Diamante to invest R$5bn in gas-fired thermal power plants

Company announced joint venture with Qatar’s Nebras Power to invest in two projects in Santa Catarina

09/09/2022

Pedro Litsek — Foto: Divulgação

Pedro Litsek — Foto: Divulgação

Diamante Geração de Energia unveiled a joint venture with Nebras Power, an international energy investment company and a subsidiary of Qatar Electricity & Water Company (QWEC), to invest R$5 billion in two natural gas thermoelectric projects in Santa Catarina. Last year, the company had already acquired the 857 MW complex Jorge Lacerda, in Santa Catarina, from Engie Brasil Energia for R$325 million.

The first project foresees the construction of the Norte Catarinense thermoelectric plant, a 600 MW project bought from Engie, with investments of up to R$3 billion. It is expected to be located in Garuva. The second is a 440 MW generation unit, which will be set up inside the Jorge Lacerda thermoelectric plant, with an investment of up to R$2 billion.

Engie CEO Pedro Litsek said that in the joint venture, each party owns 50% of the projects and will jointly explore investments in the gas thermoelectric plants. According to him, the equity in these projects will be divided equally between the companies, with 30% of the total investment being made with their own capital.

“The first [project] is more prepared to participate in auctions, which is the Norte Catarinense thermoelectric. We already have the permit, land, and everything that is needed. The second project is in the final stages of the environmental permit within the Jorge Lacerda complex, and we hope to have this permit by the end of the year,” Mr. Litsek said.

The investment is conditioned on a guarantee of new revenues, should the company win the capacity auctions scheduled for 2023. The construction of the thermoelectric plants is expected to start the following year, and the projects should start operating in 2028.

The second venture, within the Jorge Lacerda complex, which has seven coal-fired generating units, plans to take advantage of the land and infrastructure already installed on the site to install a gas turbine. As an example, Mr. Litsek highlights the transmission and water lines already available.

The executive considers that the project has an important social side. Bill 712/19, which extended for 15 years, starting in 2025, the contracting of coal-fired thermoelectric plants, benefited the Jorge Lacerda thermoelectric complex, by means of an energy contract.

The former owner, Engie Brasil Energia, was considering shutting down the complex if it did not find a buyer, but the coal industry found a way out to make operations viable. The law also provided for the reallocation of the labor force of about 20,000 workers involved in the coal chain to other activities.

“The two projects will allow us to mobilize the manpower we already have to be used in these new ventures,” Mr. Litsek said.

The challenge for Diamante to be competitive in the auction and, in the future, in maintaining the thermal plants, are the gas supply guarantees. The Garuva project is more strategic and can even initiate the operation of the LNG (liquefied natural gas) terminal that is being built in the Port of São Francisco do Sul.

“We are close to the connection point of the New Fortress Energy terminal on the Bolivia-Brazil pipeline, and we see the gas for the Norte Catarinense Thermoelectric coming from this terminal,” Mr. Litsek said.

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Ibema mulls new pulp mill in Paraná

Studies are in an advanced stage and are expected to be submitted for approval later this year

09/08/2022

Nilton Saraiva — Foto: Divulgação

Nilton Saraiva — Foto: Divulgação

Ibema, a cardboard maker that has Suzano as a shareholder, is studying the feasibility of building a new mill to make bleached chemi-thermomechanical pulp, or BCTMP, in Turvo, Paraná. The estimated investment in the unit, which will have a production capacity of up to 160,000 tonnes of raw material per year and is expected to be Brazil’s largest one, was not disclosed, since negotiations with suppliers are still underway.

The studies are in an advanced stage and are expected to be submitted for approval later this year, CEO Nilton Saraiva said. This way, the construction work could start, at the latest, by the second quarter of 2023. “This plant will have Brazil’s most modern BCTMP production process,” he said.

About 40% of the additional BCTMP production will be used by Ibema and 60% will be supplied to Suzano through a long-term contract and at market prices. The new plant will meet the companies’ current demand and support future expansions in cardboard production.

“The BCTMP project will considerably improve the return of the capacity expansion projects that are currently being studied by both companies,” said Fabio Almeida, Suzano’s executive director of paper and packaging, in a note.

The investment will also allow for an increase in both margins and quality of the cardboard paper, which is used in packaging production, produced by Ibema. There will be gains in rigidity and printing, for example.

Ibema’s cardboard output, which is operating at the limit of its capacity, is expected to exceed 150,000 tonnes this year. In 2023, through initiatives to streamline production, the output should reach 160,000 tonnes. The company has plants in Turvo and Embu das Artes, São Paulo.

“The project brings us more control over the supply chain, which is important because of customer service and brings greater competitiveness in terms of costs,” the executive said. Today, the company exports about 25% of its cardboard output despite mounting quality requirements in the international market.

According to Mr. Saraiva, Ibema has already secured the necessary volumes of wood to supply the new plant, considering its own crop and third-party inputs. The mechanical pulp contains 80% eucalyptus and 20% pine.

Looking at the industrial assets, the Turvo plant will specialize in cardboard produced from virgin fiber, while the Embu das Artes plant output will be focused on recycled paper, another strategic market for the company.

In 2019, the company launched Ibema Ritagli, the first post-consumer triplex cardboard in the Brazilian market, with 50% recycled fiber, of which 30% comes from post-consumption. Today, about 7% of total revenue comes from products with post-consumer trimmings. Ibema Impona, in turn, is composed of post-industrial trimmings.

According to Mr. Saraiva, the domestic demand for cardboard is still strong and exports had to be reduced to ensure domestic supply. The domestic market is expected to grow by 2% to 3% in volume.

The demand for cardboard remains steady, especially in the pharmaceutical and delivery segments and in those where plastic is being replaced by more sustainable materials like disposable cups. The demand from end consumers for products with a greater sustainability footprint, such as cards with post-consumption trimming, has also ensured sales growth. “This brings opportunities in circular economy projects,” he said.

*By Stella Fontes — São Paulo

https://valorinternational.globo.com/
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Raízen starts integrating Biosev’s sugarcane suppliers

350 farmers will have access to access to rural credit, technologies and input purchasing pool

09/08/2022

A year and a half after agreeing to buy Biosev from Louis Dreyfus Company (LDC), Raízen is starting to integrate the company’s sugarcane suppliers into its relationship dynamics with farmers. In total, 350 farmers will have access to the company’s initiatives such as access to rural credit, technologies and an input purchasing pool.

With the addition of these producers to its base, Raízen will have around 2,000 sugarcane suppliers, which represent half of the volume of raw material processed. In the 2022/23 season, they are expected to harvest around 40 million tonnes, half of the almost 80 million tonnes the company is expected to crush in this cycle, as Raízen itself indicated in its last earnings report.

The integration of suppliers is the last step in the union of Biosev’s business with Raízen. The transaction, closed for R$3.6 billion and exchange of shares with Biosev’s former shareholders, increased Raízen’s crushing capacity by 30 million tonnes per cycle, making it account for one-fifth of the sugarcane processed in the South-Central region.

Offering relationship programs to these and its other sugarcane suppliers is a crucial part of Raízen’s strategy to ensure the supply of raw material at a time when the sugar-and-ethanol industry faces a shortage of sugarcane.

Amid low productivity, the mills face increasing competition. There is also fierce competition with the advance in soybean cultivation, which has reduced sugarcane fields.

One strategy has been to include the new suppliers in a pool of input purchases led by Raízen in its Cultivar program, which results in cost reductions by increasing the scale of purchases.

Ricardo Berni — Foto: Divulgação

Ricardo Berni — Foto: Divulgação

The company expects Biosev’s former producers to start joining the pool in the next crop, said Ricardo Berni, Raízen’s agribusiness director. In the last season, the organization of the pool allowed the company and 282 producers to circumvent cost inflation aggravated by the war in Ukraine at the end of the season, resulting in a savings of R$71 million, compared to R$295 million committed with inputs.

In general, the savings are around 7% to 10% in relation to market prices. In three harvests, Raízen and 200 suppliers – mostly large ones – saved R$120 million.

“More than the savings, farmers now have access to information, better logistics, and predictability,” Mr. Berni said. As many suppliers also produce other crops, the partnership can help them with other activities.

The former suppliers of Biosev’s plants will also be able to access rural credit Raízen intermediates with Santander. Last season, the company facilitated the granting of R$120 million in credit from the bank to its suppliers.

Between 20% and 25% of the producers that integrate the Cultivar program tap the line of credit. Through the program, Raízen speeds up the concession of credit to farmers, reducing the red tape normally faced by individual farmers.

The company does not reveal estimates of the pace of integration of Biosev producers to its input purchase and agricultural credit programs, but expects “good adhesion,” assures Mr. Berni. The challenge is to access regions where Raízen was not present before, such as Ribeirão Preto (São Paulo), Minas Gerais and the Biosev cluster in Mato Grosso do Sul.

Some suppliers coming from Biosev are already accessing technologies that Raízen fosters in its startup hub, Pulse, in Piracicaba (São Paulo). The company has been promoting 24 tools developed there with producers from the Cultivar program. “With the scale we have acquired, we can transfer much more technology,” said Mr. Berni.

According to him, the “triad” of solutions offered – formed by the Cultivar program tools, the Elos program, more focused on sustainability, and Pulse – intends to “raise the level of profitability and productivity” of producers, who continue to be harassed by competition in the segment and by the expansion of soybean plantations.

Raízen also indicated that it expects to consolidate until the end of this harvest a program that will reward suppliers that improve their environmental and social practices. The plan is to offer better conditions to producers with “excellence in sustainability,” such as priority access to the purchasing pool, discounts on products and more attractive rates.

*By Camila Souza Ramos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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CSN concludes purchase of cement company

Benjamin Steinbruch signed check for R$5.2bn to take over LafargeHolcim’s operations in Brazil

09/08/2022

Benjamin Steinbruch — Foto: Claudio Belli/Valor

Benjamin Steinbruch — Foto: Claudio Belli/Valor

By signing a check for R$5.2 billion, businessman Benjamin Steinbruch, the main shareholder of steelmaker Companhia Siderúrgica Nacional (CSN), concluded on Tuesday the purchase of the cement company LafargeHolcim Brasil, unveiled one year ago. The deal was approved by CADE, the country’s antitrust watchdog, in August and was not contested within the usual period of 15 days. In dollar terms, the acquisition was closed for $1.025 billion – at the exchange rate of R$5.7 to the dollar at the time, the value was equivalent to R$5.8 billion.

In a notice of material fact, CSN said its subsidiary CSN Cimentos S.A., which concentrates the group’s cement manufacturing and sales operations, takes over 100% of the shares of LafargeHolcim (Brasil) S.A. As a result, the company acquired from the French-Swiss group Holcim is now called CSN Cimentos Brasil S.A. and becomes a wholly owned subsidiary.

Last year, Mr. Steinbruch’s cement company also acquired Paraíba-based Cimento Elizabeth for R$1.1 billion.

The acquisitions of Elizabeth and LafargeHolcim elevated CSN to the rank of Brazil’s second-largest cement producer, behind only Votorantim Cimentos and just ahead of InterCement Brasil. Total annualized production and sales of the new CSN Cimentos are estimated at 12 million tonnes – a volume to be confirmed by the end of 2023.

Holcim representatives arrived in Brazil on Monday to define the last details of the deal – and receive the check from Mr. Steinbruch’s hands. They met with him and had dinner with CSN executives, the businessman said during an event held by Valor. CSN was awarded in the Metallurgy and Steelmaking category.

“I am paying this semester, until the end of the year, R$9 billion in acquisitions,” Mr. Steinbruch said, listing the purchases of the cement company, Rio Grande do Sul-based power generation company CEEE-G, and two other companies in the sector (Energética Chapecó and Santa Ana Energética).

According to the businessman, the group has a project to invest more in power generation, with emphasis on renewable energy, such as solar. The goal is to supply the group’s own demand. The manufacture of cement is electricity intensive.

CSN already owns a thermal plant (235 MW) in the steel plant of Volta Redonda (Rio de Janeiro) and stakes in the hydroelectric plants of Itá (in the South region) and Igarapava (between Minas Gerais and São Paulo).

LafargeHolcim brings a net revenue of R$2.15 billion obtained in 2021, with an EBITDA of 64.2%, to CSN Cimentos. Ten operational units (integrated plants, mills and blending) in the states of Paraíba, Bahia, Espírito Santo, Minas Gerais, Rio de Janeiro, Goiás and São Paulo will be integrated by the group, with a capacity of 10.3 million tonnes a year.

After the two deals, CSN Cimentos has 13 plants in Brazil.

*By Ivo Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank cools expectations of rate cut in early 2023

Lack of consistency in inflation projections still worries asset managers

09/08/2022

The Central Bank has tried to cool expectations that it will start reducing Brazil’s key interest rate as early as the first quarter of 2023. The fact that short-term inflation slowed down and commodity prices went south in the international market was a determinant to bringing down future interest rates in the last few days. This backdrop paved the way for the market to price in the yield curve the key rate, known as Selic, below 13.75% per year as early as March 2023.

The rise in future rates on Tuesday partly eliminated this variation. Yet, some market participants still expect interest rate cuts early next year.

Central Bank President Roberto Campos Neto told the audience at an event held by Valor on Monday that the monetary authority is not thinking about lowering interest rates at this moment. He has also reinforced the message of the last meeting of the Monetary Policy Committee (Copom), in August, when the Central Bank indicated that it will analyze the need for raising the Selic once more. Mr. Campos Neto’s message was reinforced by Bruno Serra Fernandes, the bank’s monetary policy director, who showed concern on Tuesday about the de-anchoring of inflation expectations for 2024 – the median is 3.43%.

“The work of the Central Bank has already been done. It recognizes this and has signaled that, from now on, it must remain cautious in order to bring inflation expectations to the target. We agree. The Central Bank must remain cautious, but we also think that this stance will make inflation converge to the target,” said Gustavo Pessoa, a partner and fixed-income manager at Legacy Capital. The firm’s baseline scenario includes rate cuts starting in March 2023.

“Since inflation is just starting to slow down, the Central Bank doesn’t want to commit to cuts, but reality will weigh in. Inflation has started to give way strongly, and not only because of the government’s measures. And this lower inflation has left the real interest rate [ex-ante] close to 9%, a level that will be enough to make inflation converge to the target. This will allow the Central Bank to start cutting interest rates at some point,” Mr. Pessoa said.

In Legacy’s view, in March 2023 the monetary authority will look, in particular, at inflation for 2024 on the relevant horizon, whose expectation is today at 3.43%. “We expect expectations to anchor again and the median of 2024 projections to return to 3% by March. The Focus expectations will probably drop, given the Selic rate level. So it would be a natural path for the Central Bank to start cutting interest rates. We think this will happen as of March, and how fast interest rates will drop depends a lot on inflation dynamics here and abroad,” he said.

On Monday, the yield curve was pricing a cut of about 0.20 percentage points in March 2023 as the starting point for an easing cycle. After the market closed on Tuesday, there was a relevant repricing, and the market stopped betting on cuts in the first quarter of next year.

Alexandre de Ázara, the chief economist of UBS BB, believes that Mr. Campos Neto wants to combat expectations of a premature start to the easing cycle. “I believe he said that it is important to maintain interest rates flat for a while. In my view, the Central Bank doesn’t like to see the market price cuts in the first quarter and I think he wanted to fix that,” he said.

Mr. Ázara believes it is early to price a cut in the first quarter, but sees room for stronger cuts throughout next year, as of June. UBS BB projects that in 2023 the Central Bank will make four 100-basis-point cut in the Selic rate, starting in the second meeting of the second quarter, and a final 50-basis-point reduction in 2023. In addition, the bank expects the cycle to continue in 2024, with the Selic reaching 7.75%.

“This will help inflation to converge to the target in 2024. If it falls too slowly, inflation will not converge in 2024. If it falls too early, it will not converge in 2023,” said Mr. Ázara, whose projection for Brazil’s official inflation index IPCA next year is 4%, well below the market consensus of 5.27%.

Cooler commodity prices in the international market have been key for the downward variation in short-term interest rates in recent weeks. Brent oil prices, now close to $90, drew attention.

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

“For two and a half years, commodities put upward pressure on inflation. It was a headwind that is now changing a little into a tailwind. I think this factor hindered the Central Bank a lot, but now it can be helpful,” said José Carlos Carvalho, a partner and head of macroeconomics at Vinci Partners. Yet, he recalled that services inflation is still under pressure. “Activity is still strong and should remain that way, but commodity-related prices more than make up for the rise in services.”

Mr. Carvalho believes that the Central Bank closed the monetary tightening cycle with the Selic at 13.75% and has a downward trajectory of interest rates ahead, considering that the real interest rate in Brazil is between 7% and 8%. According to him, these are quite high levels, well above the natural rate of interest, which is around 4%. “With help from commodities and the time for monetary policy to make its effect, the cycle of Selic hikes is over. There is no reason for the Central Bank to deliver even higher interest rates,” he said.

The cycle of interest rate reduction is related to the new federal administration and its fiscal policy, the executive with Vinci said. “In the first quarter of 2023, the Central Bank will still want to understand the fiscal policy of the next administration. In the second quarter, if it is the right thing to do, it can start thinking about cutting interest rates,” Mr. Carvalho said.

The fiscal policy is precisely one point highlighted by Tomás Goulart, the chief economist of Novus Capital, to advocate the view that the key interest rate is unlikely to start being reduced at the beginning of next year. He also cited the level of interest rates in developed countries, especially in the United States.

“The fiscal anchor is the first condition for the Central Bank to start reducing the Selic. It must know what the fiscal anchor will look like in the next administration, given the fact that the spending cap has lost credibility,” he said, citing the rule created to limit growth in public spending to the previous year’s inflation, which was circumvented by the Bolsonaro administration. The monetary authority will only feel ready to start easing the Selic when it finds out which fiscal regime will prevail in Brazil, he said.

“And then, considering the legislative process, we still don’t know what the next administration will be and what will be proposed in terms of an anchor. There is no clarity at the moment. And the legislative process to replace the fiscal anchor and pass something in Congress that has credibility should take around six months, that is, it will be time-consuming,” he said. When assessing the necessary conditions for the Central Bank to start reducing the key interest rate, Mr. Goulart said that such a cycle may start in June or August 2023.

*By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Business leaders press for overhauls, fiscal austerity

Leaders of companies that stand out in 27 sectors intend to increase investments in 2023

09/05/2022

Fiscal responsibility and an environment that provides security to private-sector investments are the basis of the model that Brazil must pursue in the next four years, according to the executives that run the most efficient companies in the country.

For this recipe to work, tax and administrative reforms were defended as priorities by the businesspeople that gathered on Monday during the “Valor 1000” award event, which highlights the companies with the best performance in 27 sectors.

Frederic Kachar, managing director of print media and radio at Grupo Globo, highlighted the renewal of winners in the categories: of the 27 winners, 12 are different from the previous year. “This shows the dynamism and how relevant companies emerge in Brazil every year,” he said. Mr. Kachar emphasized that the winning companies show “concern in developing the entire country with operations in all regions.”

“We are celebrating much more than good financial results. We celebrate the values that companies have embraced and must continue to pursue as well. Efficiency, capacity to invest and innovate, environmental protection, employee and community development, for example,” said Maria Fernanda Delmas, Valor’s editorial director.

Although they see 2023 as a still challenging year, due to the need to keep fighting inflation and the still adverse external scenario, most leading companies in each sector intend to increase or maintain the volume of investments compared to 2022. The executives also emphasize the importance of ensuring social advances in the country.

Alexandre Birman, CEO of Arezzo&Co, defends the respect for the spending cap and says that “just as businesspeople need to efficiently manage the generation, allocation, and distribution of their resources, the government must do the same. It is necessary to fight ‘huge money leaks’ so that the funds are directed to the priorities.” Among these, he lists food, education, and health.

Copel CEO Daniel Slaviero agrees that the first priority is the goal of balancing public accounts, which, in his view, will create the necessary conditions for the resumption of sustainable growth, based on the confidence of the private sector. But he points out that the “government will need to establish, together with society, the size of the indispensable social safety net for the neediest population.”

This is also one concern of B3 CEO Gilson Finkelsztain. He stressed the importance of a favorable environment for the strengthening of Brazilian companies so that they contribute to the generation of employment and income. However, he cited urgent issues like “bridging the educational gap, which widened during the pandemic, and having a growth structure that contributes to reducing inequalities in the country.”

Jeane Tsuitsui — Foto: Silvia Costanti/Valor

Jeane Tsuitsui — Foto: Silvia Costanti/Valor

The balance between fiscal austerity and inclusive public policies can come from increased public-private partnerships and investment in technologies that raise the efficiency of services provided to the population. For this reason, Jeane Tsutsui, CEO of Grupo Fleury, advocated an advance in health access policies, with incentives and partnerships that “bring quality care and primary care solutions to low-income populations,” such as telemedicine and digital devices.

In addition to fiscal austerity, Thiago Muramatsu, CEO of Syn Prop & Tech, lists as necessary fronts for action “the adjustment of interest rates, inflation control, and unemployment reduction.” Randon CEO Sérgio Carvalho said it is necessary to move forward with structural overhauls, an infrastructure plan and the efficiency of public management. “These are fundamental pillars to boost the country’s economy, with the potential to improve the business environment and stimulate Brazilian companies to grow, generate wealth and sustainably develop their communities.”

Reflecting on his area of expertise, Eduardo Parente, CEO of the Yduqs group, points out that in basic education it is key to improve “training and continuous development of teachers” in addition to “ways to raise the quality and mitigate regional inequalities of the public education system, which is very comprehensive but needs to deliver more quality.” As for higher education, expanding access of lower-income people to universities should be a priority, he said.

Whirlpool Chairman João Carlos Brega said that “there is no silver bullet,” but considers that the “resumption of the country’s growth and the construction of a safe, stable and attractive institutional environment for investments, capable of providing dignity, well-being and prosperity to Brazilians” depend on an agenda that includes tax and administrative overhauls, and expansion of investments in infrastructure. But he recalled that “society has a very important role to play” in pressing presidential candidates and in presenting new agendas during the electoral campaign.

A tax overhaul designed by executives was considered by WEG CEO Harry Schmelzer Jr. as the “number 1 priority.” He said that it “should include tax breaks for payrolls, investments, and exports, avoiding the accumulation of tax credits and also paying attention to the simplification and reduction of the bureaucracy of the processes.” The rationalization of the tax system also appears as one of the priorities of TIM CEO Alberto Griselli, along with the greater integration of Brazilian companies into international production chains and a “great effort to modernize the Brazilian educational system.” A similar vision is shared by Localiza CEO Bruno Lasansky, for whom investment in education and entrepreneurship is fundamental: “These are fronts with high potential to drive social transformation.”

For Milton Maluhy Filho, CEO of Itaú Unibanco, “controlling inflation and ending the cycle of high interest rates are two major short-term priorities,” since a more robust resumption of growth depends on them, with job and income generation. The continuity of the structural overhauls, especially the administrative and tax ones, is his third priority. Marcelo Arantes, the chief people, marketing and press relations officer at Braskem, listed as priorities maintaining the industry’s competitiveness and legal security, and encouraging job generation.

Suzano CEO Walter Schalka sees a weak world economy in 2023, possibly heading towards recession, which will demand attention in business management. “Although we work with products that present greater inelasticity in consumption, it is necessary to pay attention to the economy to be prepared,” he said, considering that a “fiscal contraction seems inevitable” in the country. World inflation and the cycle of high interest rates in rich countries and its effects on Brazil are also on CSN’s radar. However, CEO Benjamin Steinbruch points out that Brazil “brought forward the rise in interest rates,” which forces down inflation, and, with fiscal control, it will be possible to “put the economy back on track, getting Brazil out of the crisis.”

Among others, Viveo CEO Leonardo Byrro has an optimistic point of view. He evaluates that inflation may converge to something more feasible and point to a reduction in interest rates at the end of the year or in the first quarter of 2023, which unlocks growth and consumption and helps to resume spending.

This scenario gives confidence for an increase in investments. Therefore, even considering the impact of the recent rise in interest rates on fundraising, Airton Gallinari, CEO of Coamo, says that “investments should be at least 50% higher than the R$588 million in the two years 2021/2022.” São Martinho has a similar concern. “For future growth and investments, we will have to be more diligent in capital allocation. This is a discipline we implemented in 2010 and never deviated from it,” CEO Fabio Venturelli said.

*By Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Inflation expectations for 2024 rise as market expects smaller rate cut

Economists are anticipating a more challenging scenario for the Central Bank to meet inflation targets

09/05/2022

Central Bank's building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Fuel tax cuts will remain in place next year, which lowered financial market inflation expectations for 2023 but did not prevent them to rise in 2024 – a year that is already entering the monetary policy radar.

And the market has begun to factor in fewer interest rate cuts next year, anticipating a more challenging scenario for the Central Bank to meet inflation targets.

The Central Bank’s Focus survey with analysts, released Monday morning, shows that the market’s median projection for inflation in 2023 has dropped to 5.27% from 5.3%. It is the third consecutive week of decline in market projections for inflation.

This drop may be linked to the fact that fuel tax cuts will remain in place next year, per the budget bill. The measure, which some market analysts had already priced in, has the potential to lower inflation by 0.6 percentage points next year.

But the measure could also have a negative effect in the longer term because it increases the fiscal risk. In fact, the market’s median inflation forecast for 2024 increased again this week, to 3.43% from 3.41%.

The deterioration in inflation expectations for 2024 is of particular concern because the Central Bank has lengthened the time frame in which it intends to bring inflation to the target. Today, the Central Bank manipulates interest rates with a view to bringing inflation to the target in the first quarter of 2024.

The Central Bank has signaled that it is reaching the end of the monetary tightening cycle. But some analysts believe, according to the Focus survey, that the Central Bank will have to tighten the key interest rate Selic more, or at least postpone interest rate cuts.

The distribution of expectations about interest rates, released Monday by the Central Bank, shows that 80% of analysts think that the monetary authority will leave interest rates stable at 13.75% in the next meeting, in two weeks, keeping them at this level thereafter. But 20% predict a further increase, to 14% per year.

The market is calculating that there will be less room for interest rate cuts in 2023. Before, the median of the analysts’ projections indicated an interest rate of 11% per year at the end of 2023; now, they see the rate at 11.25% per year.

Besides the worsening of fiscal risk after the budget bill was sent to Congress, inflation expectations for 2024 may have been influenced by the second-quarter GDP data, which show that the economy is growing above expectations – a development that may hinder the Central Bank’s efforts to slow down inflation.

The map of the distribution of inflation expectations shows that only a little more than a quarter of economic analysts believe that inflation will stay within the target in 2024, set at 3%.

More than 30% of analysts think it will stay well above the target, in the range between 3.68% and 4.28%. The mapping also shows an upward bias in expectations for 2025, with about 40% of analysts projecting inflation above the target of 3%.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Shopping malls postpone new cycle of launches as sales speed up

Fewer greenfield projects were launched since recession of 2015

09/06/2022

Glauco Humai — Foto: Divulgação

Glauco Humai — Foto: Divulgação

Brazil is on its way to completing a decade since the last great cycle of investment in shopping malls with no sign of a new wave on the radar. Yet, those already in operation have left the pandemic crisis behind, are back to the levels seen before 2019, and expect to grow above the forecast this year.

Fewer greenfield projects were launched since the recession of 2015, which ended the strongest period ever for new projects. In 2013 alone, almost 40 projects were launched, compared with nine this year. Large groups rule out returning to a similar situation in the short term, partly due to the uncertain scenario for consumer spending, low occupancy rates in some cities and higher cost of capital, which makes investments more expensive.

Owners are now focused on expanding old malls, searching for the few good assets still up for sale and seeking new sources of revenues. “After the last big investment cycle, the new malls saw a slower maturation. Foot traffic is still lower than in 2019. In addition, there is still room to expand old developments. Thinking about greenfield projects now doesn’t make much sense,” said Bruno Gargiolli, head of real estate at XP’s investment banking business, in an event held by the bank.

“The model based on megaprojects no longer exists,” said Glauco Humai, head of the sector’s trade group Abrasce. “What do exist are opportunities, projects linked to mixed-use towers. We will even see retrofit efforts and renovations, opening of free spaces, boulevards. And companies will also try to better explore this field, integrate it with e-commerce, and look for other brands [of stores] to stand out.” Future projects are likely to follow this path, large companies in the sector say.

New expansions are still an unexplored road, said Guido Oliveira, Iguatemi’s chief financial officer. “The expansion gained steam in the [2015] crisis, but it hasn’t stopped yet,” he said, at the 10-year anniversary event of JK Iguatemi, in São Paulo, a development of the golden times. Mr. Oliveira recalled that JK cost about R$320 million. Such a project would cost now at least R$500 million, considering the inflation faced by the sector, he said.

Despite the more positive estimates with the expansion of areas, they are still discrete and are picking up steam after the crisis that postponed plans in the retail and real estate markets. The five largest public companies in the industry – Multiplan, Iguatemi, BR Malls, Aliansce Sonae and JHSF – now total 11 expansions, compared with 10 projects in the middle of 2019, before the pandemic. But JHSF and Aliansce concentrate 70% of those, and some are small expansions – the largest one, of 38,000 square meters, of Catarina Fashion Outlet (JHSF), is equivalent to less than 10% of Pátio Paulista, in São Paulo.

“There is still an effect of the crisis on expansion projects, which were frozen between 2020 and 2021 because nobody knew exactly when the recovery would come,” said Luiz Marinho, managing partner at the consulting firm Gouvêa Malls. “But in addition to this growth option, we still have projects with occupancy rates of 80% or 90%, so there is room to improve this and to change store portfolios as well.”

The companies’ results show some clues. Eleven of Aliansce Sonae’s 26 shopping malls had occupancy rates lower than the company’s average in the second quarter. The same happened with 10 of BR Malls’s 29 projects and with six of Multiplan’s 20 malls. JHSF and Iguatemi do not break down figures per mall.

In the list of shopping malls, some have 20% to 25% of idle spaces. “But these are rare cases among public companies. You see more situations like this among private companies, with less resilient portfolios. The occupancy rate has already normalized this year,” Mr. Marinho said. “You see exceptional malls on Paulista Avenue and in office areas, such as Vila Olímpia, still struggling because of the hybrid work model,” he said, referring to the city of São Paulo. In his view, companies should “put more money on the table in the agreements with brands to draw new stores and foot traffic.” The search of new shopkeepers is “somewhat stuck in recent years and must be resumed.”

Aliansce and BR Malls have been approaching digital brands in the fashion and decoration segments to bring them to the malls.

Looking to the short term, part of the groups’ agenda in the coming quarters is to accelerate measures to consolidate the current recovery in sales. Figures are now being revised upwards. Abrasce is raising to 27.4% from 17.3% the projection of expansion of tenants’ sales this year. It is the second revision this year – in May, the rate had already risen to 17.3% from 13.8%.

According to Mr. Humai, the strong performance in the first half of the year – despite the low basis of comparison – and the possibility of a stronger fourth quarter led to the revision. From January to June, sales advanced about 36%. The rate may end the year at 27% because of the expectation of a weaker third quarter – August was a lower month than expected, according to Abrasce’s initial analyses.

Ygor Altero, XP’s shopping malls analyst, said there is an expectation of growth in sales of dominant malls (of public companies) of nearly 20% in the third quarter of this year, compared to the same period of 2019, in nominal terms. Considering figures adjusted by inflation, some malls still face a real drop in sales.

Companies say that the results already show nominal sales above 2019 in some quarters, while default rates are at normal levels and the discounts granted to tenants during the pandemic are being reduced. In the short term, the companies are focused on regaining foot traffic, which is still below normal.

“We have a flow of about 100 million people in Brazilian malls, below our average of 500 million visitors per month. We think it is still the effect of working-from-home policies. Maybe it will not return to 500 million this year. But those who return to the malls are more assertive in their purchases. If it weren’t for the pandemic, we would probably be between 550 and 600 million visitors per month,” Mr. Humai said.

Mr. Gargiolli, with XP, said that asset acquisitions can also be a way to gain scale and increase sales. At the beginning of the year, Brookfield studied to sell part of its assets, but gave up because of bids below expectations. And Sonae Sierra even offered in the market its slice of Parque Dom Pedro Shopping, in Campinas (São Paulo), before canceling the deal. “We still see potential negotiations. Acquisitions of mature assets improve business returns. And we believe this should grow before the return of the greenfield projects, together with the return of individual investors to shopping malls on the stock exchange,” he said.

*By Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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M & A deals increased 26% in first half

Internet and information technology companies accounted for more than half of deals

09/05/2022

Mergers and acquisitions in Brazil increased 26.1% in the first half of this year, to 1,104 deals, compared to the first six months of 2021. Internet and information technology companies totaled 590 deals, research by KMPG shows.

The long-time consolidation drive in the technology market remains in place. Totvs announced on Thursday the acquisition of a 60% stake in Feedz, which develops human resources management software, for R$66 million. It is the seventh acquisition in the year and Totvs invested, in total, R$233.1 million this year. The recent agreement includes a clause for the purchase of the remaining 40% stake by 2025.

Semantix, a Brazilian technology company traded on Nasdaq in New York, also announced an acquisition on Thursday, when it bought the startup Zetta Health Analytics. The value of the deal was not revealed. The company offers data consulting services for the healthcare industry and complements the big data platform that Semantix offers its clients.

According to the company, Zetta has processed more than R$42.1 billion in claims and cross-referenced data from 764 databases, and now has 640 clients. Semantix says the acquisition strengthens its big data portfolio, adding services to serve the pharmaceutical industry, insurers, hospitals and other companies in the sector.

According to the KPMG survey, during the first three months of the year, 553 mergers and acquisitions took place, up 47.4% year-over-year. In the second quarter, KPMG found that 461 deals happened, up 7.45%.

Between the first and second quarter, there was a 16.6% drop. “Despite the good perspective for this year, if this deceleration trend [in the third quarter] is maintained, we will be a little further away from surpassing the figure seen in 2021,” said Luís Motta, a partner at KPMG and head of the survey. Last year, there were 1,963 M&A deals, surpassing the previous record in 2019.

Despite the favorable exchange rate for foreign companies, about two-thirds of the 646 deals took place between Brazilian companies in the first half of the year. Foreign capital, either on the buying or selling end, accounted for 36% of the mergers and acquisitions in the first half.

The internet and information technology sectors had the most mergers and acquisitions during the first half of this year, with 410 and 180 deals, respectively. Mr. Motta said that these companies remain active in the market even in situations of macroeconomic uncertainty since attracting investments is part of their growth cycle.

He recalled that the internet and technology industry experienced robust growth in the pandemic, increasing the number of companies in the market.

Technology companies end up being especially affected by rising interest rates as a result of their business models. The many investments to gain scale and expand businesses make them leveraged companies with revenues allocated to the future, which reduces cash flow and makes acquisition by larger groups an alternative.

*By Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Sengi invests R$440m in 2 solar panel factories

Company expects to triple its revenue to R$1.2bn by 2023 with new facilities

09/05/2022

Everton Fardin — Foto: Divulgação

Everton Fardin — Foto: Divulgação

The shortage of photovoltaic equipment on the Brazilian market is opening up opportunities for Sengi Solar. The company is investing R$440 million to build new factories in Paraná and Pernambuco with the capacity to make 1 gigawatt a year in equipment.

These are Sengi’s first factories in Brazil. The Cascavel unit, in Paraná, is ready and will start operating in September. The Ipojuca unit, in Pernambuco, is scheduled to start operating in July 2023. The company, a subsidiary of Tangipar, will have a capacity of more than 3,000 modules per day.

The investment was made with the company’s own capital, and revenues are expected to reach R$1.2 billion next year, up from R$400 million this year, Sergin’s managing director Everton Fardin told Valor.

“The market is red-hot and lacks options of local, state-of-the-art photovoltaic modules. Sengi intends to bridge this gap and grab a large portion of the market, tripling sales by 2023,” he said.

The company bets on offering the equipment to more than 80 distributors of photovoltaic equipment operating in Brazil. It stands out with short delivery times and local post-sales service, since more than 95% of the equipment in the market comes from centralized factories in China.

As ultra-efficient global supply chains face imbalances due to abrupt factory closures because of Covid-19 and logistical hurdles because of the war in Ukraine, the company’s strategy is focused on local production and regional value chains.

Brazil had been facing a decline in manufacturing in the photovoltaic semiconductor sector since 2019, even during a breakneck growth of the distributed generation and centralized generation markets, the executive said. The focus has gradually shifted to the distribution of products imported from China from local manufacturing.

“Therefore, Sengi Solar’s decision to build two new factories fights back strongly against this scenario and brings more autonomy to the supply chain of such a strategic product for the power industry and the planet’s decarbonization plans.”

The solar power industry is indeed the fastest growing in Brazil. In all, there are 16.4 GW of installed capacity of solar power in large plants and small self-generation projects, according to data by the Brazilian Electricity Regulatory Agency (ANEEL).

The investments are expected to generate 500 direct jobs in the two regions where the manufacturing units will be installed. The company invests in the domestic market according to the Brazilian Development Bank (BNDES) rules, which determine that at least 60% of the products are made in Brazil.

“The manufacturing units were dimensioned within the Industry 4.0 concept. We will produce much faster than the local industry,” he said. “Each process will take less than 25 seconds, including assembly, transformation, and inspection.”

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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