House passes bill establishing compensation for payroll-tax cut

Bill that makes it possible to continue exempting 17 labor-intensive sectors and municipalities from paying taxes is now on its way to presidential assent

09/12/2024

The Lower House passed the bill with the support of 253 legislators, while 67 voted against
The Lower House passed the bill with the support of 253 legislators, while 67 voted against — Foto: Brenno Carvalho/Agência O Globo

Despite passing the main text and rejecting amendments, the Lower House adjourned early Thursday without fully approving a bill that ensures the continuation of payroll tax exemptions for 17 labor-intensive sectors and municipalities while establishing compensation mechanisms for the measure. The proposal also includes a gradual reintroduction of taxes for these sectors and municipalities starting in 2025. The low quorum was a key factor in the session’s adjournment.

A new session has been scheduled for this Thursday to consider an agreed-upon amendment to address the Central Bank’s concerns and finalize the text. The bill will be sent to President Lula for approval after these steps.

The main text was passed late Wednesday with the support of 253 legislators, while 67 voted against and there were four abstentions.

The review of the text began on Wednesday night, which was the deadline set by the Supreme Court for the government and Congress to formalize an agreement to maintain the payroll tax-cut program.

Negotiations

Hours before the vote, a meeting between Finance Minister Fernando Haddad, House Speaker Arthur Lira, and party leaders sealed the agreement that allowed for the bill’s consideration.

It was decided that forgotten funds in financial institutions—approximately R$8.6 billion—would have only an accounting effect and would not be included in the calculation of the primary result.

This agreement was made to address the Central Bank’s concerns, which had sent a note to lawmakers the day before expressing worries about incorporating these funds as part of the compensation for the federal revenue loss. According to the Central Bank, such incorporation would not align with its statistical methodology and would contradict guidelines from the public spending watchdog TCU and recent Supreme Court rulings.

The opposition attempted to obstruct the session, but motions to delay the vote were rejected by the majority of lawmakers.

Before the vote, Vivien Suruagy, president of the National Federation of Call Centers, Installation and Maintenance of Telecommunications Network Infrastructure (FENINFRA), expressed concern that the issue might not be resolved within the Suprem Court’s deadline.

“Congress needs to put an end to the legal uncertainty we’ve been dealing with since the government vetoed the tax cut,” she said in a statement.

In a last-minute change, congressman Any Ortiz relinquished her role as rapporteur, which was then assigned to the government’s leader in the House, José Guimarães.

“For about a month, I’ve been urging for this matter to be brought to a vote. Everyone knows the content of this matter. It came to the House days ago and only today was the rapporteur appointed. I warned that the deadline was approaching,” Mr. Guimarães said.

In April, Justice Cristiano Zanin initially suspended the tax exemption, which would have immediately reinstated the tax on the affected sectors. However, a few days later, he issued a new ruling granting 60 days to find compensation sources for the measure—a decision confirmed by the full court. The deadline was later extended until Wednesday.

As the vote extended into early Thursday, the Federal Attorney General’s Office (AGU) requested that the Supreme Court grant an additional three business days for President Lula to sign the bill. “As today is the deadline for the decision’s prospective effect granted by this Supreme Court, it is necessary to grant an exceptional extension of three business days solely to complete the legislative process in its final stage of presidential approval or veto. Therefore, we respectfully request an extension of the suspension period and the prospective effects of the decision for an additional exceptional three business days, solely to finalize the legislative process as regulated by Article 66 of the Constitution (approval/veto),” the request said.

Current Situation

Currently, the payroll tax-cut model allows for the payment of rates ranging from 1% to 4.5% on gross revenue. This tax substitution model is more suitable for labor-intensive sectors. Together, the 17 exempted economic sectors generate around 9 million jobs.

Under the bill proposed by the economic team after an agreement with the National Congress, the payroll tax will gradually return starting next year. It will be 5% in 2025, 10% in 2026, 15% in 2027, and 20% in 2028.

The payroll-tax cut model for economic sectors was introduced in 2011 to stimulate job creation. Since then, it has been extended several times. Last year, Congress extended the measure until the end of 2027. Additionally, it allowed municipalities with populations under 156,000 to reduce their social security contributions to 8% from 20%.

The text was vetoed by President Lula, but Congress overrode the veto, leading to the series of events that reached the Supreme Court.

*Por Marcelo Ribeiro, Raphael Di Cunto, Valor — Brasília

Source: Valor International

https://valorinternational.globo.com/
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BlackRock-backed firm secures R$400m for solar power generation

First R$200m already withdrawn by the company

09/12/2024

Ty Eldridge — Foto: Rogerio Vieira/Valor

Ty Eldridge — Foto: Rogerio Vieira/Valor

Brasol, a renewable energy company primarily funded by BlackRock and Siemens, has announced its first issuance of simple debentures, amounting to R$400 million, to finance its growth plan through the construction or acquisition of new solar plants in the distributed generation segment.

CEO Ty Eldridge told Valor the focus is on infrastructure projects up to R$25 million targeting larger consumers such as industrial clients, telecommunications, and sanitation services. Bradesco BBI advised Brasol on the operation.

“The funds will be crucial for the development of strategic assets and new projects. This is also the reason for diversifying our solutions, as solar energy alone will not meet all of our clients’ needs. Hence, we are exploring battery storage solutions,” Mr. Eldridge added.

Despite the presence of numerous companies in Brazil’s distributed generation sector, the market is consolidating around a few key players acquiring projects, such as Brookfield, Origo, Matrix, and Patria.

At the end of 2023, BlackRock acquired a 45% stake in Brasol. With this investment, the plan is to allocate a significant portion of the capital for acquisitions, aiming for approximately R$1 billion in investments in the company. Brasol’s chief investment officer, Carlos Eduardo de Lima Bacha, noted that with BlackRock’s capital and other partners, along with the debenture issuance, the company now has the necessary funds to pursue these projects.

“We went to the market with a public operation and raised funds for Brasol, giving us discretion in allocating the money for future projects,” Mr. Bacha said. “Part of the funds will be used for purchasing equipment and constructing plants, as well as for consolidation through M&As [mergers and acquisitions],” he added.

The company currently has around 150 megawatt-peak (MWp) distributed across 22 states and aims to reach approximately 500 MWp of installed capacity by the end of 2025. The strategy involves utilizing Brasol’s equity, shareholder contributions, and other financial structures. The first R$200 million has already been withdrawn and is available for upcoming opportunities.

Recently, the company finalized an agreement to acquire solar farms from energy trader BC Energia. Initially, this partnership will involve controlling 13 projects with a generation capacity of 60 MW, requiring investments of R$250 million. The plan is to acquire 35 solar plants, demanding investments of R$800 million, as reported by Pipeline, Valor’s business news website.

This financial arrangement is not unprecedented. Raízen sold 31 solar projects to Élis Energia, a company controlled by Pátria Investimentos. Brookfield injected R$1.2 billion to establish a 300 MWp generation park through its subsidiary IVI Energia, with an undisclosed amount, and continues with the construction of future plants. Additionally, Origo Energia, backed by I Squared, raised R$600 million to finance the construction of around 150 small solar plants in 11 states.

Camila Ramos, CEO of Clean Energy Latin America (CELA), a consultancy specializing in the renewable energy sector, noted that remote generation projects have been using several financial instruments, including equity from investors, commercial and development bank financing, as well as capital market instruments such as Real Estate Receivable Certificates (CRIs) and credit rights investment funds (FIDC), simple debentures, and more recently, incentivized debentures.

“According to Cela’s annual survey of financing volumes for distributed generation in Brazil, this volume fell for the first time in 2023. However, in 2024, the financing market rebounded and is expected to show higher volumes than the previous year,” Mr. Ramos said.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Industry ramps up deliveries but drought may drive up prices

Planning has improved, but freight costs have tripled and product shortages remain a concern

09/11/2024

If drought in the Amazon region worsens and freight costs continue to rise, consumers may see higher prices in stores — Foto: Ricardo Stuckert/PR/Divulgação

If drought in the Amazon region worsens and freight costs continue to rise, consumers may see higher prices in stores — Foto: Ricardo Stuckert/PR/Divulgação

Improved planning by the industry and retail sectors for this year’s dry season in Manaus, compared to last year, may initially reduce the risk of shortages in manufacturing inputs and consumer products.

However, if the drought worsens and freight costs remain high, consumers could face higher prices in stores and an increased likelihood of product shortages during the holiday season.

During the 2023 dry season, the Amazon region’s four largest maritime and river cargo transport operators charged between $900 and $2,000 per container, depending on the company and volume. This so-called “dry season surcharge” is an established practice in the sector, negotiated annually when drought conditions hit. As of August 1, Valor has learned that the rates have jumped to between $3,000 and $5,900, effectively tripling within a year.

Industry associations, business leaders, and unions report that the warning of a more severe drought this year prompted manufacturers, especially of motorcycles, TVs, and air conditioners, to secure advance sale contracts with retailers. This move came despite higher distribution costs in the third quarter.

However, this strategy has its financial and structural limitations, which could create bottlenecks for consumers. Valor has learned that major retailers Magazine Luiza and Casas Bahia have expedited the delivery of televisions from the Manaus Free Trade Zone to ensure supply.

“We don’t foresee major complications for Black Friday sales since part of the deliveries has been advanced, and we have better distribution alternatives compared to a year ago. For Christmas, however, the situation is uncertain, and there could be impacts on both prices and supply,” said José Jorge do Nascimento Júnior, president of Eletros, an association of durable goods manufacturers. Black Friday falls on November 29.

“It all depends on the severity and duration of the drought, which started earlier this year than in 2023, potentially affecting distribution despite having more port options in the region,” he added.

The main alternative involves two temporary floating ports in Itacoatiara, located 170 kilometers from Manaus on the Amazon River, which received approval from the Federal Revenue Service to operate as of August. These private piers, operated by the Chibatão Group and Super Terminais, can accommodate large vessels comfortably.

Earlier this week, the first test at the Chibatão pier was expected. Products are unloaded from ships onto barges that can navigate the drier sections of the region’s rivers. Companies can lease pier areas for receiving inputs and dispatching orders from the Free Trade Zone.

Luis Fernando Resano, executive director of the Brazilian Association of Shipowners and Short-Sea Shipping (ABAC), said another option is to traverse the region between Pará and Manaus. However, completing the route on barges from Vila do Conde (Pará) to Manaus (Amazonas) could add up to 10 days to transit times due to the drought.

The issue is that freight costs in Manaus have skyrocketed. Augusto César Rocha, logistics coordinator at the Amazonas Industry Center (CIEAM), note that almost all year-end production is practically sold but not fully delivered.

“According to the rate schedules I accessed, the average freight cost per container has risen to $3,100 from $900,” he said. Leading operators in the sector include MSC and Maersk.

“We had better planning, especially from the private sector, as government actions have been limited since the 2023 drought. Last year, we managed through improvisation. This year, the industry has built up stock and partially passed it on to retail. But the dry season surcharge has risen sharply,” said Mr. Rocha.

He expects these costs to be gradually absorbed throughout the year by both industries and retailers but said that short-term profitability could be affected if costs are not passed on.

Despite the current surge in demand for TVs and air conditioners from the Manaus Free Trade Zone, Eletros does not believe this can be fully absorbed due to compressed profit margins since the pandemic and the lingering effects of high interest rates post-2021.

“We’re experiencing a very strong summer, with white goods sales up 18% in the semester and water cooler sales soaring 120%, along with significant increases in filters and beer coolers. However, we’ve faced currency pressures and interest rates are expected to rise again,” said Mr. Nascimento of Eletros.

Advance delivery agreements between Free Trade Zone industrial companies and retailers in the Southeast and South have involved lead times of a few weeks, sources say. Electronic manufacturers expedited imports of inputs and production schedules by three to four weeks this year, according to an early-week survey by ABINEE, the electrical industry association.

“This year we saw distributors [of components] bringing forward their purchases by several weeks, moving them to August and September,” said Rogério Nunes, head of the Brazilian Semiconductor Industry Association (ABISEMI).

Air transport, though more expensive than river transport, is another alternative adopted by the sector and is already a common part of logistics for electronic components manufacturers. “Given that these products take up little space and are extremely sensitive, air transport is typically used in this sector,” Mr. Nunes said.

To ensure advance deliveries to retail without disrupting the financial cycle of the chains, which would lead to premature cash outflows, a prior agreement was reached between parties. Otherwise, if a company advances purchases and pays for them well before the sales period, it increases inventory and raises its working capital needs amid a costly market environment.

“There has been a significant advance in TV deliveries by Asian brands because it’s a product with strong demand today. So, suppliers have built up advance stocks with us but without invoicing in advance to avoid immediate cash outflows,” said the general director of a major electronics retailer.

Valor has learned that one of Brazil’s largest electronics chains decided to import air conditioner batches from China to avoid missing summer sales.

In late August, Sergei Epof, Panasonic’s vice president in Brazil, said the group preemptively moved products before river water levels dropped in the North. “This way, we aim to avoid last year’s problem, when we were caught off guard,” he said.

Even with the anticipated impacts of the drought, not all effects can be mitigated, and there are risks to the supply, said Alexandre Ostrowiecki, CEO of the Multi Group.

According to him, although Multi has implemented preventive measures, this situation will inevitably lead to increased logistics costs “and could result in product shortages in the market throughout the second half of 2024,” he told Valor.

“We are working hard to minimize impacts, but the reality is that this is an unprecedented challenge for the entire supply chain,” he added.

*Por Adriana Mattos, Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Inflation might ease some pressure on Central Bank

Despite deflation, consumer price index also delivered some bad news for the country’s monetary policy

09/11/2024

Central Bank’s building in Brasília — Foto: Cristiano Mariz/Agência O Globo

Central Bank’s building in Brasília — Foto: Cristiano Mariz/Agência O Globo

In August, inflation posted its first decline of the year, moving away from the upper end of Brazil’s Central Bank target and potentially easing some pressure on the upcoming Selic policy rate hikes that the Monetary Policy Committee (COPOM) is expected to implement next week. Nevertheless, the outlook for guiding the Central Bank’s policy rate remains challenging.

According to the Brazilian Institute of Geography and Statistics (IBGE), Brazil’s official inflation rate (Broad Consumer Price Index, or IPCA) fell by 0.02% in August. This marks the first decline in nearly two years and came in below both market expectations (a 0.01% increase, according to Valor Data) and the Central Bank’s forecast (a 0.07% gain, as per the latest Inflation Report). More significantly, the 12-month rate dropped from 4.5%—at the upper limit of the target—to 4.24% between August and September. Following the release, future interest rates fell, with traders now expecting a lower chance of a 50-basis-point increase and a higher probability of a 25-basis-point hike in the Selic rate next week.

One bright spot was the slight decrease in the average of the five core inflation indicators tracked by the Central Bank, which fell from 3.83% to 3.8%, according to MCM Consultores. Core measures exclude more volatile items and thus offer a clearer picture of inflation trends relevant to monetary policy and economic activity.

There also appears to be reduced pressure on underlying service prices, which are closely tied to monetary policy. Itaú Unibanco’s economic team estimates that the seasonally adjusted and annualized three-month moving average declined from 6.2% to 5.6%.

However, the IPCA also revealed some less favorable news. The diffusion index, which measures the percentage of items with rising prices, jumped from 46.9% to 56%. Excluding food items, which are more volatile, the indicator rose from 53.1% to 61.7%.

Itaú highlights that, while service prices showed some improvement in August, they are expected to face “some pressure” in the coming months, potentially ending the year with an increase “close to 5.5%.”

The IBGE said that strong labor market performance and overall economic activity may influence trends in service prices.

Recent data includes the IBGE’s report that GDP grew by 1.4% in the second quarter compared to the previous three months, surpassing the median projection of 0.9% from economists at financial institutions, asset managers, and consultancies surveyed by Valor Data.

The pre-COPOM survey released last week indicates that the Central Bank is focusing on economic slack, which is directly influenced by GDP and the labor market, and its impact on inflation. The survey now asks private sector economists about their projections for the output gap, a question not included in June’s survey.

Banco ABC Brasil also notes that, over the longer term, core inflation measures generally “support the outlook of a slowing domestic disinflation.” Banco Bradesco’s estimates show that “core inflation is running close to 4.5% on an annualized three-month basis,” about “1 percentage point higher than in the second quarter of the year.” There are also concerns about how the drought might affect food prices in Brazil.

To manage the Selic rate, currently at 10.5% per year, the COPOM is targeting the first quarter of 2024, forecasting inflation of 3.4% in a reference outlook and 3.2% in an alternative one. In both cases, according to the Central Bank’s own terms, the rate is “above” the 3% target.

Since at least the first quarter of last year, the COPOM has been warning, both in official communications and in statements from its members, about the challenges of the “second stage” of post-pandemic efforts to bring inflation to target. On Monday, the median market projection for the Selic rate, according to the Focus Bulletin, increased from 10.5% to 11.25% by December and from 10% to 10.25% by the end of next year.

The committee will once again meet under challenging conditions next Tuesday and Wednesday to decide on the base interest rate. This stands in contrast to the upcoming Federal Reserve meeting, where the Fed is expected to start an easing cycle, having kept its policy rate between 5.25% and 5.5%—the highest level in over two decades—for just over a year.

*Por Estevão Taiar, Valor — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Dry weather affects crops, raises flag on food prices

Lack of rain delays planting of beans, soybeans; concerns increase export premiums at the port of Paranaguá

09/11/2024

Coffee crops damaged by drought in Bom Jesus — Foto: Alexandre Maroti/Arquivo pessoal

Coffee crops damaged by drought in Bom Jesus — Foto: Alexandre Maroti/Arquivo pessoal

The recent fires in agricultural production areas in different parts of Brazil prompted a warning on the population but the dry weather is currently the major concern in Brazilian agribusiness. The lack of rain is delaying planting of important crops, such as soybeans and beans. The impact of the drought on the prices of food and other agricultural products has been limited so far. However, that does not downplay the issue as meteorology indicates that the dry weather is expected to continue in the foreseeable future.

In the case of soybeans, Brazilian agriculture’s main export item, the drought has demanded changes to the planting schedule for the 2024/25 season. According to the official calendar, in important producing states, such as Mato Grosso, sowing for the new season should start on the first weekend of September.

The delay in planting is accelerating sales on the spot market. Researchers from the Center of Advanced Studies on Applied Economics (CEPEA) say this movement fuels competition between domestic and international buyers for soybeans.

That is reflected in soybean premiums, a bonus paid on the price of the grain at origin. On Monday (9), premiums for soybeans delivered to the port of Paranaguá (Paraná) were $1.18 per bushel, and, for October, $1.20 per bushel. The CEPEA indicator based on the Paranaguá port has risen 1.35% this month so far, to R$140 per bag.

The drought has also hampered the planting of beans in the country. The sowing of the first of the three national crops began in August, mainly in Paraná, but the dry soil has made the work difficult. According to a survey by the Department of Rural Economy (DERAL), by the Secretariat of Agriculture and Supply, as of September 5th, planting had occurred in only 3% of the area planned for the 2024/25 summer season. In the same phase of the previous cycle, work had reached 10% of the area.

DERAL estimates that farmers in Paraná will plant 131,000 hectares of beans between August and December, an area 22% larger than that of 2022/23. “With the price of soybeans down [compared to previous years], farmers have turned to beans,” said Marcelo Lüders, president of the Brazilian Institute of Beans and Pulses (IBRAFE). If projections are confirmed, production should grow 57% in the state, to 251,000 tonnes.

At the moment, there is a stock of beans on the national market as the third yearly crop has ended—the harvesting was 812,500 tonnes. “In some areas of the Cerrado region, high temperatures increased the incidence of whiteflies, reducing productivity,” Mr. Lüders said.

Farmers have been receiving R$260 per bag of “carioca” beans [pinto beans], or R$50 more than the average for the same period in 2023. “If the weather doesn’t help, we won’t have beans between late October and the beginning of the next harvest,” Mr. Lüders says. “In that case, prices are expected to soar.”

The fires that occurred between late August and early September in São Paulo hit 80,000 hectares of sugarcane in the state. Due to the dry weather in the center south, the mills brought forward the end of crushing for the 2024/25 season, which could increase sugar prices in the first quarter of next year.

“The off-season will start earlier. As the drought damaged the sugarcane fields, there will be few sugarcane, and crushing will end earlier,” said Maurício Muruci, an analyst at Safras & Mercado. In São Paulo, the price of crystal sugar rose 2.5% in August, to R$24.50 per bag.

The analyst believes that the increase in crystal sugar prices on the domestic market could impact the entire food industry that uses sugar as an ingredient, as well as food staples. He said that could reflect on the Extended Consumer Price Index (IPCA) from October onwards. On Tuesday (10), despite the worrying situation regarding Brazilian crops, the most liquid sugar contracts on the New York Futures Exchange, a reference for global negotiations, closed down 1.9%, at 18.47 cents per pound.

Climate issues in Brazil and other important producing countries have fueled rising coffee prices on the international market. On Monday (9), the most traded contracts on the New York Futures Exchange rose almost 4%. On Tuesday (10), they rose another 0.73%, to $ 2.4720 per pound.

“The crops [for the 2025/26 season] are very weak, with high defoliation and drying flower buds. I see only bad consequences of this drought,” said Alexandre Maroti, the owner of 15 hectares of coffee in the city of Bom Jesus, Minas Gerais.

He says he used to produce, on average, 80 to 90 bags of coffee per hectare. At the moment, due to the drought and high temperatures, the yield is no more than 40 bags per hectare. Mr. Maroti foresees a 20% drop in the 2025/26 cycle.

The situation is a little better for larger farmers, who boast irrigation systems. Still, many Brazilian coffee farmers are wary and estimate a drop in harvesting volume until next year. In some states, such as Minas Gerais, it hasn’t rained for four months.

“Coffee prices have soared due to adverse weather events around the world, which could reduce production,” said Rich Asplund, coffee analyst at Barchart. Mr. Asplund points out that Robusta prices also rose—in this case, the increase was due to Typhoon Yagi’s passage through Vietnam, a country that had been hit by severe drought last year. Vietnamese production in 2023/24 was only 26 million bags, while the country’s annual capacity is 31 million per year.

Vicente Zotti, managing partner at Pine Agronegócios, points out that, in the case of arabica, it is necessary to analyze the climate of each coffee region in Brazil to estimate the consequences for the 2025/26 cycle. The extent of the drought varies in each of these areas.

The hot and dry weather led the Citrus Defense Fund (Fundecitrus) to reduce its estimate for the orange harvest in the citrus belt of São Paulo and the Triângulo Mineiro region. A 7.1% reduction was announced on Tuesday (10), to 215.78 million boxes of 40.8 kilograms, or 16.60 million boxes less than the previous projection, in May.

According to Climatempo, since May, the volume of rain was 31% below the forecast. In any case, drought is not the only major issue in orange crops, which are experiencing an increased incidence of greening, a disease that reduces the orchards’ productivity.

The severe drought damages some crops but the dry weather has not caused losses to all of them. “The drought has two sides. It favors some crops, such as carrots and tomatoes, as [low humidity] advances maturation and harvesting,” said João Paulo Deleo, a vegetable analyst at CEPEA.

In the case of potatoes, the harvest window starts in July and runs until early October. However, “when it starts to get too hot in September, harvesting is accelerated so as not to lose quality,” Mr. Deleo says.

The heat and dry climate also accelerate the ripening of some fruits, making them taste sweeter. The analyst points out, however, that most of these crops are irrigated and production costs increase in times like these, which could compromise supply in the longer term.

“Extremely dry periods could affect crops in other ways. Furthermore, it will be necessary to monitor the supply of water for irrigation,” he emphasizes.

(Camila Souza Ramos contributed reporting.)

*Por Fernanda Pressinott, Isadora Camargo, Cleyton Vilarino, Gabriella Weiss, Globo Rural — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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U.S. interest rate cut may provide additional support to Ibovespa

While talks of further Selic rate hikes remain in focus, the stock market has surged 10.2% since early July

09/06/2024

Aline Cardoso — Foto: Carol Carquejeiro/Valor

Aline Cardoso — Foto: Carol Carquejeiro/Valor

As the U.S. monetary easing cycle approaches, market participants are increasingly anticipating this month’s interest rate decision, expecting it could fuel further gains for the benchmark stock index Ibovespa. According to Santander’s analysis, U.S. Federal Reserve rate cuts tend to benefit the Brazilian stock market, provided they occur within the context of a soft landing for the U.S. economy. It’s no coincidence that, despite recent speculation about additional Selic rate hikes—Brazil’s policy interest rate—the Ibovespa has already surged by 10.2% in the second half of the year.

“This is an unprecedented cycle,” said Aline Cardoso, Santander’s head of research and equity strategy, emphasizing that if U.S. and Brazilian monetary policies diverge as expected, it would mark the first time since the Real Plan that Brazilian interest rates increase without the U.S. economy being in a deep recession.

Santander’s study recalls that in 1995, following a U.S. interest rate cut, the Brazilian stock market rose 20.1% in the quarter leading up to the decision, 15.8% in the three months after, and 22.6% over the subsequent six months. Similarly, in 2019, the Ibovespa gained 5.6% in the three months before the U.S. Federal Reserve initiated rate cuts, 5.6% in the following quarter, and 13.5% over the next six months.

“If U.S. interest rate cuts are implemented in a more stable economic environment, aimed at gently stimulating growth, they typically have a positive impact on both stocks and bonds,” notes Santander in a report authored by Ms. Cardoso and analysts Guilherme Bellizzi Motta and Luane Fontes, “as they signal confidence in the economy while offering support to financial markets.”

In contrast, during a U.S. recession, Ms. Cardoso points out that it has been rare for the U.S. Federal Reserve to cut interest rates while the Brazilian Central Bank was compelled to raise the Selic rate. “This has only occurred twice, during two extreme crises — in 2001, after the burst of the dot-com bubble, and in 2007, to stabilize the banking system,” she notes.

On the latter occasion, the recession was so severe that it led to heightened risk aversion, strengthening the dollar and weakening emerging market currencies, including the real. Faced with this shock, the Central Bank had to raise interest rates to curb inflationary pressures.

This time, however, Ms. Cardoso believes that any potential Selic rate hike could be driven by the need to restore the Central Bank’s credibility with economic and market agents. “The rise in interest rates would reflect the risk premium associated with changes in the Central Bank’s leadership next year, with the president and three directors stepping down. The market is concerned about how the monetary authority will navigate this transition,” she explains, noting that such uncertainty contributes to higher risk premiums on assets.

The Brazilian stock market has historically suffered during periods when U.S. monetary easing coincided with a “hard landing.” According to Santander, three months after a U.S. rate cut in such conditions, the Ibovespa declined by 5.5%, with a 5.8% drop six months later.

“Our analysis concludes that stock performance has been asymmetrical over time,” says Ms. Cardoso. “During mild economic downturns, both the Ibovespa and the S&P 500 tend to exhibit significant gains, with the upside often outweighing losses during more severe slowdowns,” she explains.

During periods of “extraordinary” interest rate cuts—often implemented in response to sudden shocks, such as in 1987 and 1998—the trend generally favors equities, provided the underlying credit or liquidity event does not severely impact the broader economy.

However, some market participants remain cautious about the potential impact of an additional tightening of the Selic rate on the stock market. In a note to clients, J.P. Morgan’s Latin America equities strategy team, led by Emy Shayo Cherman, highlights that equities have delivered negative returns during all rate hike cycles since 2008.

“What could be different this time? First, this tightening cycle is much shorter compared to previous ones. Second, there’s an expectation that all rate hikes will eventually be reversed, and even future easing could follow. Some may view this as a reasonable cost to bring interest rates down to single digits while simultaneously bolstering the Central Bank’s credibility,” the J.P. Morgan strategists explain.

Bank of America (BofA) professionals share a similar view, noting that if the Fed cuts interest rates amid a “soft landing,” the outlook could be positive for Latin American stocks, though local factors will also play a key role. “In Brazil, markets have already priced in Selic rate increases, and we continue to monitor concerns surrounding fiscal policy,” BofA’s strategists note.

BofA maintains its “overweight” recommendation (exposure above the market average) for Brazilian equities, emphasizing the country’s potential for corporate profit growth this year. Despite the Ibovespa’s recent rally, valuations remain “relatively attractive.”

*Por Maria Fernanda Salinet — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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São Paulo agribusiness faces R$2bn in losses from fires

Sugarcane sector is the most affected; fire killed crops of settlers and farmers in Ribeirão Preto

09/06/2024

Fire on the Fazenda da Barra, owned by settlers, in Ribeirão Preto — Foto: Acervo Pessoal

Fire on the Fazenda da Barra, owned by settlers, in Ribeirão Preto — Foto: Acervo Pessoal

The fires in the state of São Paulo have caused losses of more than R$2 billion to agribusiness, according to the state government, and forced small farmers and settlers in the Ribeirão Preto area to leave their farms and homes. Large companies in the sugar-and-ethanol sector—among the most affected—are carrying out daily firefighting actions in the countryside of São Paulo.

Guilherme Piai, São Paulo’s secretary of agriculture, said the fires hit 8,049 farms on almost 480,000 hectares. In sugarcane fields alone, around 240,000 hectares were affected, he told Rádio Bandeirantes. In total, 50 municipalities are in a state of emergency due to the fires.

The sugar-and-ethanol industry is the most affected, but there are also losses in grains, coffee, livestock, and other crops, in addition to damage to conservation areas in the state.

Settlers were also affected by the fires. On Tuesday (3), farmers from Fazenda da Barra, the largest settlement of the Landless Workers’ Movement (MST) in the Ribeirão Preto region, saw flames cross the train line that connects the area to the Cândido Portinari neighborhood and reach part of the movement’s 472 plots of land.

Nivalda Alves de Jesus, a settler who is part of the Mãos da Terra Agroecological Cooperative, said since Sunday (1) the fire had been causing damage to the farm, and on Tuesday (3) it reached some plots. Around 3,260 people live in the 1,700-hectare settlement.

“We lost production from our vegetable garden, structures for chicken coop, pig pens, and irrigation equipment. We released the chickens and pigs so they wouldn’t burn to death. In my plot, there was nothing left. The fire also reached my house’s tiles, windows, and doors,” she said. Ms. Jesus, who has lived in the settlement for 20 years, said that was the worst fire ever in the region.

Ms. Jesus said the settlement was still covered in smoke and the air was unbreathable on Thursday (5), forcing her to move to her daughters’ home in town. The settlers are now focused on assessing the losses and joining forces to meet the contracts for delivering school lunches to several municipalities.

Small coffee and vegetable producers in the Ribeirão Preto area also suffered losses. On Wednesday (4), João Lúcio Pinto’s smallholding in Buritizal was destroyed by fire, as flames that had been burning a sugarcane field on the banks of the road connecting Buritizal to Igarapava advanced over his property.

The fire burned the entire vegetable garden, killed animals, and destroyed the family’s house and the four cars they used to transport produce. In Santo Antônio da Alegria, at least 30 small coffee farms have seen losses since August 17th.

The two small farms owned by Mateus Cassarotti de Assis, which grows 25 hectares of coffee, were affected. He said the fire came down the mountain range that borders São Sebastião do Paraíso, Minas Gerais, burning coffee and eucalyptus trees. “We tried to contain the fire but it was useless. The counterfire measures did not work,” he said.

Raízen, one of the most affected sugar-and-ethanol companies, told Valor it is carrying out firefighting actions “daily in the vicinity of practically all of its 30 bioparks in operation.”

The company stated that, in addition to the dry weather, gusts of wind make it hard to contain the fire and have been largely responsible for the spread of fires.

The same concern was expressed by Secretary Guilherme Piai. He warned of what he called a “triple factor 30”—temperatures above 30 degrees Celsius, winds above 30 km per hour, and relative humidity below 30%. “We are experiencing these weather conditions, and between the 13th and 14th the risks will increase as intense winds are expected,” he said.

*Por Eliane Silva, Luciana Franco, Isadora Camargo — Ribeirão Preto and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Siemens Energy, Eletrobras sign R$300m deal

Plan is to update, renew transmission assets in different parts of Brazil

09/04/2024

Equipment manufacturer Siemens Energy signed four contracts with Eletrobras amounting to over R$300 million for updating transmission assets in several Brazilian states. The plan is to renew depreciated assets or those that have reached the end of their useful life.

Siemens Energy’s vice president for Latin America, André Clark, said the Brazilian system is reliable but has been operating for several decades and needs some repair and improvement. Furthermore, with climate events such as drought and heavy rains, combined with the expansion of intermittent renewable energy sources (wind and solar) in Brazil’s power mix, it is necessary to make an effort towards the grid’s resilience.

“The system was designed when there was only one type of supply and demand, stably, in a one-dimensional electrical system, without the extreme weather events we are currently experiencing,” he said. “We are facing new system operation barriers, a more adverse environment with further climate change, and changes in the demand and supply profile.”

In August, Brazil faced three blackouts in ten days. In one of the events, a kite caused the blackout, which raised fears among experts about the grid’s vulnerability. Mr. Clark emphasizes that the system is reliable but recognizes that adjustments to the current reality are required.

The investment is part of a project to improve transmission services, required by the Brazilian Electricity Regulatory Agency (ANEEL) to meet the conditions of regularity, continuity, efficiency, and safety. The agreements include clauses requiring transmission companies to carry out works to replace assets at the end of their useful life. Consumers pay for the improvements, as the amount is returned to the company through an increase in Allowed Annual Revenues (RAP).

The energy transmission segment has been increasing revenues for manufacturers in Brazil, not only with the update of structures but also with the construction of new projects following auctions. Under Siemens Energy’s total revenue in Brazil, the area of grid technologies accounts for 61%. In fiscal year 2023, this share was 45%.

According to Eletrobras’s vice president of engineering, Robson Campos, deliveries will start in 2024 and continue until the end of 2026. “Brazilian regulations encourage this type of investment and all major transmission companies invest heavily. Eletrobras has a planned investment of R$3.3 billion in improvements for 2024. These contracts with Siemens Energy represent less than 10% of what we will invest.”

Among the projects, is the update of the Grajaú substation, responsible for almost 40% of the energy supply in the city of Rio de Janeiro. In the Northeast region, the German company will supply new fixed series capacitor (FSC) banks for the Imperatriz line, in Maranhão, to ensure stability to the power system and increase transmission capacity.

In the states of Maranhão, Pará, Mato Grosso, and Rondônia, the manufacturer will install new circuit breakers to protect high-voltage assets. In the area of the Madeira River, known as “Linhão do Madeira,” Siemens Energy will provide an online monitoring system for gases dissolved in insulating oil for transformer stations.

*Por Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil’s first forest concession moves forward with consultation phase

Government intends to restore 15,000 hectares in Bom Futuro National Forest in Rondônia state

09/04/2024

The government expects to complete Brazil’s first public concession for forest restoration by the end of this year. This is also the first project to restore degraded lands financed through carbon credits, which could be an important test for the functioning of this mechanism. The goal is to restore 15,000 hectares in the Bom Futuro National Forest in Porto Velho, Rondônia.

Still in public consultation, the bid has attracted interest from private-sector companies and was well-received by the Indigenous community neighboring the territory. However, it still raises questions regarding oversight, land regularization, financing, and security.

As planned, the Bom Futuro National Forest (Flona) will be subdivided into blocks and handed over to the administration of companies. They will need to restore the land by bringing the vegetation as close as possible to the region’s original vegetation, said Renato Rosenberg, director of Concessions of the Brazilian Forest Service, an agency linked to the Ministry of the Environment and Climate Change.

The restoration of each degraded hectare in that forest is expected to require around R$20,000 for irrigation, soil recovery, and seedling planting. As a result, restoring the area would cost around R$300 million. Companies will be able to capture the carbon credits related to the new trees that will be planted and a portion of this revenue will go to the Brazilian state in the form of a concession fee.

Mr. Rosenberg said revenue is not the focus, though. “The government’s primary objective is not revenue generation and that’s why we are minimizing the concession fee.” Under the model being designed in partnership with the Brazilian Development Bank (BNDES), the proposal that offers the highest percentage of revenue—with a cap close to 15%—and a fixed payment at the time of contract signing wins. The financial equation, however, may vary according to non-mandatory actions that the project wants to encourage. “Investments in research and purchasing seedlings and seeds from Indigenous communities could be some of these actions. It’s not mandatory, but if they do it, they get a bonus,” he said.

Neighboring the Bom Futuro Flona, the Karitiana Indigenous community views the project’s arrival with optimism, both in economic terms and for the security of the demarcated territory, which occupies about 800 hectares. “We need to restore reforestation. We are suffering a lot from invasions by miners and loggers, and I think they [the concessionaires] can help monitor our region as well,” said Edilene Karitiana, one of the group’s leaders.

However, the format of the security scheme for the territory to be granted, which has a history of invasions and actions by land grabbers and organized crime, has not yet been defined. Without police power, concessionaire companies will need relevant support from the State to operate with some security in the area.

From the government’s perspective, part of the risk “is inherent to the business risk itself and is the same as in the case of a project in a private area,” said Mr. Rosenberg. “On the other hand, only the public power has police power. Therefore, part of this risk will be allocated to the granting authority,” he added, noting that the limits of each actor’s role will be discussed in the public hearings scheduled for this month.

The Karitiana people also see opportunities for selling seedlings. The supply of seedlings for restoration projects is one of the possible bottlenecks for the government’s goal of restoring 12 million hectares, as revealed to Valor in July last year by the president of the Brazilian Forest Service, Garo Batmanian. At the time, he estimated a demand of about 5 billion seedlings of various species. Production at that time was around 150 million seedlings per year.

In the case of concessions, according to Mr. Rosenberg, this risk is private and with little chance of problems. “They [concessionaires] will have a very comfortable maximum schedule to carry out the restoration. During this period, they will have time to organize the nurseries, whether vertical or horizontal,” he said.

One organization interested in participating in the bidding, re.green!, emphasizes that it already adopts partnerships with local communities in other projects, especially seed collection courses, an essential activity in seedling production. The company’s director of institutional relations, Mariana Barbosa, says that the Bom Futuro Flona could be a milestone for forest restoration in the country but notes that there are still questions to be answered.

“It’s a unique and innovative model. We see it as a positive agenda and have been studying the bids over the past few months. The current stage is precisely this: understanding how it will work, moving from a place of looking at opportunities to now seeing the project taking shape,” Ms. Barbosa said.

Mr. Rosenberg came out optimistic from the initial surveys with potential interested parties. Biomas, a company created in 2022 by Itaú Unibanco, Santander, Rabobank, Vale, Suzano, and Marfrig to operate in reforestation and conservation, is also interested in participating.

Natalia Renteria, director of Regulatory Affairs at Biomas, believes that the concession proposal “makes perfect sense” for the company. She reiterates that the success of a concession of this type can be a milestone for scaling restoration projects. “For a sector that is still in its infancy, it is very important. To scale in line with the country’s climate commitments, an economic model that stands on its own is necessary. And concessions fit into this. We are evaluating this opportunity and view the opening of this process very positively.”

The bid schedule includes a public consultation with Indigenous peoples confirmed for next Monday (9) at the central village of the Karitiana Indigenous Land in Porto Velho. On the 10th, the advisory council of the Bom Futuro Flona will meet, and the public hearing will take place the following day.

After these events, there will be a two-week period for clarifying doubts before forwarding the final version of the bid to the Federal Court of Accounts (TCU). The public spending watchdog has 75 days to analyze the material.

*Por Murillo Camarotto — Brasília

Source: Valor Inaternational

https://valorinternational.globo.com/
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Vibra prioritizes Petrobras brand renewal amidst growth strategy

CEO Ernesto Pousada outlines plans for expanding international presence and exploring new market opportunities

09/02/2024

Ernesto Pousada — Foto: Leo Pinheiro/Valor

Ernesto Pousada — Foto: Leo Pinheiro/Valor

Vibra CEO Ernesto Pousada said the company’s top priority is renewing the Petrobras brand across its network of fuel stations. According to him, internal research indicates that consumers identify strongly with the BR brand, particularly in segments like convenience stores (BR Mania) and oil change services (Lubrax).

However, the outcome depends on ongoing discussions with the state-owned oil company. If Vibra is unable to renew the contract for the use of the BR brand across its more than 8,000 stations, the alternative plan is to develop the Vibra brand, a move that other companies have already tested, Mr. Pousada noted. “Both parties need to advance the discussions in the coming years. Vibra is keen on renewing, but under certain conditions,” Mr. Pousada said during Vibra Investor Day on Thursday (29th).

The contract for the use of the BR brand by Vibra is set for 10 years and will expire in 2029. Petrobras has not commented on the matter.

Mr. Pousada also said that part of Vibra’s growth strategy involves increasing lubricant sales to international markets, particularly in Latin America, where the company currently has a minimal presence. The company’s market position in this sector is still very small, leaving room for growth until it becomes the regional leader, the CEO mentioned during the event.

The initial phase of international expansion will focus on the southern part of South America, in the six countries where the company already operates, said Vanessa Gordilho, Vibra’s executive in charge of business, products, and marketing. “It won’t be starting from scratch and doesn’t require much effort,” said Ms. Gordilho.

According to Mr. Pousada, the past four quarters have been dedicated to “getting the house in order.” Additionally, the CEO said that the company will continue preparing its internal processes and management for a new growth cycle, which he expects to occur in the coming years.

Another avenue for expansion is through Comerc, whose acquisition of the remaining 50% stake was announced last week. The company plans to implement a strategy to capitalize on R$1.4 billion in synergies, which includes refinancing Comerc’s debt—currently more expensive than Vibra’s average debt cost—among other initiatives, said Clarissa Saddock, Vibra’s chief renewable energy and ESG officer.

Vibra also sees opportunities in its recently formed partnership with Itaú for energy commercialization, especially given the prospects for the complete opening of the market in the coming years, and in pending projects related to micro and mini-distributed generation and energy efficiency.

Regarding natural gas, Mr. Pousada mentioned that the company does not yet have a significant presence and is seeking the “right angles” to gain access to the molecule and advance in this segment, aiming to complement its product portfolio for clients. However, the executive said that the company does not have a strong desire to enter the natural gas market, and any moves in this area will be approached with capital discipline. Mr. Pousada also projected a 15% growth in the liquid fuels market by 2030.

*Por Fábio Couto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/

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