Suzano targets new markets of $115bn

Walter Schalka — Foto: Claudio Belli/Valor
Walter Schalka — Foto: Claudio Belli/Valor

Suzano, the largest producer of eucalyptus pulp in the world, plans to enter new markets of $115 billion a year that are likely to grow in tandem with the decarbonization agenda. The company says its transformation project toward the bioeconomy remains firm and cited four fronts: textile, carbon, bio-oil and microfibrillated cellulose.

“We will continue delivering results in the short term. But we have to look to the future, to think on how we will operate to transform the company and the society”, said on Wednesday CEO Walter Schalka.

Some of the new businesses are in the process of becoming operational. The company has already submitted for certification 7,5 million tonnes of carbon equivalent — from a total of 30 million tonnes that can be exploited — and these credits will be traded on the voluntary market, said the director of New Business, Strategy, IT, Digital and Communication of Suzano, Christian Orglmeister.

In addition, the first textile fiber plant from microfibrillated cellulose in partnership with Finland’s Spinnova starts production at the end of the year — this market alone is estimated at $70 billion.

Some of these businesses are on the verge of becoming operational: the company may soon trade 7.5 million tonnes of carbon equivalent in the voluntary market, and the company’s first textile fiber mill in partnership with Finland’s Spinnova will start production at the end of the year.

Marcelo Bacci, Suzano’s chief financial, investor relations and legal officer, said that the reduction of the company’s disbursements to R$1,500 per tonne by 2027, considering investments and production costs, will increase free cash flow generation by R$2.3 billion a year. In 2021, these disbursements totaled R$1.669 per tonne.

The Cerrado project, which foresees the installation of a pulp mill with a production capacity of 2.55 million tonnes per year in Ribas do Rio Pardo (Mato Groso do Sul), will contribute to these gains, since it will have the lowest cash production cost in the world.

The new pulp plant under construction in the interior of São Paulo will bring greater energy efficiency and reduce the pulp cash cost by R$115 per tonne, which means an impact of R$12 per tonne on the company’s cash cost.

“The project will have high energy efficiency, allowing for a 64% growth in energy generation per tonne produced,” said Aires Galhardo, Suzano’s head of pulp operations.

The company currently generates 0.14 megawatt per tonne and will reach 0.23 MW per tonne when the project is operational, as it will generate 0.63 MW per tonne.

The global demand for hardwood pulp will continue to grow over the next few years, driven mainly by the tissue, packaging and specialty paper segments, said Leonardo Grimaldi, the company’s head of commercial pulp, people and management.

The company estimates that the global consumption of hardwood will organically increase by 4.7 million tonnes in the next five years, to 41.1 million tonnes in 2026.

But the prevailing assessment is that this increase can be higher considering two major trends: the replacement of other fibers for hardwood pulp and the migration of plastic to materials from renewable sources, potentially expanding the consumption of the raw material to 43.1 million tonnes in 2026.

On the supply side, considering the projects already unveiled, the expanding capacity including closures and conversions may reach 6.9 million tonnes in the period.

However, supply disruption has occurred more and more frequently and is expected to reduce the additional volume of fiber in the market in the coming years, the executive said. Historically, 700,000 tonnes produced in older mills leave the market each year. This volume reached 2 million tonnes in the 2020-2021 period, he added.

In this scenario, the operation rate of the global industry would be 91% in 2026, compared with 90% in 2021, Mr. Grimaldi said.

Suzano will continue to grow on the tissue paper market and this expansion can be organic, through investments on new projects, or via acquisition, Luís Bueno, the company’s head of consumer goods and corporative relations, said recently.

The executive recalled that there is much room for expanding the demand for tissue in Brazil, given the low per capita consumption index in relation to other markets. Last year, the company operated at 100% capacity in tissue.

Suzano entered this market in 2018 with an initial focus on the North and Northeast regions, where it is already the leader with 66% and 28% shares, respectively. After advancing into the Central-West and Southeast regions, it ended 2021 as the third largest player in this market, with a share of 11.2%.

Source: Valor International

https://valorinternational.globo.com

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Investment plan to bolster Renault in Brazil

Ricardo Gondo — Foto: Silvia Zamboni/Valor
Ricardo Gondo — Foto: Silvia Zamboni/Valor

Renault’s factory in São José dos Pinhais (state of Paraná) stopped 41 days throughout 2021 because of semiconductors shortage. For the same reason, between Monday and Friday the unit’s line work will be interrupted again. To the impossibility of working at full speed, which has become routine in the automotive industry, is added, currently, a strong pressure of costs. Despite the challenging environment, Renault’s global management is about to announce the value of a new investment plan, necessary to develop and produce, in Brazil, a future family of vehicles.

A little less than a month ago, the automaker announced that the Brazilian plant would be prepared to produce a new vehicle platform. This platform will serve as the basis for different new models. It is an important renovation, for several reasons. It is the first major change in platforms for the brand since 2007.

In addition, this new base also bears the signature of the Renault-Nissan-Mitsubishi alliance, which for more than one occasion seemed doomed to failure. The initiative also provides an opportunity for Brazil to be included in the transportation transformation process, since the new platform will also be used to produce electric cars.

The size of the new investment has yet to be defined. But, according to the CEO of Renault Brazil, Ricardo Gondo, the plan is bold. Besides the new platform, it includes a new engine. Therefore, it will require a large amount.

The executive is optimistic about the willingness of the parent company to invest in Brazil. A year ago, the company seemed more hesitant. In March 2021 an investment plan shorter than usual was announced – covering the period between 2021 and 2022 and totaling R$1.1 billion; resources already practically all used in the modernization of products already known.

Despite the plans for an electrification-oriented platform, for Mr. Gondo the production of 100% electric cars in Brazil will still take a long time. “Unlike Europe and the United States, this type of vehicle is still expensive for the Brazilian consumer in general,” he says. The executive recalls that the European consumer also receives tax incentives from governments to exchange the car for an electric model.

Even so, Renault intends to be recognized by the Brazilian public for the electrification of its line. In addition to the two 100% electric models already sold in the country – the Zoe compact model and the Kangoo SUV – next week, the company will introduce the Kwid compact SUV in an electric version. In Brazil, the 100% electric cars are all imported.

The French automaker is also studying the return of the Megàne to Brazil – the name is the same as one of the first models sold by the company in the country, but the Megàne that has just been launched in Europe is different. It has a pickup body and an electric engine.

Despite the high prices of electric cars serving, for now, a niche of the Brazilian market, Renault has plans, in the future, to popularize this type of model through sharing services. The mode is part of Mobilize, a company of the group launched in Brazil in the middle of last year. Sharing and long-term rental are among the new products offered by Mobilize and have helped to increase the company’s revenues.

Renault’s electric vehicles also continue to run on Fernando de Noronha. The project, part of the archipelago’s decarbonization plan, began three years ago. With the delivery of ten more vehicles a few days ago, the electric fleet in Noronha now totals 46 units. In a partnership with Neoenergia, the project includes solar panels for the installation of two clean energy plants.

“Renault was one of the first to enter electric mobility,” says Mr. Gondo, a mechanical engineer who, before taking over the automaker’s command in Brazil three years ago, held different positions in the local operation and also in Europe. According to him, there is no prediction when the supply of components will be resumed. Meanwhile, he says, the brand is working to establish its identity.

Electrification is the group’s global focus. In January, the Renault-Nissan-Mitsubishi alliance announced a $25.8 billion investment program over the next five years focused entirely on electric cars.

Source: Valor International

https://valorinternational.globo.com

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War creates chance for Brazil to integrate into global chains

Lia Valls — Foto: Leo Pinheiro/Valor

The weakening of globalization intensified by the war in Ukraine opens a good chance for Brazil to reduce its economic isolation and connect to global production chains for goods and services. But the opportunity will be lost without opening the economy and comprehensive economic reforms that make Brazil more attractive to international companies.

The thesis that the conflict in Eastern Europe opens a “once-in-a-century opportunity” for Brazil was recently raised by Central Bank President Roberto Campos Neto in an event at public spending watchdog TCU. “Brazil has not inserted itself into global chains,” he said. “Now it has an opportunity with the redivision of global chains.”

For geopolitical reasons, the United States and Western Europe would be interested in reducing their dependence on inputs and products not only from Russia, but also from China. Brazil, at least in theory, could benefit, both because of its geographical proximity and because of shared values, such as democracy. Mr. Campos Neto says that, for this to materialize, the country must be “in the right place, with the right policies.”

Experts told Valor that, in reality, the war is a new chapter in the process of “corrosion of globalization,” as defined by economist Adam Posen, from the Peterson Institute, a Washington-based research organization.

“The deglobalization process is not new,” said Lia Valls, an associate researcher at Fundação Getulio Vargas (Ibre/FGV) and a senior fellow at Cebri, a center for studies on international relations. This trend emerged after the 2008 global financial crisis, which hit the working class in the United States, leading it to question the income inequality caused by globalization.

Since then, there have been several attacks on world economic integration, from Brexit to China’s five-year plan focused on the industry to dominate the high value production chains, from U.S. President Donald Trump’s retaliations against the Asian country to the foreign policy of his successor, Joe Biden, aimed at reindustrializing the U.S.

The pandemic intensified this trend, with the restrictions that several countries imposed on exports of health products and equipment. It also led to disruption in global value chains, such as chips and electronic goods, encouraging companies to rethink supply chains and prioritize secure access to inputs over costs and productivity.

In the war, the problem impacts mostly energy, food and minerals supplied to the world by Russia and Ukraine. But the case raises more general concerns about the risk of disruption in the supply of inputs and final products due to geopolitical risks.

“The U.S. and the European Union will not be the ones to guide the revision of global value chains. These are decisions made by the companies themselves,” said Carlos Pio, a professor of international political economy at the University of Brasília and a former executive-secretary of Brazil’s Foreign Trade Chamber, known as Camex.

In the companies’ decisions about where to produce each input used in the value chain, it matters a lot if the country has an open economy, which reduces costs to move products and capital, and if the business environment in general is competitive. “What the Brazilian government can do to better position the economy as a whole is having a pro-market reform agenda,” Mr. Pio said. He is in favor of a unilateral opening of the economy, since the negotiation of trade agreements with other countries generates slow results and our level of protection is high, according to him.

A criterion widely used to measure the level of integration of an economy into global value chains is the share of imported components in exports of industrial goods. In the case of Brazil, this indicator is at 14%, well below Mexico, with 38.4%, according to data compiled by the World Bank.

In a 2020 report on global value chains, the World Bank highlights some government decisions that have hindered integration into global chains. One is the Inovar-Auto program, put in place during the Rousseff administration, which protected the industry and required a high percentage of local content, causing the industry to stop focusing local production on exports.

But integration into global chains has not made any tangible progress during the Bolsonaro administration despite the pro-market economic view. Economy Minister Paulo Guedes has been criticized for his strategy for trade. He has been publicly arguing for a plan to first give equal competitiveness to companies, with the approval of a tax overhaul, and only then substantially lower import tariffs.

Mr. Pio, who was part of Mr. Guedes’s team until July, believes that the Bolsonaro administration has moved in the direction of trade opening by cutting tariffs, although he considers that this process must be accelerated.

Ms. Valls ponders that Brazil’s disconnection from global value chains, although true, has some nuances. First, Brazil is not outside all chains, but rather of some of the most valuable ones. In the case of food, for example, Brazil has a large footprint. And there are some cases where the country is a major player in a high value chain, she said, citing planemaker Embraer.

Brazil has a greater integration, according to data compiled by the World Bank, as a supplier of inputs for industrial exports from other countries. In this case, the percentage is 17.7%, reflecting the export of basic products used in industrial processes in other economies.

Comparisons of international indicators of participation in production chains can show some distortions. Small countries, such as Chile, have few alternatives other than integrating into trade.

“Our internal market is large, and multinational companies historically come to Brazil to take advantage of it,” Ms. Valls said. The question mark is how to get companies to look beyond the domestic market. The geopolitical environment favorable to the relocation of global value chains is not enough. “If you don’t have the conditions of attractiveness, companies will not come.” This includes commercial issues, such as tariffs trade agreements with other economies, but also factors such as macroeconomic stability, clear and stable rules, infrastructure and quality of human capital.

The Ibre/FGV researcher ponders, on the other hand, that Brazil’s greater connection with global chains is not a panacea, which would bring only gains or solve all development problems. “The discussion over the search for productivity has no end,” she said. “If I want to avoid the so-called middle-income trap, I have to invest in development, human capital.”

It is also necessary to ensure that the gains from globalization are not captured only by companies and, therefore, are also shared with consumers. Another concern is to avoid that, in this process of integration into global chains, standards like the preservation of the environment are loosened.

Source: Valor International

https://valorinternational.globo.com

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Industry offers retailers more money to boost sales

Supermarkets are a battlefield for industries trying to sell — Foto: Maria Isabel Oliveira/Agência O Globo
Foto: Maria Isabel Oliveira/Agência O Globo

The current scenario of fiercer competition between brands, following the drop in consumer disposable income, has made the industry spend more to try to improve its sales. Amounts paid by companies to retail chains, or negotiations involving discounts on invoices, lost strength in the first year of the pandemic, but accelerated again at levels above those of the last five years.

According to a survey conducted by Valor based on the financial statements of eight major chains that publish these figures, over R$2 billion in commercial funds were paid by manufacturers to retailers in 2021, a rise of 11.6% over 2020. For comparison, this expansion rate is more than double the average annual growth of 5.7% seen since 2016.

According to calculations, there was a 3.4% drop in the total amount in 2020 compared to 2019. When the health crisis began two years ago, the payment of emergency aid by the government supported the accelerated demand in consumption, and without the need for companies to support much more aggressive actions, some payments lost strength – a different picture from today.

The information was collected from the footnotes and/or financial reports released by GPA, Assaí, Carrefour (including Atacadão), Americanas, Magazine Luiza, Raia Drogasil and Panvel. Among all the companies, in two there is practically stability (GPA and RD) and in only one, Americanas, there is a drop, of 9.5%, in the amount.

There are companies that do not inform these numbers in their reports, such as Via and Grupo Mateus – the publication is not mandatory, according to Brazilian accounting standards. The industry does not usually inform this data in their earnings reports (Whirlpool, Ambev and M.Dias Branco, for example, do not disclose the information), so the best barometer is the retail market. Adding up all the chains, the expansion in disbursements is in line with the increase in total gross revenue in 2021 (11%).

According to consultants who work with the networks, these negotiations accelerated as of 2021, in a movement that has been extended through 2022, with a focus on increasing sales by commercialized volume. In 2021, much of the increase in revenue came from rising inflation, and not from volume (which even shrank in certain products).

“In the good years, companies take their foot off the gas in terms of funds. That’s not to say that retailers won’t continue to negotiate this with industry, but the commercial stimulus drops. But everything indicates that 2022 will be a year of more bumps, and with retailers feeling more pressure on cash, the need for these agreements on the store side increases,” says Eugenio Foganholo, head of consulting firm Mixxer.

“What happened in 2020 was a disruption of products, with the crisis of the supply chains in the pandemic,” says the chairman of the board of a retailer in São Paulo. “There was a shortage of merchandise, from cell phones to furniture, and no one had to beat a drum to sell. Part of 2021 wasn’t bad either, and that made the funding for actions in TV disappear. But if you look now, there are even wholesalers advertising meat and beer offerings in prime time. And the industry is the one who pays for part of this, under the cooperative advertising agreement.”

These negotiations involve marketing funds (support for campaigns in newspapers, on TVs), or in shelf exposure (who pays more has better space). There are still bonuses associated with industry purchase and customer sales targets, and freight reimbursements. If the chain exceeds the goal, a bonus is paid. And the payment can be made through the reduction of invoices payable to the industry.

Store openings are still part of the negotiations, although they do not involve such significant amounts, through the free delivery of initial batches of products to new stores. Openings receive greater funds than refurbished stores – last year, openings and conversions grew more than in 2020. Between openings and closings, the balance was positive in 204,000 stores, and in 2020 there were 75,000 closings. For 2022, the projection is for a new positive balance.

Among the cases analyzed, Carrefour (whose largest business is Atacadão), Dimed (Panvel) and Assaí lead the increase in payments, with expansion of 32%, 22% and 18%, respectively, in 2021 versus 2020. Carrefour integrated at the time the Makro chain to its store base, absorbing new contracts. The chain and Assaí have resumed openings since 2021.

Consultants also point out two aspects in these negotiations: the pressure that the industry itself faces in its expenses and the effect of high inflation in these trade agreements. Manoel Araujo, head of Martinez de Araujo Consultoria de Varejo, remembers yet another aspect. “I have five brands of a certain product in the store, and I signal that I will look for other cheaper brands in the market. I can still use the store’s own brand, which fits like a glove in these times of crisis. This all ends up entering the daily negotiation of discounts,” he says.

Despite the fact that, strategically, these negotiations are fundamental in the sector. Brazilian accounting rules do not require the disclosure of those numbers in the footnotes or in the earnings reports. And the subject has already been the target of fraud in the sector years ago.

There are chains and industries that only mention in the footnotes the existence of commercial agreements, and others that specify them in the “accounts receivable” or “suppliers” lines. The amount is also credited as a type of credit of the cost of the goods purchased.

Audit reports on chains’s financial statements often cite the bonuses as a “significant” issue that merits exchange of information with management for further clarification but conclude that the handling of the issue in statements is “acceptable”. In 2003, Dutch retailer Royal Ahold admitted that its profits were inflated by $500 million between 2001 and 2002 because of the inclusion of bonuses that never existed.

Source: Valor International

https://valorinternational.globo.com

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Oxiteno sold to Thai group for $1.48bn

Joao Parolin — Foto: Divulgação
Joao Parolin — Foto: Divulgação

The sale of the chemical industry Oxiteno — which belonged to Ultra group — to Indorama — leader in the Brazilian PET resin market — was concluded on Friday for $1.48 billion. This way, Indorama Ventures Public Company Limited (IVL) reached the top of the ranking among the ethylene oxide and surfactants producers in the Americas.

With annual sales of around $15 billion, not considering the most recent acquisition, the Thai company incorporated the company, a reference in innovation in the Brazilian chemical industry, in its integrated oxides and products division (IOD), with a strong portfolio complementarity. The synergies are estimated at $100 million.

Ahead of Oxiteno for the last 15 years, the executive João Parolin assumes the position of CEO of IVL’s IOD business for South America. All the company’s management is being repositioned in the new structure. “Oxiteno has a portfolio more focused on specialties and surfactants and accelerates Indorama’s innovation journey,” the executive told Valor. “It is an opportunity for portfolio enrichment.”

Oxiteno has a relevant presence in the agribusiness, personal and home care, paints and varnishes and oil and gas markets and operates 11 plants — 7 in South America and 4 in North America. The deal adds a new geography for the Thai group’s IOD division, which was already in North America, with ethylene oxide and surfactant production in the United States, but did not yet have operations in South America.

In Mr. Parolin’s evaluation, the incorporation by Indorama will strengthen Oxiteno, put up for sale by Ultrapar after reviewing its portfolio of assets. “It was a good solution”, he said. The Ultra group, which is also leaving pharmaceutical retail with the sale of Extrafarma to Pague Menos, plans to focus on power and infrastructure, keeping under its umbrella the fuel distributor Ipiranga, Ultracargo (storage of bulk liquids) and Ultragaz, distributor of liquefied petroleum gas (LPG).

Last year, Oxiteno traded 779,000 tonnes of specialty chemicals and commodities, up 3% compared to 2020. Net revenue jumped 36%, to R$7.1 billion, and Ebitda reached R$1.1 billion, the highest in its history.

According to Dilip Kumar Agarwal, CEO of IVL, the acquisition is in line with the group’s ongoing goal of doubling Ebitda every five years. “Based on our experience of completing about 50 acquisitions in 20 years, the quality of Oxiteno’s people and our shared values were important considerations,” he said in a statement. The group has three major business divisions: PET, polyester fibers and textiles, and IOD.

The transaction implies EV/Ebitda multiple of 6.3 times, considering the results for 2021. Indorama paid $1.33 billion to Ultra on Friday and another $150 million in April 2024. The final price exceeds the initially agreed total amount of $1.3 billion but is still subject to adjustments.

Source: Valor International

https://valorinternational.globo.com

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Port privatization gains steam, but time is short

A container ship docked in Santos, Brazil’s largest port: privatization is complex — Foto: Ana Paula Paiva/Valor

The successful auction of the Companhia Docas do Espírito Santo (Codesa) may boost the other port privatization projects underway. However, market players are skeptical about the feasibility of getting them off the ground by 2022, especially the privatization of the Port of Santos — a much more complex project from a technical and political point of view.

The concessions for the ports of São Sebastião (São Paulo) and Itajaí (Santa Catarina) are smaller and simpler. That is why holding these auctions this year is seen as more likely, although there are also challenges.

The privatization of Santos is a priority for the federal government. The public consultation stage of the project ended last week, and the government plans to publish the public notice in November in order to hold the auction later this year. Any contract would be signed next year.

The auction model will be similar to that of Codesa. Santos Port Authority (SPA) will be privatized, and the administration of the port will be granted for a period of 35 years — R$1.4 billion will be spent on construction and R$14.16 billion on maintenance, mainly dredging. In addition, the winner will have to allocate R$3 billion to make the Santos-Guarujá underwater tunnel feasible — its construction and operation will be tendered separately.

The project has been the target of much interest from the private sector, but the perception of risk is also high. “There are many groups studying it, but it will be important that the government gives a reasonable time for the companies to study the final tender, because there are many risks involved. It is a complex port, which encompasses multiple interests, has many terminal contracts in effect, and the auction will have heavy investment obligations,” said Rodrigo Paiva, a partner at consultancy Mind-Infra.

For Thiago Miller, a partner at law firm RMM Advogados, “it is very unlikely” that the auction will take place this year. “The big determining factor of the schedule will be the analysis of the [public spending watchdog] TCU,” he said.

The disbelief about the viability of bidding for the port on time is shared by at least three other sources that follow the matter closely.

The government, however, guarantees that there is enough time to hold the auction in 2022. Fábio Abrahão, the head of Concessions and Privatizations of the Brazilian Development Bank (BNDES), said that the team will seek to hasten the project as much as possible to try and sign the contract this year — in the market, the evaluation is that leaving the act for 2023, in the next administration, creates an additional risk to the conclusion of the process.

“Privatization today is different from what it was in the 1990s. We no longer have that resistance from the population. In Santos, there are multi-billion investment obligations foreseen, the entire productive sector is convinced that it is necessary, and the companies have already understood the rules of protection [to current contracts]. It would be an uneconomical decision [not to hold the auction],” Mr. Abrahão, who oversees the structuring of the project, said.

The Codesa auction was the first privatization of a port authority in the country. The Brazilian port sector is already used to private or leased terminals, but the port authorities — responsible for the management and development of the common areas of the ports – are still state-owned and, historically, have been the target of partisan nominations and political interference.

Besides Codesa and Santos, the federal government has structured a portfolio of projects in the segment. “We are creating a new market,” Mr. Abrahão said.

The projects for the ports of São Sebastião and Itajaí, also planned for this year, follow a different model: there will be no privatization, only the concession of the ports. In addition, the new operator will have the right to explore not only the common structure, but also terminals — in the case of Codesa and Santos, on the contrary, there are restrictions on the participation of terminals in the auction, to avoid conflicts of interest.

The format was chosen because they are small ports with specific vocation and, therefore, there would be no feasibility for a concession only of the common areas.

Today, the port of São Sebastião basically handles soda ash, an input imported by the glass and soap industries, and is home to a Petrobras private terminal.

Considered challenging from an economic point of view, the project does not foresee minimum investments. The idea is that the new operator, once it takes over, has the freedom to choose the interventions. “The expected revenue is lower, but so are the expenses. There is less profitability and fewer problems, unlike Santos. It can attract niche markets,” Mr. Schwind said.

For Mr. Miller, there are two major challenges for the expansion of the operation in São Sebastião. The first is the need to build a second pier, further out to sea, to obtain more depth. The second is the lack of a land access to the port, something that will depend on the state.

The Port of Itajaí is geared towards container handling. The plan is to attract large shipping groups from the sector. However, it is also a complex project, with a high volume of investment (R$2.8 billion) and operational challenges. “It would be important to mitigate some very big risks in the public notice. Among the obligations, there is expropriation and purchase of private areas, which are not simple. For a private-sector group, it is a very difficult risk to assess,” Mr. Paiva said. Even so, he believes that the auction can be successful.

The Brazilian Development Bank has already started studies for the privatization of the Companhia das Docas do Estado da Bahia (Codeba), which is likely to follow a model similar to that of Santos and Codesa, but the process is just beginning. Besides this, the bank is negotiating to expand its portfolio, with projects that would be left for the next administration. “In the very short term it is estimated that other ports will enter. It would be natural to have Rio de Janeiro, and Pará would also be a good candidate to join the program,” Mr. Abrahão said.

Source: Valor International

https://valorinternational.globo.com

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Central Bank increases fourfold renminbi share in FX reserves

Brazilian Central Bank increased the renminbi share in its foreign exchange reserves — Foto: Tomohiro Ohsumi/Bloomberg
Brazilian Central Bank increased the renminbi share in its foreign exchange reserves — Foto: Tomohiro Ohsumi/Bloomberg

Faced with rising inflationary pressure and monetary tightening in major economies, the Brazilian Central Bank increased the renminbi share in its foreign exchange reserves to 4.99% in 2021, the highest since the Chinese currency became part of the basket in 2019.

The share is four times higher than the previous year’s allocation, of 1.21%. The increase represented, in nominal terms, $13.766 billion more in assets measured in renminbi. At the same time, the representation of the U.S. dollar fell 5.69 percentage points over 2020 and stood at 80.34% in the period, the lowest since 2014. The drop is equivalent to $15.276 billion.

The share of the euro dropped as well, to 5.04% in 2021 from 7.85% in 2020, a reduction of $9.691 billion. The Central Bank did not elaborate on why it decided to reduce investments in the greenback. Yet, with high inflation and the prospect of interest rates being raised by the U.S. Federal Reserve, the prices of the main asset in the reserves (U.S. Treasury bonds) are likely to fall. In addition, inflationary pressure has also risen in the euro zone, generating the same effect on European securities.

There is even greater incentive to invest in renminbi after the United States blocked Russian investments in dollars. As a result, some economists argue that the Chinese currency is likely to gain prominence in the countries’ forex reserves.

In the report, however, the Brazilian Central Bank refers only to the profitability of currencies. According to the monetary authority, assets in renminbi have higher yields than those in dollars, although they have the same risk as the total curve of U.S. securities.

The Central Bank has also increased the share invested in sterling, to 3.47% in 2021 from 2.02% in 2020, as the United Kingdom is further ahead in the process of monetary tightening. The position in gold, another typical hedge against inflation, increased to 2.25% from 1.19%.

The monetary authority has also resumed investments in Canadian and Australian dollars in 2021. These investments were reduced to zero a few years ago because these currencies have a high correlation with the real, since they are from commodity-producing countries and have also been used by investors as a protection against inflationary risks.

Source: Valor International

https://valorinternational.globo.com

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Investors who hold on to risky assets are rewarded

Angel Investor - ThirdBrainFx

The Brazil of interest rates at double-digit levels produced a first quarter of good results for investors. It was good for those who stayed with the safety of fixed income and even better for those who were encouraged to shoulder the stock market risk and bet on more volatile classes, such as multimarket and stock funds.

The Ibovespa, the main barometer of the local variable income market, appreciated by almost 15%, boosted by foreign capital. The flow of new money also led to an appreciation of the real against the dollar and those who had funds in hard currencies saw this portion of their portfolio shrink.

The Russia-Ukraine war, new cases of Covid-19 in China with shutdown policies in Shanghai, adjustment of the American monetary policy and elections in Brazil in the second half are all risk factors, but when you look at the picture of this early 2022 it doesn’t even seem as if that movie is subject to twists and turns in its story. Inflation both locally and in the U.S. continues to be a source of concern.

“It is difficult to argue against capital flow,” says a financial market adage, and it is a fact that it is the international capital that has been guiding the appreciation of Brazilian assets. In dollar terms, the Ibovespa gained almost 35% this year.

Foreign investors have already bought net R$89.6 billion in stocks in the spot market by March 29, while individuals have withdrawn R$25.4 billion. Local institutional investors withdrew more R$71.2 billion, according to B3. In this group are asset management companies, who had to sell assets to cope with the requests for redemption of shareholders. In the year to the 28th, stock and hedge funds saw withdrawals of R$72.7 billion, according to the Brazilian Financial and Capital Markets Association (Anbima). On the other hand, fixed-income portfolios attracted R$128.2 billion.

But it is precisely in periods of greater aversion to loss — when the investor goes to fixed income massively — that may be the best time to compose the portfolio with higher risk assets, according to Fernando Lovisotto, chief investment officer of Vinci Partners. He sees in this beginning of 2022 a scenario similar to 2016, with recovery in commodity prices pushing exports and Brazil benefiting from the foreign flow.

With the rapid adjustment of monetary policy and the cycle of interest rate hikes now nearing an end, “the correlation of commodities to the real is back in place, it is something that had been lost between 2020 and 2021,” Mr. Lovisotto said.

He suggests rebalancing the portfolio, increasing the proportion of assets that have fallen, to the structural level. “I think it’s good the opportunity level for the return level.” He expects foreign inflows to be long-lived, as the number of investable emerging countries has been reduced with the Russia-Ukraine conflict and there are question marks regarding China and India. “But there is volatility, [the investor] will go through some turbulent moments along the way: there’s an election and we don’t know the outcome of the war.”

The specialist sees potential for virtually all local classes, among strategies linked to real and nominal interest rates, shares and multimarket funds, which again had a good performance in the first quarter. For Mr. Lovisotto, this is a window that extends for 24 months. “The managers are gaining, in general, with positions in rising U.S. interest rates, in local interest rates, in the stock market, and in the currency,” he says. He thinks there is still a lot of premium along the maturities of government bonds and futures contracts, with real interest rates of up to 7%, which has also drawn the attention of foreign capital.

In the stock market, if at first the flow has favored raw material producers’ stocks, it is expected that with the end of the high interest rate cycle the stocks linked to the domestic cycle will perform well, adds Mr. Lovisotto. March may have already been an indication of this movement, with the “small caps” index rising almost 9.5%.

As for the portion of the portfolio linked to international assets, the indication of the Vinci executive is not to increase what the investor has today, just to maintain the portion that fulfills the role in the diversification of currencies and geographies.

With new inflationary shocks resulting from the war between Russia and Ukraine and the scenario of monetary tightening in developed economies, Rodrigo Eboli, an asset manager at Brainvest, says that the most prudent thing to do is to maintain a well-diversified portfolio without running major risks. As much as local assets have performed well throughout the first quarter, Brazil has not had great improvements in terms of fundamentals since December.

“There are elections ahead, which are far from being defined, the doubt about what fiscal policy the next administration will put in place, but as prices were very depressed, with exchange rates, interest rates, and the stock market already reflecting a high degree of pessimism, there was this recovery,” Mr. Eboli said. He cites that real interest rates at 5%, 6% are inviting to any investor when compared to developed economies, which are in the process of monetary adjustment at a later stage than some emerging countries. The foreigners who were outside the risk entered quickly, but he thinks that this is a more opportunistic capital, which does not commit to the long term.

At Brainvest, the manager says that the investors’ portfolio is more defensive. In fixed income, the company had already shortened the allocation in fixed-rate and inflation-linked securities for the 2023 maturities. The floating-rate securities, already yielding 10% a year, help the portfolio not to suffer sudden oscillations in the short term, and with this mix it was possible to preserve the exposure to variable income and hedge funds.

“We still think this is a challenging year, we need to take risks, but we won’t have a full pot,” says Mr. Eboli. “The main lesson of the first quarter was the importance of not being contaminated by excessive pessimism, like at the end of last year, when market prices reflected this. Those who were resilient didn’t change their portfolio and are now reaping the rewards.”

Despite the more favorable exchange rate for international diversification, he says investors have to consider the interest rates at 12.75%, the level the Selic, Brazil’s benchmark interest rate, is expected to reach. “The opportunity cost has increased and it’s not easy out there. With the Fed raising interest rates — and no one knows the terminal rate — and stock market prices at ten-year highs, you have to think.” For those who have nothing overseas, it makes sense to set up an offshore allocation plan.

Given the set of uncertainties, with oil shock and geopolitical confusion, the election in Brazil seems to have taken on a supporting role, said Renato Junqueira, managing partner at Gap Asset Management. “The market may price one thing or another. It is not expected to change much until the second half of the year. Prices will be more subject to the global scenario.”

Source: Valor International

https://valorinternational.globo.com

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Economy Brazil unemployment at 11.2% in February

Desemprego elevado é um dos maiores desafios do Brasil após crise sanitária

The unemployment rate in Brazil reached 11.2 percent in the mobile quarter encompassing December 2021 through February this year. The index is lower than in the quarter ended in November (11.6%) and in the one ended in February last year (14.6%).

The figures can be found in the Continuous PNAD (National Household Sample Survey), released today (Mar. 31) by the Brazil’s official statistics agency IBGE.

The jobless also declined in number to 12 million in the quarter ended in February, down 3.1 percent from the previous quarter (ended in November), or 389 thousand fewer people. Compared to the same quarter last year (ended in February 2021), the drop was 19.5 percent, 2.9 million fewer people.

The employed population (95.2 million) remained stable from the previous quarter, but rose 9.1 percent against the same quarter last year.

Source: Agência Brasil

https://agenciabrasil.ebc.com.br/en

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States spent less on security during pandemic

Ursula Dias Peres — Foto: Silvia Zamboni/Valor
Ursula Dias Peres — Foto: Silvia Zamboni/Valor

Unlike health and education, states’ total spending on public security in 2021 was below that seen before the pandemic period. Spending on public security, considering the 26 states and the Federal District, was 3.4% lower than in 2019, despite the favorable situation for revenues in the last two years. In addition to fueling demonstrations that are still taking place in some states to use up the last days of the deadline for adjustments above inflation in an election year, the situation also shows, according to experts, the need for a new model of organization and financing of public security.

In Minas Gerais, the Legislative Assembly approved on Tuesday a 24% adjustment for public security. Also on Tuesday, the government of São Paulo raised salaries of civil servants in public security by 20%. In Rio Grande do Sul, the police will hold a new demonstration on Thursday to ask for salary adjustment for inflation of the last three years. According to the Superior Electoral Court (TSE), due to the elections, raises above inflation to public servants can be granted this year only until April 5.

The drop in spending on public security compared with health and education. The health crisis naturally increased health expenditures, which ended 2021 with a real increase of 15.9% compared to 2019. Spending in this field exceeded the 10.8% growth in current net revenue in the same period. Expenditure on education grew at a slower rate than revenue, but ended last year with a 7.1% increase compared to the pre-pandemic period.

The data collected by the Solidarity Research Network consider the expenses committed to public security reported by states. The 2019 and 2020 values were updated by the IPCA, Brazil’s benchmark inflation index. Expenses consider costs, payroll and investments. States represent about 80% of public sector expenditure on public security.

The real drop in expenses with public security in 2021 compared to 2019 occurred in 14 of the 27 federative entities, according to the data collected by the Network. For Ursula Dias Peres, a researcher at the Center of Metropolis Studies of the University of São Paulo (CEM/USP) and the Solidarity Research Network, the decline in security expenses in the total of the states is not large, but relevant because salary adjustments are restricted since 2020 and, in view of the increase in state revenues last year, the situation favored pressure from servants this year.

The higher collection of sales tax ICMS last year was not anticipated and led to an adjustment of spending by the states during the year, the researcher said. At the same time, Complementary Law 173 of 2020, which restricted salary adjustments, was in force until the end of 2021.

“This has heavily affected fields more dependent on human capital, such as public security, civil and military police and fire departments,” Ms. Peres said. She recalled that, in general, it was not necessary to cut programs, since the effect of the lack of adjustments naturally led to a reduction in expenses. She considers that there is heterogeneity between the states. There is no standard governance model, which results in different payroll weights for expenditures.

The good financial situation of the states did not go unnoticed by security civil servants. Cláudio Wohlfahrt, financial director of Ugeirm, a union of police clerks, inspectors and investigators in Rio Grande do Sul, says that the state’s GDP grew 10.4% in 2021, more than double the federal rate of 4.6%, and that the collection last year exceeded the budget forecast.

“The government’s coffer is full,” he said. The claim of security civil servants, who organized a strike on Tuesday and are expected to demonstrate again on Thursday, is to ask for adjustments that have not been made since 2019, says Mr. Wohlfahrt.

In a note, the Finance Department of Rio Grande do Sul says that, in recent years, it had no margin to guarantee any adjustment to civil servants, having delayed salaries for 57 months. Only in 2020, with reforms and adjustment measures, it was possible to catch up on salaries. The fiscal situation has improved, the government said, but the only issue that can currently be discussed is a general revision. The Rio Grande do Sul government announced that it will send to the Legislative Assembly a proposal for a general 6% adjustment for public servants, with an annual impact of R$1.5 billion.

What is not yet known, says Ms. Peres, is how ICMS will behave this year. Last year, revenue from the main tax collected by the states increased, partly due to the recovery of the economy and also driven by inflation and fuel prices. This year, she recalls, there are already changes in the tax levied on fuel. And any adjustment given in an election year for public security will be permanent.

Ms. Peres explains that, unlike health and education, security does not have a minimum constitutional allocation that obliges states to spend according to the level of revenue growth. In addition to the issue of destination, there are also important differences with other public services. Health, for example, says Ms. Peres, in addition to having been more impacted by the nature of the Covid-19 health crisis, in some states it is also operated largely by third parties, through social organizations, which makes spending less subject to restrictions on salary adjustments.

For sociologist Samira Bueno, executive director of the Brazilian Forum on Public Security (FBSP), an NGO that collects and monitors data in this field, one of the great challenges for associations that represent security civil servants is to claim salary adjustments at a time when indicators show a reduction in crime rates. According to the Violence Monitor, a partnership between FBSP and news outlet G1, there were 41,100 murders in 2021 in the country, down 7% from the previous year and the lowest number since 2007.

Source: Valor International

https://valorinternational.globo.com

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