception of a very expansionary fiscal policy at the moment, which signals that it will be difficult to make the necessary adjustment.”

In that sense, he said, the market has been seeing a more difficult fiscal adjustment, raising the prospect of pressured inflation and a Central Bank struggling to fulfill its mandate. “These expectations will not fall without a fiscal improvement, and that will not happen anytime soon.”

*By Victor Rezende and Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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