Unigel raises bet on agribusiness, fertilizers

Daniel Zilberknop — Foto: Claudio Belli/Valor
Daniel Zilberknop — Foto: Claudio Belli/Valor

Unigel, one of Brazil’s most traditional petrochemical companies, is focusing on agribusiness after Russia invaded Ukraine. Months after restarting the operation of two fertilizer plants leased from oil giant Petrobras, which contributed to 2021 being the best year ever, the company will expand local production of strategic inputs for nitrogen fertilizers and chemicals that are currently 100% imported.

“In the medium term, we have growth plans in all three fields: agribusiness, acrylics and styrenics. But today the major focus is on agriculture because we can see Brazil’s reliance on imported fertilizers. This exposure makes us want to invest more,” said Daniel Zilberknop, Unigel’s chief financial officer.

The company, which is the largest producer of acrylics and styrenics in Latin America, could be exposed to the risks of shortages generated by the war. By leasing Petrobras’s fertilizer units in Bahia and Sergipe, which were previously idle, Unigel became the only local producer of ammonia, used in fertilizers and in the acrylic chain. Before, this raw material had to be 100% imported, and Russia accounts for 23% of the global supply.

Unigel Agro will complete the business portfolio and integrate the company’s other operations, first in the case of ammonia and now in sulfuric acid, Mr. Zilberknop said. There will be more developments ahead, and green hydrogen and green ammonia are on the company’s radar.

At this moment, the company is investing $100 million in a new plant for the product in Camaçari, Bahia, which will be used to reactivate an ammonium sulfate plant (a nitrogen fertilizer), which came in the package of assets leased from Petrobras – sulfuric acid is used in the production of both fertilizers and acrylics, and the steam generated in the production process is used as energy in the styrenics operation.

To reactivate the nitrogen fertilizer plants, the company had already disbursed about $100 million. “Before, we navigated more the petrochemical cycle. With Unigel Agro, the scale has also changed. We intend to expand into agribusiness production, further integrating our business,” the executive said.

Last year, while the stronger petrochemical spreads boosted performance in the first half, the full operation of the nitrogen fertilizer plants has driven the results at a time of weaker spreads – in the year, the results in acrylics and styrenics also grew compared to previous years, with a greater focus on operational efficiency.

Unigel ended 2021 with gross revenue of R$8.49 billion, more than double what was reported in the previous year, and EBITDA of R$1.7 billion, a more than threefold increase. The net income reached R$882 million and the cash generated by operational activities more than doubled to R$1.1 billion.

After a ramp-up in the nitrogen fertilizer plants in August, Unigel became the largest nitrogen fertilizer manufacturer in the country. The business had a relevant contribution in the results in 2021, accounting for 25% of the gross revenue and 33% of the adjusted EBIDTA.

Today, Unigel Agro’s installed capacity is 925,000 tonnes per year of ammonia, 1.125 million tonnes of urea, 670,000 tonnes of ammonium sulfate and 220,000 tonnes of Arla, used to reduce emissions from large vehicles.

In the executive’s view, the war in Ukraine brings direct consequences for the oil and gas and fertilizer markets but for now is not a reason for concern for Unigel Agro, which uses gas in the production of urea and ammonia.

Considering local supply contracts with Petrobras and Shell, assured demand and raw material hedging, the operation is expected to smoothly navigate the conflict. Russia is the largest exporter of ammonia and urea in the world and one of the biggest players in NPK fertilizers, which caused the prices of these inputs to skyrocket as the country was sanctioned for the invasion of Ukraine.

Unigel ended 2021 with R$849 million in cash reserves and will be able to face the investment in sulfuric acid with the funds generated by its businesses. The company was on its way to selling shares on the stock exchange but suspended the IPO in the second half of last year amid deteriorating market conditions.

“The company is at its best moment and is able to invest in growth with deleveraging,” the executive said. At the end of the year, Unigel’s net debt, of about R$2.1 billion, accounted for 1.2 times the annualized EBITDA, a ratio seen as comfortable by rating agencies.

Source: Valor International

https://valorinternational.globo.com

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War already impacts M&A in Brazil

Daniel Wainstein — Foto: Divulgação
Daniel Wainstein — Foto: Divulgação

The Russia-Ukraine war has already started to impact M&A operations, according to investment banks and firms consulted by Valor. In these first 20 days of conflict, no deal has been canceled, but there are already discussions about repricing of assets for sale, especially in the segments of oil, gas and agricultural commodities, due to the uncertainties generated in recent weeks.

With the rise in oil prices, the market is trying to understand what the new price level for the raw materials will be. “What is the peak?” — this is the question that needs to be answered to define the prices of assets, notes Gustavo Miranda, head of investment banking at Santander. “We are watching the unfolding [of the war] to start defining the next steps.”

There is also a discussion about how Brazil may be affected by the war. “There is an understanding today that Latin American countries would be less affected because they are far from the battle area and also because they are important commodity producers,” Mr. Miranda said.

“I’m not seeing anyone postponing transactions and the interest in Brazilian assets remains solid,” said Ricardo Lacerda, a partner and CEO of investment bank BR Partners. “But we have already seen price disruption, especially for energy assets. Nobody wants to run the risk of mispricing.”

In late January, when the war was still a geopolitical tension, Petrobras and power company Eneva communicated the closure, without agreement, of the negotiations for the sale of Polo Urucu — belonging to the state-owned company, in the Solimões Basin, in Amazonas. In a statement, Eneva said that, despite the efforts between the parties, it was not possible to converge on an agreement. Petrobras, on the other hand, informed that it decided to terminate the current competitive process and would evaluate the best alternatives for the asset.

The rise in oil prices was determinant for the end of the negotiations. When Eneva started negotiating the purchase of the asset in February last year, the price of a barrel of oil was around $40. At the end of January, the price reached $90. On Monday, the barrel closed at $107 — the peak in the war was at $130 last week.

Russian investors who have been prospecting in the country may have to revise their strategies. In early February, for example, the Russian company Acron announced an agreement with Petrobras to buy a fertilizer unit in Três Lagoas, Mato Grosso do Sul. Market sources are waiting for the outcome of the negotiations.

Russian companies may have greater difficulty in creating liquidity and making payments between international banks, a source said.

Gas assets under negotiation are also likely to undergo price revaluation, according to M&A experts. They were already valued before the war, and deals on renewable energy projects will also continue to draw the interest from investors, particularly foreigners. “We will see a lot of deals in solar and wind power projects, as well as carbon credits,” said Mr. Lacerda.

According to an investment banker, two clients with mandates to sell assets (one energy and the other retail) wished to close the deal in the first half, to avoid greater price and term volatility in the second half, with the elections. Now, with the conflict, both have asked the bank to extend the process, even if it stays until 2023.

For Daniel Wainstein, a partner at Seneca Evercore, it is important to note that the country’s scenario before the war was of demand-based inflation, rising interest rates and low growth prospects. “Now you have more inflationary pressure from supply and the outlook now is for interest rates and inflation rising in Brazil and globally.”

“We are in a moment in which the investor is adopting a wait-and-see approach, without much haste, in expectation in what will happen in the coming weeks,” he said. Seneca closed four deals this year. “The appetite for Brazil has not reduced. With the war, we are holding on.”

The executive says that Brazil is among the countries that will benefit from the conflict. “The B3 in relation to other stock exchanges in the world suffered a low impact because a good part of the companies operate with commodities.”

The war between Russia and Ukraine has a special meaning for Mr. Wainstein. The Seneca Evercore executive’s maternal grandparents were Ukrainian. “My grandfather was a Bolshevik and fought in the Russian revolution. He fled there when Stalin started persecuting the Jews,” he said.

In the capital market, the short term is also uncertain. “The environment is one of volatility here and overseas. We won’t be able to see IPO operations in the short term. It is also challenging for secondary offerings,” said Mr. Miranda, with Santander, noting that the movement in the capital market was already weak because of the election year.

For Bernardo Parnes, a partner at One Partners, the capital market activities are more affected than the pace of acquisitions, especially considering the full year. “The M&A adapts terms, changes price, solves problems with clauses such as MAC or with a guarantee account. But it happens one way or another,” said Mr. Parnes.

Consulted by Valor, Eneva maintains the same position as the one communicated on January 28. Petrobras declined to comment. Acron did not immediately reply to a request for comment.

Source: Valor International

https://valorinternational.globo.com

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Study shows urbanization needs of Amazon

Flavia Chein — Foto: Arquivo
Flavia Chein — Foto: Arquivo

The Amazon urbanization pattern has a dispersed population, low demographic density, only two metropolises and the absence of medium-sized cities. A great distance separate urban centers, there is lack of access to basic services such as sewage and water networks, garbage collection, power and broadband. The cities have their backs to the forest or to the rivers. The more than 700 municipalities in the so-called Legal Amazon are out of step with Brazil in all indicators. The good news is that there is still time to design urban centers in a planned and sustainable way.

Two researchers with the Federal University of Juiz de Fora — economist Flavia Chein and Igor Procópio — studied the Amazon cities in detail and produced the report “The cities in the Legal Amazon: diagnosis and challenges for sustainable urbanization”. The report is part of the series of studies on the region of the Amazônia 2030 project.

“The Legal Amazon region is historically configured as the least developed in the country and the urbanization process was not able to create sustainable cities,” says Ms. Chein, “A path was opened in the forest with the construction of roads and there was an explosion of municipalities around, but they were not able to create a network of services. This would be fundamental in the region, because the distances are very large. There is no integrated urban network”.

Many Amazonian municipalities are small, with up to 20,000 inhabitants. There are few medium-sized ones and only Belém and Manaus are metropolises. This lack of intermediary centers worsens the possibility of developing conditions for urban habitability,” says Ms. Chein.

The idea is to identify solutions and policies for a more sustainable urbanization of the region. “We still have a territory to be occupied. The occupation in the past happened in a disorganized way. The Amazon is in a different stage of occupation from the rest of Brazil. It has a demand for housing and equipment that can be designed incorporating the ecosystem”, he says. “It is not because we made mistakes in the past that we need to continue with this non-existent urban design project.”

The analysis defined what is urbanization considering the features of the huge municipalities in the Legal Amazon. “Amazonian cities are less urbanized than those in the rest of Brazil.” She explains: “If one analyzes the Amazon municipalities, most have up to 60% of the people residing in urban areas, while in the rest of Brazil the percentage is higher than 90%. What we have are scattered urbanization spots in giant municipalities, places where the populations are more agglomerated. It is there that the typical problems of a non-ordered and unplanned urbanization can be identified.”

The researchers considered two measures in the diagnosis. The first shows the percentage of the municipality’s total population that lives in an urbanized area. The second relates the total area of the municipality and the percentage of urbanized area.

Ananindeua, in the metropolitan region of Belém, is the Amazonian municipality that has the highest level of urbanization — 100% of the population lives in the urban area. But in relation to the total area of the municipality, urbanization does not reach 32%. The most urbanized municipality in Brazil, which is Belo Horizonte, has 75% of urbanized area.

“When you look at the distance from the municipalities in the Legal Amazon to the nearest metropolis, what you see are great distances. In the rest of Brazil, with many municipalities and metropolises on the coast, the distances are much smaller,” she says.

In the Amazon the distances are barriers. The scattered populations have no connection with the large centers. Another difficulty is the heterogeneity within the municipalities themselves. “From the point of view of urbanization, the Amazon cannot be treated as a single space. There are many Amazons hidden in there”, says Ms. Chein. To deal with the difficulties, the economist says that “it is necessary to have a much greater pact between the several government levels. Besides this, the role of the municipal governments is fundamental.”

“It is necessary to think of the Amazon inside the Amazon and not as something important for the world or for Brazil,” she recommends. “It is necessary to generate well-being in the cities, work conditions and access to culture for those who live there,” she says. “It is in the cities that things happen. Today we have a generation of young people in the Amazon that needs to be encouraged and recognize the region as a place that welcomes them. This starts with designing cities with sanitation, power, communication, schools, bookstores, theaters and cinemas.

Source: Valor International

https://valorinternational.globo.com

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Vetoquinol expands in Brazil, develops products for export

Vetoquinol

Vetoquinol, one of the largest veterinary companies in the world, expanded revenues in Brazil by 22% last year, to R$129.4 million. By 2026, the French multinational expects to double the size of the operation by creating and exporting products to nearby markets.

Jorge Espanha, the company’s chief executive in Brazil, linked last year’s performance to the expansion of the company’s portfolio, the higher rate of medicalization of pets and the performance of animal protein exports, which provided conditions for the sector to invest.

The acquisition of Clarion Biosciences, a Brazilian company based in Goiás, in 2019, is the main growth driver for Vetoquinol, Mr. Espanha said. Last year alone, the company put 10 new products on the market, five of them developed in Brazil. “These are products that will be exported to the world,” he said. Before the purchase, the company’s revenues in the country stood at R$88 million.

The closer relationship between guardians and pets during the coronavirus pandemic also favored the business of the Brazilian subsidiary – even though the pet segment currently represents only 15% of the operation in the country. Globally, the rate is over 65%.

More representative in terms of revenues at this moment, livestock also had a favorable year for the adoption of technologies focused on animal health. According to Mr. Espanha, the strong pace of exports, especially of poultry and beef, allowed producers to add value.

The executive was cautious when talking about the future. According to him, government programs will be necessary after the elections to generate jobs and encourage consumption. Otherwise, an eventual increase in supply – livestock enters the cycle of high availability of animals this year – can reduce margins.

The company is also pressured by the high cost of inputs used to make its products, in addition to international freight. As a result, the company has been moving up purchases and using its global operation as a trump card in negotiations.

Vetoquinol is investing R$5 million in the expansion of its industrial complex in Goiás. The plan is to have three production lines and export products. Listed on the Paris stock exchange, the company expanded sales by 22% worldwide last year, to €427 million. The business was driven by the acquisition of antiparasitic products for pets.

Source: Valor International

https://valorinternational.globo.com

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EU seeks companies in Brazil to encourage transition technologies

Maioria das organizações planeja fazer transição digital em 2019 - Revista do Call Center

A Brazilian farmer who wants to adopt some practice that reduces greenhouse gas emissions in his property may not always know or have available the necessary technologies to put his ideas in place. But these technologies do exist, and the European Union is making its efforts to show that there may be companies in the bloc capable of meeting this demand.

Through Low Carbon Business Action (LCBA), a business platform created by the European Union from the European Green Deal of 2020, the bloc wants to encourage commercial agreements between small and medium-sized European technology suppliers and Brazilian companies that want to invest in energy transition, circular economy and climate change mitigation in the country.

Some deals have already started to be made. Since the beginning of its operations in Brazil, the LCBA has already negotiated 14 agreements totaling €22 million, implying a potential reduction of more than 430,000 tonnes of carbon dioxide equivalent per year. And, to accelerate its operations in Brazil, the LCBA will launch a public call to draw more Brazilian entrepreneurs in search of technologies for greener businesses.

For this cycle of client prospection, the platform listed priorities to foster in Brazil: biogas and biomethane, low carbon agriculture, waste management, renewable power (including bioenergy, wind and solar) and recycling.

“The European Union has tested technologies for this. The challenge was how to bring them to Brazil and other countries,” said Marcelo Perpétuo, LCBA’s country manager. The effort is also in place in other countries of the Americas, including Argentina, Chile, Canada, Colombia and Mexico. LCBA initially maps small and medium-sized European companies that have developed green technologies, creating a portfolio that currently includes more than 500 companies in Europe.

The proposal is to offer solutions from European companies that do not usually have the same means of multinationals to reach the market, but that also have disruptive technologies for energy transition or circular economy.

Mr. Perpétuo cites cases like that of a small business in Serbia that developed an enzyme that can be added to animal feed and is able to reduce methane emissions from cattle, or of a company with presence in Spain and Finland that can identify the species within an area of vegetation using microsatellites and radars.

Besides bridging the gap with clients on the other side of the Atlantic, LCBA also offers to support investors in their investment and business projects. This support can be technical, organizational, or even financial. Thus, if the inputs need financing, the team of the European initiative helps to structure the investment plan and offers the financial firms an environmental analysis of the proposal.

“Today there is a lot of capital set aside for ESG, but there are few robust projects for this capital to be delivered. When we enter the process, it makes things easier,” Mr. Perpétuo said. All the support is funded by the EU.

The fact that LCBA also proposes to work with companies from different segments paves the way for technologies that are usually directed to some fields that can be explored in different businesses, in a kind of “cross-pollination” of technologies, the executive said.

He guarantees, however, that the Brazilian companies interested in the initiative need to ensure that the investments they intend to make are in fact transformative of the business, to avoid the risk of greenwashing. To this end, the projects are evaluated based on environmental indicators and by an independent auditor.

Source: Valor International

https://valorinternational.globo.com

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Agribusiness exports grow 65% in February

Soy export in Paranaguá — Foto: Fabio Scremin/APPA
Soy export in Paranaguá — Foto: Fabio Scremin/APPA

Brazilian agribusiness exports reached $10.51 billion last month, 65.8% more than a year earlier and a new record for February, according to data from the Secretariat of Foreign Trade (Secex) compiled by the Ministry of Agriculture. So far, the best February ever had been 2019.

Both the average prices of exported products and volumes increased and helped the result — rising 24% and 33.7%, respectively. As a result, the share of agriculture in Brazil’s total exports grew again and reached 45.9%. In February 2021, the share was 38.7%.

The sector’s trade balance saw a surplus of $9.2 billion, as imports dropped 2.1% in February, to $1.25 billion, despite the increase in average prices of several imported products, such as wheat, malt, salmon and palm oil.

Imports compiled by the ministry do not consider inputs used in the sector, but it released a balance of purchases of these products in February – fertilizer imports increased 124.1%, to $1.63 billion. The average price grew 128.7% in the period.

“It is important to point out that, in February, the survey of international fertilizer prices carried out by the World Bank indicated an average price increase of almost 100% in the last 12 months. To clarify this point, the volume of fertilizers imported by Brazil was about 2% lower compared to February of the last two years (2021 and 2020): from 3 million tonnes in February 2021 to 2.94 million tonnes in February 2022,” the ministry said. The main fertilizer suppliers to Brazil were Russia, Canada, China, Oman and Qatar.

The positive performance of agribusiness exports in February was driven by shipments of soy beans, fresh beef, green coffee, soy meal, fresh chicken and wheat, the latter a product that typically makes up the country’s import basket.

The volume of soybeans exported was a record in February, with 6.27 million tonnes, up 137% compared to the same period last year, when 2.6 million tonnes were shipped.

The value of these shipments saw an even more expressive increase, 203%, to $3.1 billion from $1 billion. The average price per tonne increased 28%, to $501 from $392.

China is the largest importer of soybeans from Brazil. In February, the Asian country increased the amount purchased by 130%, reaching 4.3 million tonnes, about 69% of all Brazilian soybeans sold to the world. The amount paid for the product increased 186.6% year over year and stood at $2.17 billion.

With the normalization of sales to China, exports of fresh beef grew by 75.1%, reaching $965 million. The volume exported increased by 42%, and the average export price grew by 23.3%.

China doubled the value of purchases compared to February 2021, to $546.49 million and 87,100 tonnes from $261.79 million and 56,410 tonnes.

Foreign sales of chicken meat rose 26%, to $643.11 million. The increase in the average export price was 18.8%, and 6% in the volume exported.

Brazilian exports of green coffee increased 83.5% in price. Brazil exported 208,500 tonnes, up 9.1% from 2021.

The ministry also highlighted wheat in the list of the main products exported. “The grain exports exceeded imports: $246.3 exported (836,600 tonnes), compared to $141.58 million imported (498,800 tonnes).”

According to a report by the Center of Advanced Studies on Applied Economics (Cepea) of the Luiz de Queiroz College of Agriculture (Esalq/USP), the favorable conditions of international prices and the greater external acceptance of wheat with lower pH, a characteristic of the local product, have driven the increase seen in Brazilian exports.

Source: Valor International

https://valorinternational.globo.com

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Canada opens market for Brazilian beef, pork

Livestock in Mato Grosso do Sul: Brazil surpassed the threshold of 200 open markets since the beginning of 2019 — Foto: Divulgação
Livestock in Mato Grosso do Sul: Brazil surpassed the threshold of 200 open markets since the beginning of 2019 — Foto: Divulgação

Agriculture Minister Tereza Cristina said on Monday that Canada has authorized the start of imports of beef and pork produced in Brazil. She is in the country to meet Canadian executives to try and expand the potash supply to Brazil.

“The opening means that we exceed the 200 markets set by me as a goal in the Ministry of Agriculture, and it is also very good news for Brazilian meatpackers, who can employ and bring income to the interior of the country,” the minister said in a video posted on social media.

With the authorizations confirmed on Monday, Brazil surpassed the threshold of 200 open markets since the beginning of 2019, when Ms. Cristina took office. She said that Canada is “one of the most important markets in the world.”

The Brazilian Animal Protein Association (ABPA) celebrated the opening of the Canadian market for pork from Brazil. The organization clarified that, at first, the green light is valid only for the product from Santa Catarina, which was the only state free from foot-and-mouth disease without vaccination when the request was made.

“Negotiations will continue for the inclusion, in the future, of new areas already recognized with the same status by the World Organization for Animal Health,” the ABPA said in a note. Santa Catarina accounts for over 50% of Brazilian pork exports.

Ms. Cristina left for Canada on Saturday. In Ottawa, she met with representatives of Brasil Potash, a Canadian-controlled company that explores a deposit in the Amazon, and with Canada’s Deputy Minister of Agriculture, Paul Samson.

“For our country to continue increasing the food supply and contributing to world food security, we will need potassium fertilizers,” the minister wrote in another post. “This does not just mean ensuring current levels of purchases, but expanding them. We can and must strengthen our ties and strengthen long-term partnerships. This means, in practice, food in quantity and quality at affordable prices on everyone’s table,” she said.

Tereza Cristina will also meet with the chief executives of Gensource, Mike Ferguson, of Nutrien, Ken Seitz, of Canpotex, Gordon Mckenzie, and of Fertilizer Canada, Karen Proud.

Source: Valor International

https://valorinternational.globo.com

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Brazil commits to increase oil exports after U.S. request

Eberaldo de Almeida Neto — Foto: Leo Pinheiro/Valor
Eberaldo de Almeida Neto — Foto: Leo Pinheiro/Valor

The Brazilian government has committed to increase oil exports amid a U.S.-led effort to mitigate the impacts on global supply in the face of U.S. sanctions on Russian production and to contain the appreciation of the barrel on the international market.

Yet, despite its growing share in global exports in recent years, Brazil has a limited capacity to raise domestic production immediately. The Brazilian contribution in the short term, therefore, is expected to be marginal, experts say.

Overall, Brazil exported, on average, 1.3 million barrels/day in 2021, equivalent to 45% of the volume extracted from domestic fields. The country is one of the ten largest producers of the commodity in the world and is on its way to becoming one of the most relevant exporters in the next ten years.

The Ten-Year Energy Plan, from the Energy Research Company (EPE), projects that, starting in 2022, most of what Brazil produces will be exported. The forecast is that 51% of the volume produced in the country will be sold on the foreign market this year. In 2031, about two thirds of the national production will be shipped, which could raise Brazil to the position of one of the five largest exporters in the world, the state-owned research company says. It turns out that the growth of exports will be gradual and there are no prospects that the country can, immediately, contribute in a relevant way to replace a potential reduction in the Russian supply. Brazilian oil accounts for about 4% of global production of the commodity.

Fernando Valle, a senior oil and gas analyst at Bloomberg Intelligence, says that Brazilian production, concentrated mainly in the pre-salt layer, has particularities that make a short-term response to the increase in global production difficult when compared to the reality of onshore unconventional oil and gas fields (shale) in the U.S. and Canada – where producers take between three to nine months to increase production, depending on market conditions.

In the pre-salt layer, the development of new projects takes years to getting off the drawing board, Mr. Valle said. Floating platforms (FPSO), for example, are typically leased three to four years in advance, and Asian shipyards now concentrate the business – which now face delays in the delivery of orders due to the imbalance of global chains after the outbreak of the pandemic.

“In addition, Brazil imports diesel and gasoline, so exporting oil means importing oil products. [Any increase in exports] is marginal. Can it increase 100,000 barrels/day? Yes, but the only way [to increase exports substantially] would be if there was a drop in domestic demand, but this scenario is not the best for Brazil,” Mr. Valle said.

Overall, Brazil produced on average 2.905 million barrels/day of oil in 2021, 73% of which from the pre-salt, according to data from the National Petroleum Agency (ANP). This year, only one major rig is expected to start operating in the country: the Mero 1 unit, in the Santos Basin pre-salt.

Petrobras, which accounts for 72.5% of the volume produced in the country, is the largest exporter of domestic oil. Yet, foreign oil companies like Shell, Repsol Sinopec, Petrogal, Equinor, TotalEnergies and Petronas have reported growths in the volumes produced in Brazil – and, unlike Petrobras, which sends most of its barrels to domestic refineries, they have the foreign market as the main destination for local production.

Onshore production, whose production structure is simpler and has a faster response capacity, is small in the country, accounting for 3% of domestic production last year.

The skyrocketing price of oil, driven by the uncertainties in the international market with the war in Ukraine, led the United States to ask Brazil and other major producers, including Venezuela, to expand global production. The U.S. Energy Secretary, Jennifer Granholm, made the request to the Minister of Mines and Energy, Bento Albuquerque, during a videoconference talk last week.

Eberaldo Almeida Neto, head of the Brazilian Institute of Oil and Gas (IBP), is also skeptical about a substantial increase in Brazilian exports in the short term. “Brazil is a market economy and will always produce according to economic rationality, unlike OPEC [Organization of the Petroleum Exporting Countries] countries, which are subject to supply quotas, or countries under sanctions,” he said. “Furthermore, to make offshore areas viable, it is necessary to prove long-term resilience. These investments will not be made based only on the short term,” he added.

Mr. Almeida Neto believes, on the other hand, that a scenario of high barrel prices in the international market, as the current one, tends to favor the extension of the lifespan of mature fields – which are in a natural decline phase, especially in the Campos Basin post-salt and onshore basins. According to him, more expensive oil can make viable reserves that would not be economically attractive with a cheaper commodity. These fields, however, tend to have a lower potential for increasing volumes.

In late February, when commenting on the possibility of Petrobras accelerating investments, in view of the recent rise in oil prices, the company’s chief financial officer, Rodrigo Araujo, said he did not see “much room” for that.

“The only space is when we consider new wells on existing platforms. There is no room to change the production plan in the next three to four years,” said João Henrique Rittershaussen, the company’s head of production development, on the same event.

Marcelo de Assis, head of Latin America upstream research at Wood Mackenzie in Latin America, also believes that Brazil has limitations to respond immediately to the new market conditions. He says that, in the short term, what oil companies operating in the country can try to do to capture the gains from an appreciated oil is to postpone by a few months the maintenance shutdowns of platforms. The analyst also sees limitations in the possibility of adjustments to existing projects, through the connection of new offshore wells to platforms that are already producing. “These are also time-consuming processes, the drilling and connection of the wells takes months,” he said.

Source: Valor International

https://valorinternational.globo.com

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Foreign capital brings R$80bn to Brazilian stock market

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The foreign investors have already brought almost R$80 billion to the Brazilian stock market this year, including purchases on the spot market, futures and stock offerings. In less than three months, Brazilian stock exchange B3 has already attracted 57% of the volume that came in last year. In the face of the Russia-Ukraine conflict, Brazil and other Latin American countries have benefited from the connection to commodities and the rotation of portfolios, from growth stocks to value stocks.

The question is how long this movement will last. There are those who consider that there is still a flow to arrive, since Brazilian assets are cheap in dollars. Others think that the new money won’t go that far because there are elections in Brazil, an unresolved fiscal and interest rate hikes in developed economies.

“Money looks for two things: growth differential and interest, where there is more interest. Ideally, if the region has a positive interest rate differential and also growth, at the margin, it will attract more capital. What the country experienced recently that performed so well was the fact of having depreciated prices. Brazil suffered before with a very devalued currency in relation to comparable peers and had no interest or growth. Press the forward button and the nominal interest rate is adjusted, but not growth,” says Marcelo Santucci, partner and head of international portfolios at BTG Pactual.

“Some of the money came from depreciation and interest rates, what is lacking is structural growth, reforms, there is the challenge of fiscal adjustment and uncertainty with the elections. To have the real big money, you need the structural. That’s one last unknown.”

For Mr. Santucci, this recent movement of foreign flow does not seem to be lasting. Despite the recent international setback, he believes that the diversification of currencies and regions remains a valid strategy for the Brazilians to smooth out periods of high tension as seen in global markets.

Long before the escalation of the war in Eastern Europe, there was already a reallocation of assets in global portfolios that to some extent accompanied the rise in U.S. Treasuries futures, says Leonardo Morales, partner at SVN Gestão de Recursos.

With the rise in long rates, investors reduced their exposure to growth companies, mainly in the technology sector, with more stretched multiples, and went to assets more linked to the commodity chain and banks, which had more attractive prices, segments considered value stocks in the traditional economy. “When you look at the Ibovespa, 60% is made up of commodities and banks. In this rotation, Brazil was favored, as well as all of Latin America: Peru, Colombia, Chile, all had an appreciation, and their currencies, too.”

Mr. Morales says that Brazil has lost a lot of weight in international indices in recent years and any increase brings a strong inflow of capital to the country. He also recalls that Russia usually has a similar participation in the benchmarks of emerging exchanges, but sales there didn’t even happen because the Russian stock market has been paralyzed since the invasion of Ukraine. “There is always a ‘smart money’ that must have sold before and bought Brazil and Latin America.”

It was a money flow that ended up giving outlets to equity managers and local multimarkets that continue to take redemptions, he adds.

A diagnosis of how long this movement will extend over time is, however, the “$1 billion question”, says Mr. Morales. His perception is that it will continue at least until the end of the quarter, in the face of inflationary pressures and commodity prices aggravated by the military confrontation between Russia and Ukraine, benefiting raw material manufacturers. “These are companies that are generating cash, without debt, the rotation from growth to value has room to continue.”

The intensity of the inflow of resources in these first months of the year in Brazil was really surprising, but it is basically explained by the fact that the domestic market is supported by commodity exporters. The global investor makes this association here and with other economies in the region, says Marcelo Arnosti, chief strategist for equities, multimarkets and offshore assets at BB DTVM.

He observes that most companies listed on the local stock exchange are evaluated as being of value, in which the expected return on invested capital is not in the very long term as in growth companies. “The [American index] S&P500 and the Asian one are more recognized as ‘growth’ by the weight of tech companies,” he says. “Asia lost part of its flow to Latin America and Brazil, which explains why the stock market is resistant and the real has been appreciating.”

For Mr. Arnosti, this movement is difficult to fully anticipate, but the rotation should continue, even if the dynamics more directly related to commodities falls.

Looking ahead, this inflow of funds will not necessarily be replicated in the next three, four months, says Marcus Vinícius Gonçalves, Franklin Templeton’s president in Brazil. “Things can go a different way. It does not mean that we have a negative reading, the reading is positive, there will still be flow, but the electoral uncertainty will weigh,” he says. “Brazil is stupidly cheap, the Brazilian stock market is cheap. It could be a very good year for allocators here and abroad.”

Some sectors of the Brazilian stock market were reasonably discounted. The war only accentuated this perception for the commodities segment, says Daniel Celano, head of third-party resources management at Schroders in Brazil. “But we see it as a very one-off thing. For foreigners, in fact, to place Brazil on the list of long-term investments, they need to see growth and GDP, for now, is uncertain.”

For him, the Brazilian exchange rate was closer to the fundamentals, given the good numbers of the external accounts, but he does not see the currency much lower than around R$5 per dollar.

He claims that inflationary concerns remain a global phenomenon, a side effect of the pandemic that ended up being amended by the military conflict in Ukraine. In Brazil, inflationary uncertainties, with growth, elections and the fiscal framework tend to take off the drive from the flow that has been observed.

Source: Valor International

https://valorinternational.globo.com

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Market projects higher benchmark interest rate

Interest Rate Benchmarks | Refinitiv

A scenario that was already difficult for the disinflation process took on even more complex contours, which is ex require a higher interest rate. The significant worsening of the balance of risks for inflation, in the wake of the war in Ukraine, knocks on the door of the Monetary Policy Committee (Copom) of the Central Bank, which is expected to raise the Selic, Brazil’s benchmark interest rate, again this week. While the prevailing assessment is that of a slower tightening now, the new challenges already signal the need for a higher base rate ahead.

In its last three decisions, the Copom promoted increases of 150 basis points in the Selic, but signaled that, at this week’s meeting, the magnitude of the rise should decrease. With the basic interest rate at 10.75%, the market believed the signal from the monetary authority and, of 93 financial institutions consulted by Valor between March 10 and 11, 82 expect the Selic to be raised by 100 bp, to 11 .75%.

The worsening of the inflationary scenario, however, made nine institutions project a 125 bp increase, while two – Austin Rating and UBS BB – believe that the committee will maintain the pace of interest rate hikes at 150 bp at the Wednesday meeting.

Despite this, it is clear to the market that the scenario has worsened significantly. Valor also consulted institutions about inflation this year and in 2023. The survey, conducted on Thursday, covered scenario revisions that took place after the fuel price hike by Petrobras and after a new surprise observed in Brazil’s benchmark inflation index IPCA in February. If, in the previous survey, the midpoint of the estimates indicated inflation at 5.2% this year, now the expectation is that the IPCA will close 2022 at 6.5%.

It is worth remembering, however, that this week’s Copom meeting is expected to be the last in which the 2022 calendar year will continue to be considered in the relevant horizon for the performance of monetary policy. The deterioration of expectations for 2023, which become more important, also triggers a warning signal. In February, the median indicated the IPCA at 3.4% at the end of next year and, now, the midpoint of the projections is at 3.8%.

Part of the market also adjusted its estimates for the Selic and began to see a higher rate ahead. In the Valor survey, the median of 91 projections collected points to the Selic at 12.75% at the end of the cycle (compared to 12.25% in the previous survey). A relevant part of the market, however, believes that the basic interest rate can reach at least 13% – which was stated by 44 institutions (48.3% of the total).

“When we think about the design of monetary policy from now on, we see that the Central Bank is dealing with an increasingly persistent inflation,” says Gustavo Arruda, BNP Paribas’ head of economic research for Latin America. “With a new shock on top of already high current inflation and inflation expectations above the target, what the Central Bank should do is continue in action, and that means raising interest rates for longer.”

Last week, the French bank raised its forecast for the Selic to 13.25% from 12.25% at the end of the cycle, which would take place in June. “It’s not a big change of scenery, it’s 100 bp higher. I believe that this is an adjustment for the Central Bank to coordinate inflation expectations and avoid the transmission of these shocks throughout the economy,” says Mr. Arruda.

Despite the deterioration of the inflationary scenario, the vast majority of agents continue to see a 100-point rise in the Selic rate this week as the most likely move. This is the case of Apex Capital’s chief economist Alexandre Bassoli, who projects the basic interest rate at 12.75% at the end of the current cycle.

Although he emphasizes that monetary policy “still has a lot of work to do to make inflation converge to the targets,” Mr. Bassoli still expects a deceleration in the pace of the Selic increase, from 150 bp to 100 bp, when considering the lagged effect of interest rates. “We have already advanced a lot in the cycle here in Brazil and, considering the uncertainties, this Copom guideline to produce a deceleration in the pace of growth seems reasonable. But there is still work to be done,” he emphasizes.

The economist recalls that the Copom had already mentioned “next adjustments”, in the plural, and, in the current context, there is a suggestion that the hike to be carried out this week will not be the last. “We have at least one more to go. I would expect at least two more,” he says. According to Mr. Bassoli, the probability of an extension of the cycle has increased, as the inflation figures in Brazil showed unfavorable dynamics even before the conflict, which tends to worsen.

On Brazilian stock exchange B3, the digital options market indicated, on Friday afternoon, a 66% chance of a 100 bp increase in the Selic in March. This possibility, however, has already reached more than 90%. In addition, the market has now built in higher odds of a 125 bp increase (20%) and a 150 bp increase (15%).

“In our view, even with a scenario of more perennial shocks, the Central Bank has a more limited total budget to raise interest rates, given the advanced stage of the cycle,” assesses Mirella Hirakawa, senior economist at AZ Quest. “It makes sense to go as planned and reduce the dose of adjustment.”

Although also pointing to a slowdown in pace, chief economist at Panamby Capital, Tatiana Pinheiro, notes that a good part of the factors advocates in favor of maintaining it. “Inflation surprised upwards; expectations continued to be revised upwards; commodity prices in reais also increased despite the appreciation of the real; even economic activity came in a little better than expected… These are indicators that go in the opposite direction of a reduction in the pace of adjustment.”

A focus for investors’ attention, in the current environment of high uncertainty, will be what the Copom will signal for the next steps. There are those who believe that it would be more prudent for the committee to anticipate a further deceleration of pace for the May meeting. This is the case of Fernando Honorato, chief economist at Bradesco, for whom the Central Bank should re-emphasize, as in the last meeting, the lag in monetary policy and also give weight to the transitory aspect of the shock in the balance of inflation risks.

“The Central Bank’s reference scenario projections will change significantly, but it has to assume some reversal of the commodity shock by the end of 2023, which is the horizon it is looking at. If not, we will be thinking about Selic levels above 13%, eventually, and that would involve a very big sacrifice for the activity”, evaluates Mr. Honorato. Last week, Bradesco increased its Selic forecast at the end of the cycle to 12.75% from 11.75%, but the economist expects more moderate interest rate adjustments ahead so that there is time for the Copom to observe the effects on economy.

In addition, he says that the Central Bank should emphasize the fight against the secondary effects of a classic supply shock like the current one. “If it doesn’t do that, the monetary authority will give the impression that it wants to endogenize an external supply shock, which is like saying it intends to fully combat this local effect of global inflation. It actually makes more sense to emphasize combating secondary shocks.”

For Mr. Hirakawa, with AZ Quest, what remains for the Central Bank “is to slow down the pace while maintaining the hawkish tone for the next meetings. “The Copom has to remain vigilant, but it must lengthen the cycle with more moderate doses of tightening because inflation expectations for 2023, lower than those for 2022, will become its exclusive focus after this week’s meeting,” she says.

At the other end, UBS BB started to project an increase of 150 bp and a Selic of 13.75%, in view of the increase in commodity and energy prices, which should make inflation this year and in 2023 higher than previously expected and lead to a slower normalization of relative prices. Thus, it is of “extreme importance” that no central bank, in particular the Brazilian one, allows inflation expectations to move upwards, at the risk of losing control, economists point out in a note to clients.

Source: Valor International

https://valorinternational.globo.com

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