Vitol joins energy trading in Brazil

Company received initial investment of R$108m, will focus on large consumers

11/03/2022

Murilo Soares — Foto: Silvia Zamboni/Valor

Murilo Soares — Foto: Silvia Zamboni/Valor

Vitol, the world’s largest independent oil trading company, has launched its energy trading company in Brazil – a segment in which consumers directly negotiate their demands. The new company is called Vitol Power Brasil and aims at serving large energy consumers.

The company received an initial investment of R$108 million, is backed by its parent company, and has already started its first operations. The potential client portfolio, in theory, may be equivalent to Vitol’s own portfolio, which is not disclosed for strategic reasons. The solutions will be tailored to the client’s needs, a typical approach in this sector.

The company sees great potential in the Brazilian market, said Murilo Soares, Vitol Power Brasil’s chief commercial officer. According to him, this is the first step of a business platform.

The focus is on large players in the wake of ordinance 50, of 2022, published by the Ministry of Mines and Energy, which allowed consumers in the high-voltage market to buy electricity from any supplier. This is expected to increase the liquidity of the free market, which will bring more business opportunities, said Mr. Soares.

“Brazil is the largest energy market in South America, with more than 70 GW of demand and several large players. Vitol joins Brazil’s power industry with a long-term vision and commitment, bringing all its trading expertise from around the world to this market,” he said.

The liberalization meets the 500-kW limit defined by Law 9.427, of 1996, by allowing any high-voltage consumer, regardless of their consumption, to choose their supplier. Nearly 106,000 new consumer units will be able to join the free market.

The company knows the country’s potential, as it has been operating in Brazil’s oil and gas sectors for more than 20 years. The arrival of the global fuel giant will diversify its local operations, but it intends to operate mainly in the free energy market.

Brazil’s power industry is expanding mainly through the free market. Some trading companies are expanding their operations by offering services to consumers and generation companies and building greenfield projects specifically for renewable sources.

But Mr. Soares, who leads the company’s implementation and operation in Brazil, said this model is not Vitol’s path. The Dutch multinational company intends to be an independent trading company without generation assets, at least at this first moment.

“As an energy commodity trading company, we will not have a specific focus with regard to the energy sources we will trade. However, it is important to emphasize the company’s commitment to encouraging renewable sources. Vitol’s renewable energy business in the United States includes more than 1 GW of solar and wind power in operation or under construction and an additional pipeline of more than 2.5 GW of projects in solar and battery storage, totaling investments of more than $1 billion. In Brazil, we are unlikely to invest in generation assets at a first moment,” he said.

The market is likely to advance in the coming years, especially with regard to credit risk, with the entry of new and large customers, according to the executive. With greater security and liquidity, he expects a favorable scenario for increasing operations and creating new products.

“In this sense, the energy trading company is the first step towards the creation of a Vitol business platform in the country. By 2023, the company projects to commercialize about 50 average megawatts and by 2025, with the consolidation of the high-voltage market, to reach 1 average gigawatt.”

The focus on the wholesale market and medium and long-term contracts does not rule out retail operations. “We have already started the process to create Vitol Power Brasil’s retail profile in the Electric Energy Trading Chamber (CCEE), which shows that although it is not our focus, we will be attentive to opportunities.”

Currently, only consumers with a demand of more than 500kW, such as industrial companies with electricity bills over R$150,000, can buy electricity from any supplier. The Ministry of Mines and Energy proposes expanding the possibility of choice to low-voltage consumers – including residential and commercial ones, which are in the so-called regulated power market – as of 2028.

*By Robson Rodrigues — São Paulo

Source: Valor Interntional

https://valorinternational.globo.com/
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Investors say goodbye to Petrobras’s dividend era

Analysts start to review recommendation after elections

11/03/2022

Petrobras, Brazil’s largest company by revenues and market capitalization, emerged as a clear loser from presidential election — Foto: Leo Pinheiro/Valor

Petrobras, Brazil’s largest company by revenues and market capitalization, emerged as a clear loser from presidential election — Foto: Leo Pinheiro/Valor

Analysts had a thorny task in the last few months: predicting the future of Brazilian listed companies, especially state-owned ones, before the tightest presidential election ever, with two antagonistic projects for the country. Now that fate is sealed, the time has come to redo the math.

In general, the already consolidated understanding is that the retail, education, and low-income construction sectors will benefit most from the new federal administration. In particular, the correction of target prices and recommendations for winners and losers has begun. Petrobras, Brazil’s largest company by revenues and market capitalization, is clearly in the second group.

The state-owned behemoth has the power to cause seismic tremors in the economy and investments. According to the most recent data from Exchange B3, the shares with the public are divided among about 718,000 individuals, 5,900 companies, and 2,900 institutional investors.

This correction by banks and brokerages had already been happening more discreetly after the first round of voting, according to the events and the winds of the polls. With the definition on Sunday, it tends to become more explicit.

On Monday morning, after the results were known, XP cut by 25% its price target for Petrobras, although keeping a buy recommendation, and took the opportunity to reallocate its bets on its private-sector competitors Prio, which it started covering, and PetroRecôncavo, whose coverage was resumed. BTG Pactual cut its price target by 10%, keeping the previous neutral recommendation, while J.P. Morgan made the most radical move, cutting by 30% the company’s price target and downgrading its recommendation to neutral from buy.

Analysts have different views on what will happen with the oil company’s pricing policy but are unanimous about the change in investments – for example, the return of heavy allocations in refining – which means the end of the dividend bonanza.

“While we are confident that many mistakes of the past will not be repeated,” BTG says in a report, “investors cannot underestimate the new government’s ability to use Petrobras as a vehicle to drive economic growth, investment, jobs, and energy security.”

Put into numbers, the bank calculates that a 50% increase in investments would reduce the dividend yield in 2023 to 15% from 21%, which would cause shares to fall 25%. If investments double, in the worst-case scenario, the dividend yield drops to 9%, causing stocks to decline 53%.

J.P. Morgan foresees payment of 25% of free cash flow in dividends, compared to 60% today, and has a pessimistic view regarding the pricing policy. The bank has reduced the chances of the company passing on international oil prices to fuel prices to 40% from 60%. “The new administration has openly criticized Petrobras’s conduction and has already signaled changes in the company,” the bank said in a report.

Petrobras shares closed slightly higher on Tuesday, at R$33.37 (common shares) and R$29.86 (preferred shares), after a sharp drop the day after the runoff vote.

The state-owned oil company’s recent phase as a relatively safe and highly profitable investment, after a long recovery from the corruption scandals of the not-too-distant past under the Workers’ Party’s rule, has created a great expectation among analysts and investors of the continuity of the current strategy of divestment and large dividends, as well as potential privatization.

The shock of reality was enormous: since the stock peaked on October 21, the company’s market capitalization has dropped R$106 billion. And this is all about politics, considering that local and foreign peers gained ground in the same period.

In this particularly good year for the industry, Petrobras still rose 50%. Yet, it underperformed Prio (which climbed 78%), PetroRecôncavo (70%), and U.S.-based rival Exxon (80%).

For the coming months, there is nothing to expect but ups and downs caused by political news. The third-quarter earnings report, which comes out on Thursday, will have little to say.

In J.P. Morgan’s view, the shares will only come out of a volatile scenario when there is clarity about the plans for Petrobras, which is likely to take at least the first six months of the new term, it predicts.

Meanwhile, more analysts will review their price targets for 2023 and also their recommendations, as a correction seems inevitable. The company was, even with all the problems of a state-owned company, coming in at multiples closer to its peers. But this is now history.

*By Nelson Niero, Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras may put sale of stake in Braskem on hold

With Lula da Silva’s victory, oil company is expected to analyze again plan to leave industry

11/03/2022

Petrobras may or may not exercise the right of preference to acquire the partner’s stake, sell its part or remain in the business — Foto: Edilson Dantas/Agência O Globo

Petrobras may or may not exercise the right of preference to acquire the partner’s stake, sell its part or remain in the business — Foto: Edilson Dantas/Agência O Globo

The sale of Petrobras’s stake in Braskem is uncertain after Luiz Inácio Lula da Silva (Workers’ Party, PT) won the presidential race, sources involved in the talks say. The state-owned oil company hired J.P. Morgan as an adviser last year, when Novonor, the company formerly known as Odebrecht, decided to sell its share.

With the sale of Novonor’s stake, Petrobras may or may not exercise the right of preference to acquire the partner’s stake, sell its part or remain in the business. Novonor, with 38.4% of the company’s capital, and Petrobras, with 36.15%, are part of the petrochemical company’s controlling group.

Sources told Valor that the state-owned company was willing to offload its stake for the right bid. However, with the victory of Mr. Lula da Silva, who has already said he is against privatizing more companies, the oil company is expected to reanalyze the idea of leaving the Brazilian petrochemical company.

Sources close to Mr. Lula da Silva’s campaign have begun to discuss the role of Petrobras in the new administration. They told Valor that the integration of refineries and petrochemical companies is a global trend. One source understands that the petrochemical industry is an important and profitable field that should be strategic for Petrobras. However, there is no definition yet on the sale of Petrobras’s stake in Braskem.

One of the biggest critics of Petrobras’s strategy of focusing on exploring oil in deep waters, and a historical advocate of the company’s stake in the petrochemical company, former Petrobras CEO José Sergio Gabrielli is in the group that advises the Workers’ Party regarding the future of the state-owned company. Mr. Gabrielli told Valor he sees synergies between refining and the petrochemical industry, but only the future administration can speak on Petrobras’s strategy for the sector.

Sources linked to Novonor’s creditor banks say that the Odebrecht family will have to get rid of the business, and Mr. Lula da Silva’s election does not change this situation. However, it is unclear whether potential buyers will maintain a bid covering only Novonor’s stake should Petrobras decide to remain in Braskem’s capital.

The company received a new proposal from the private-equity firm Apollo, which raised the bid to R$47 per share, but there are no formal talks underway, a person familiar with the matter said. The U.S.-based firm will do due diligence before moving forward with the deal, but sources say this is no longer a determining factor.

Apollo’s main concern is the petrochemical company’s assets in Alagoas. Although Braskem has advanced a lot in the talks with authorities about soil sinking in Maceió, the firm still sees risks, including from the financial standpoint. The amount provisioned to cover expenses with the geological problem, allegedly caused by Braskem’s activity there, totals R$12.9 billion so far.

In previous talks with Novonor, Apollo had imposed as mandatory the due diligence before making a formal bid. Now, the company will do the due diligence at its own risk, a source said. The company is said to be interested in Petrobras’s stake as well.

At this moment, there are no negotiations on the table, despite Apollo’s decision to raise its bid. Unipar’s bid for Braskem’s sliced assets in São Paulo has already expired, and the company is waiting for signals from Novonor on what will happen with the petrochemical company before presenting the same bid again or a new one. J&F is also potentially interested but has not presented a new bid.

According to sources, Novonor’s creditor banks showed no interest in Unipar’s bid. They hold about R$15 billion in debts converted into Braskem shares. On the other hand, Apollo’s bid is supported by part of this group. BTG Pactual left the negotiations, according to a source linked to the creditors. The debt-buying division of André Esteves’s bank had asked for a steep discount.

Some creditors believe that Braskem shares can recover in the future, but are skeptical of trading them on the stock exchange in the short term. The banks wait for a better bid, especially from foreign investors.

Novonor and Unipar declined to comment. Apollo and Petrobras did not immediately reply to requests for comment.

*By Mônica Scaramuzzo, Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Blau buys Bergamo, seeks new deals

Purchase is first since IPO, in April last year, and new mergers and acquisitions are expected

10/01/2022

Marcelo Rodolfo Hahn — Foto: Ana Paula Paiva/Valor

Marcelo Rodolfo Hahn — Foto: Ana Paula Paiva/Valor

Blau Pharmaceuticals signed a contract to purchase 100% of the capital stock of Bergamo Laboratory, a subsidiary of the American Amgen, one of the largest biotechnology companies in the world, for $28 million. The acquisition is Blau’s first since its IPO, in April last year, and new mergers and acquisitions operations are likely to take place, according to the company’s command.

“The acquisition will increase our offer of oncological products, with an important increase in production capacity”, said Marcelo Hahn, CEO of Blau, to Valor.

Bergamo Laboratory reported net revenue of approximately R$185 million in 2021, according to Blau, and produced about 2.2 million units, with a portfolio of 19 products and about 190 employees. Founded in 1946, the laboratory was acquired in 2011 by Amgen.

Payment for Bergamo does not involve shares and will be made in cash upon the closing of the deal. The acquisition still needs to be approved by regulatory authorities such as the antitrust regulator Cade, which is expected to happen between 90 and 120 days.

“For us, it is an excellent opportunity. Bergamo Laboratory has biological products and specialized in oncology,” said the head of mergers and acquisitions of Blau Pharmaceuticals, Roberto Morais. “The biggest asset is the immediate increase in production capacity and some new oncology products, chemotherapy,” Mr. Morais said.

Bergamo Laboratory has one plant in Brazil, in Taboão da Serra, in the metropolitan area of São Paulo, very close to two other Blau’s plants, in São Paulo and Cotia, close to the capital. With the acquisition, Blau adds a unit to the other five it already has, in addition to the plant that will be built in the Suape Port Complex in Pernambuco state.

According to Hahn, Bergamo Laboratory will also add to Blau a good knowledge of the industry and a go-to-market model, a differentiated approach to commercialize oncologic products inside clinics and hospitals. According to him, Amgen has differentiated knowledge and works with innovative drugs, and with the acquisition, Blau also receives expertise in the commercial area.

The CEO also says that Blau is looking for new opportunities. The company carried out an IPO in April 2021 and raised R$1.26 billion. “We have never been so active in the area of mergers and acquisitions. We have many companies in our pipeline right now,” in various stages of negotiations, Hahn says. Blau is reinforcing its mergers and acquisitions team.

“We have a well-defined strategic plan. Besides opportunities and pillars for growth in the organic part, we want to increase our industrial park to increase our production capacity. We want to grow in the market and position ourselves as one of the major manufacturers in Brazil and Latin America. For this, we will depend on acquisitions”, according to Mr. Hahn.

The idea is to maintain the operation in Brazil and be able to supply South America and other countries. “In the business plan, we have investments in Brazil, the United States, and Europe for manufacturing”, says the CEO. According to him, in Latin America, there are offices, packaging, and quality control area, necessary in some countries, but the proposal is to centralize in a place with high production capacity and low operating costs.

Besides that, the company is investing in plasma collection centers in the United States. In June last year, it began the collection of plasma in the first center and is finishing the construction of the second, which may start operating by the end of this year, says Mr. Morais. According to him, the company already has defined the location of the third plasma center and is in negotiations for the fourth location, in the Florida region. Mr. Morais says that the company is on schedule for the IPO

“The feeling is that we are just beginning, we still have enough breath to grow, next year we have a public offering, and we will have a very strong investment in the coming quarters to continue growing and bringing value to shareholders,” says the CEO.

*By Cristiana Euclydes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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CSN will invest to replace imported steel

Steelmaker, which acquired a line to make high added value, pre-painted steel in South Korea, has a project valued at up to R$400m

11/01/2022

Luis Fernando Martinez — Foto: Silvia Zamboni/Valor

Luis Fernando Martinez — Foto: Silvia Zamboni/Valor

Brazilian steelmaker CSN wants to occupy a market seen as relevant for high-value-added steel that is currently served by imported material, almost entirely from China. This type of steel, qualified as pre-painted, is used to make white goods like refrigerators, freezers, washing machines, and others, and others, like as coating panels for home construction.

The company is preparing an investment of R$350 million to R$400 million to set up a production unit in Brazil, in a place to be defined this month or by the end of the year. The steel company has acquired in South Korea a complete sheet-painting plant, which will have an annual capacity of 160,000 tonnes, said Luis Fernando Martinez, CSN’s chief commercial officer.

According to him, the rolling mill belonged to the South Korean steelmaker Hyundai Steel and had been paralyzed since September 2020. It is being disassembled and will start being shipped to Brazil later this month.

“We have been analyzing this project for some time, aiming to add value to CSN’s galvanized steel,” the executive said. To make the pre-painted steel, the company uses its own galvanized steel coils.

Mr. Martinez said that there are a few potential sites where the plant could be assembled, including Araucária (Paraná), where it already has operations; Volta Redonda (Rio de Janeiro), next to CSN’s steel production plant; São Paulo; and the Northeast region. All these possibilities, with more or fewer chances, depend on negotiations for the concession of incentives, besides logistics and trained employees.

CSN plans to start the operation of this industrial unit in up to 18 months, seeking to speed up construction and to begin sales to the market in the first quarter of 2024. The infrastructure in Araucária and Volta Redonda is ready, which is seen as an advantage. “This speeds things up,” he said.

Brazil currently imports 165,000 tonnes per year of pre-painted steel coils, he said. “We want to occupy this space and replace imports.” Almost 95% of the material comes from China, through ports in Santa Catarina. São Francisco do Sul, Imbituba, and Itajaí account for almost 91%, according to data from importers.

CSN is already Brazil’s only producer of pre-painted steel. The company’s rolling mill facilities in Araucária have an installed capacity of 120,000 tonnes a year. “We are operating at maximum capacity,” said Mr. Martinez, stressing that it is a booming market.

The Brazilian market for this type of steel last year totaled 259,000 tonnes, according to data from the Brazil Steel Institute and the Economy Ministry. Of this volume, 156,800 tonnes were absorbed by the home construction activity, while 45,100 tonnes were used to make housewares and for commercial purposes. Capital goods, especially electronic materials, accounted for 33,200 tonnes. The automotive industry, the fourth-largest market, accounted for 11,600 tonnes.

Companies such as Whirpool, Panasonic, Metalfrio, Kingspan (panels), Metalúrgica Barra do Piraí, Marko (roof tiles), Imbera, Panatlântica, Facchini (vans), J. Paulatti, Fiat, Elevadores Atlas, and Frigelar are among the users of pre-painted material in Brazil, sources say.

Imports have had continuous growth in the last five years: they went from 73,000 tonnes in 2017 to 95,000 in 2018, 119,000 in 2020, and 165,000 last year, according to official data.

Mr. Martinez said that the applications of pre-painted sheets have been growing in several sectors, many of which it cannot serve. He cited, for example, trailers and semitrailers, van manufacturing (which uses a lot of aluminum, a competitor metal), building facades that imitate wood, and other architectural solutions.

From its Araucária unit, CSN delivers the material to the clients cut in the format ordered, painted, and packaged with plastic film, said Mr. Martinez. In other words, ready to enter the production line. “With the new line, which will further increase quality, we will be able to replace the so-called post-painted steel [painting done at the client’s site or service provider] with pre-painted steel. This is one more market,” the executive said. “A lot of imported material doesn’t meet quality standards.”

*By Ivo Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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EU rejects Lula’s plan to change agreement with Mercosur

Mercosur and the EU continue to work technically on the bi-regional agreement

11/01/2022

Ursula von der Leyen — Foto: Jean-Francois Badias/AP

Ursula von der Leyen — Foto: Jean-Francois Badias/A

The European Union signaled its opposition to president-elect Luiz Inácio Lula da Silva’s intention to change the Mercosur-EU agreement.

On Saturday, the day before the runoff vote, Mr. Lula da Silva published an article in the Paris-based newspaper Le Monde saying that “improving the terms of the Mercosur-European Union agreement will allow us to increase our trade, deepen the bonds of trust and strengthen the defense of our common values.”

In his first speech after his victory in the presidential race, on Sunday, Mr. Lula da Silva warned that he wants to “resume relations with the United States and the European Union on new bases.” And that he was not interested in trade agreements that condemn Brazil to be an eternal supplier of commodities.

When asked by Valor, the EU answered Monday with a clear “no” to Mr. Lula da Silva’s idea, saying that the focus should now be on working towards the implementation of the negotiated understanding.

“We believe that the agreement negotiated with Mercosur is very beneficial for both parties and will provide a framework for strengthening political and sectoral cooperation, trade and sustainable development,” said Mirian Ferrer, EU’s spokesperson for Trade and Agriculture.

“We look forward to engaging with the Brazilian authorities, as well as with the other Mercosur countries, to bring the ongoing process to a successful conclusion (of the agreement). We are notably seeking to strengthen our cooperation on sustainability and deforestation through an additional instrument,” she added.

Mr. Lula da Silva’s idea, which means eventually reopening the trade agreement, had already been cited by him during a trip to Europe before the election campaign. The president-elect suggested that Brazil should get more concessions, for example in the industrial front, and not limit itself to slight gains in agriculture, sources say.

But Brussels indicates that nothing will change. A source from the bloc reiterated that “in principle” it is unlikely to change. The Europeans are still talking about sending to Mercosur a call for an additional commitment against deforestation by the end of the year. This European document is still in the making in the European Commission, and has not yet been sent to the 27 member states, sources in Brussels say.

Reopening the Mercosur-EU agreement, after complicated negotiations over 20 years with interruptions, means continuing to delay an improvement in bilateral trade conditions for companies on both sides against a particularly tense geopolitical backdrop.

Mercosur and the EU continue to work technically on the bi-regional agreement, recently closing issues such as geographical indications. Nobody expects anything to move forward soon, not least because the president-elect’s transition team will have other priorities.

In Brussels, the president of the European Commission, Ursula von der Leyen, in a recent speech to the European Parliament, failed to mention Mercosur when talking about trade agreements. She cited new updates of agreements with Mexico and Chile, but these two are not going to come out any time soon either.

People within the Bolsonaro administration believe that Brazil’s private sector has not asked to reopen what has already been negotiated with Europe. And that Argentina’s President Alberto Fernández, aware of the fragility of its economy, is the one willing to review the understanding.

Plus, some people in Brasília feel that the Europeans made a mistake by failing to close the agreement with Mercosur as soon as possible and to accelerate Brazil’s entry into the Organization for Economic Cooperation and Development (OECD).

The prevailing assessment is that European governments, in order to satisfy some segments of the population that demanded more emphasis on the environment, have antagonized too much the relationship, especially with Brazil. As a result, European companies that want to invest more in the region do not have the advantages they could have through the bi-regional agreement, for example.

*By Assis Moreira — Geneva

Source: Valor International

https://valorinternational.globo.com/
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Market forecasts strong quarter for Petrobras

Average revenue estimate of R$163.7bn represents 34.6% increase over 2021

10/31/2022

Analysts expect that state-owned company will maintain good cash generation in the quarter — Foto: Geraldo Falcão/Agência Petrobras

Analysts expect that state-owned company will maintain good cash generation in the quarter — Foto: Geraldo Falcão/Agência Petrobras

Oil prices and the exchange rate are expected to have a prominent role in the third-quarter earnings report Petrobras is set to release after the market closes on Thursday. Analysts also cite the greater use of refineries and falling imports of liquefied natural gas as important factors. The average of forecasts of three banks compiled by Valor suggests a net income of R$163.7 billion, which would mean a 34.6% year-over-year growth.

The analysts’ expectation is that the state-owned company will maintain good cash generation in the quarter and announce new dividend payments on Thursday. The projections of BTG Pactual, Goldman Sachs, and Itaú BBA for revenue vary between R$153.3 billion and R$177.89 billion.

On average, the three banks estimate an EBITDA of R$95.2 billion, which would represent a 15% increase over the third quarter of 2021.

“Despite reductions in oil prices and maintenance shutdowns at major refineries in the quarter, we expect Petrobras to announce solid results, with the high refinery utilization rate and increased sales compared to the previous quarter,” Itaú BBA analysts wrote in a report.

Petrobras is expected to report profits in the quarter. In the case of Itaú BBA, the state-owned company is seen as posting gains of R$41.84 billion. Goldman Sachs estimates that the company will earn R$45.56 billion, while BTG Pactual foresees gains of R$53.57 billion.

In dollars, UBS forecasts the company will post a $8 billion profit, while XP is a little more optimistic and estimates $8.2 billion. It is important to emphasize, however, that the profit may still suffer non-recurring effects, which are harder for banks to estimate.

As a comparison, in the third quarter of last year, the company posted a net profit of R$31.14 billion, while in the second quarter of 2022, the net profit was R$54.3 billion.

From July to September this year, the price of oil remained high in the international market, but lower than in the previous quarter, when there was greater impact from the war in Ukraine. According to Itaú BBA calculations, the Brent, the main international oil reference, had an average price of $98 per barrel in the third quarter.

The banks estimate that the state-owned company will pay more than $6 billion in dividends referring to the quarter’s results. Goldman Sachs points out that Petrobras can distribute up to $12 billion in dividends by the end of the year, without reducing the cash position to less than $9 billion.

According to the data released on Monday, Petrobras had an average production of 2.64 million barrels of oil equivalent per day (boe/day) in the third quarter, down 6.6% year-over-year. In relation to the immediately previous quarter, the drop was 0.3%.

One factor expected to contribute for the state-owned company to see better financial results in the annual comparison is the increase in rainfall. In 2021, Brazil faced a historic drought that affected hydroelectric generation and led the company to increase LNG imports to supply thermoelectric plants. This year, the scenario was reversed and LNG imports fell. Thus, according to XP, the gas and energy sector is expected to report good margins in the third quarter of 2022.

The release of Petrobras’s results on Thursday will be followed on Friday by two conference calls, one in English and another in Portuguese, and a press conference, in which the company’s executives will comment on the numbers.

XP stated, in a report, that investors will be alert to comments regarding signs of cost inflation in operations and updates on the sale of company assets, as well as possible talk about upcoming moves on dividends.

*By Gabriela Ruddy — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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High-quality investment explains GDP growth, UBS says

Dynamism can help Brazil navigate almost unscathed through the stormy crisis raging abroad, economist says

10/31/2022

Alexandre de Ázara — Foto: Silvia Zamboni/Valor

Alexandre de Ázara — Foto: Silvia Zamboni/Valor

The dynamism of Brazil’s spending has helped create a stronger economy in Brazil. With an investment rate comparable to the best periods of the Workers’ Party (PT) administrations, the country has a potential growth – without generating inflation – of 2.5% in the coming years, said Alexandre de Ázara, the chief economist of UBS BB.

The confidence in this accelerating effect of investment on the Brazilian economy shapes the bank’s optimistic view about the country’s macroeconomic scenario. UBS BB was among the first to bet on stronger growth and lower inflation in 2022. The scenario for 2023 is the same. Mr. Ázara foresees 1.4% growth next year and put Brazil’s official inflation index IPCA at 4%. The medians of the Central Bank’s Focus survey with economists are, respectively, 0.6% and 4.9%.

Such dynamism can help Brazil navigate almost unscathed through the stormy crisis raging abroad, the economist said. In a world very concerned about inflation in the United States and the slowdown in China, “Brazil became the darling, but in a relative ‘ugly contest’.”

However, it is key to know from the winner of the presidential election what the fiscal policy will look like. “If a proposal comes out to take items out of the spending cap and a R$200 billion waiver, I think the reaction will be very negative.”

Read below the main excerpts from the interview:

Valor: What supports UBS’s more optimistic view on Brazil’s economy?

Alexandre de Ázara: At the worst moment in 2020, we projected that GDP would contract 6% to 7%, and the most pessimistic analysts were talking about 10%. In 2021, we expected growth close to 2%, it ended up at 4.6%. For this year, we started with something between zero and 0.5%, and it will end up close to 3%. In other words, for three years now, we, the economists, have been consistently underestimating Brazil’s GDP growth. I wanted to make this introduction to answer the question. I looked at the longer-term perspective, breaking down factors of production by capital, labor and productivity. We know that productivity growth was very high during the Lula administration. Between 2003 and 2013, it was 1% and 2% all the time, but it collapsed during the Rousseff administration and never recovered. My longer-term reading is that this increase in productivity, which made us imagine potential GDP at 4% or even 5%, was the effect of the creation of the credit market in Brazil. Until 2003, companies were not able to get a loan running for more than a year. Only the big ones could. Apart from that, we had the demographic dividend [when an economy grows as a result of a change in the age structure of its population], which peaked at that time. In 2014 and 2015, the economic policy led Brazil into a crippling recession, of 7%. There was then an uncoordinated but common economic policy response of classifying the country’s capital stock as excessive. And the only way to destroy excessive capital, without war or natural disaster, is to have depreciation. Then in 2014 the investment rate fell to close to 10% of GDP, which did not change despite the lower interest rates. One theory to explain that is that the interest rate had lost the power to drive investment. The other theory, which I like better, is that the power is the same, but there was a much higher capital stock than desired. It is difficult to demonstrate this in practice, but I can use this as a backdrop for my scenario. The economic recovery from the second half of 2016 onward brought a 1.7% GDP growth. Why wasn’t it higher? Because the capital stock was still excessive. But at some point between 2018 and 2019 that process must have ended. Then the pandemic hit and we could not realize that.

Valor: Does investment made GDP growth surprise to the upside?

Mr. Ázara: After breaking down GDP growth by consumption, investment, and government spending, the only component of GDP that is above pre-pandemic levels is investment, and by a lot. Investment is now close to 18% of GDP. This is the highest investment rate in Brazil since 2010, when the Economist magazine made that cover with Christ the Redeemer taking off. This increase in the ratio of investment to GDP, and also a higher-quality investment, has a very important accelerating effect, and that is why GDP has been surprising to the upside for two years now. This was not clear to anyone. Economists look at these numbers often because they don’t change all the time, but they tell a compelling story. That is why we have 1.4% GDP [projection] for next year. Another thing is that in order to calculate GDP in the short term, one thing many do is use data from China as a kind of proxy for world trade. Before the lockdowns [because of the zero-Covid policy], that proxy served well. That has changed. A lockdown in Macau, China, causes a contraction of demand and supply of services in that country that doesn’t necessarily impact the world in the same way.

Valor: But shouldn’t this investment rate fall with the rise in the Selic rate?

Mr. Ázara: There was a prevailing view that if interest rates went up, the investment would slow down, but this didn’t happen. Investment grew in this period only because a high rate of return was expected, and this only occurs because productivity will be good. And there is no public spending, this is the beauty of it, the greatest proof that we don’t need public spending to grow. [Former President] Dilma Roussef’s economic policy [2011-2016] focused on public spending, and I understand that she had the best of intentions, but it doesn’t work. The GDP fell by 7% and unemployment increased, creating uncertainty for families.

Valor: You are also more optimistic about inflation.

Mr. Ázara: I am more optimistic about inflation next year. There is a relative price of goods to be adjusted because of the normalization of world supply. It is not a permanent move, but it is likely to help to smooth out dynamics in the next 12 months. That is why I have a more optimistic projection than the market for this. My projection for services inflation, on the other hand, is closer to the consensus.

Valor: What is the potential GDP projection UBS works with for Brazil?

Mr. Ázara: We think the country can grow close to 2.5% in the next two or three years. For the long term, however, this number is closer to 2%. In order to improve, we have to make structural reforms that I don’t think either of the two candidates in the runoff vote will be able to do.

Valor: And what are these reforms?

Mr. Ázara: To grow above 2% a year, there is a list. But I think two are more important. The first is a new pension reform. Brazil still has very privileged civil servants. The rules that apply to them do not apply to the private sector. The second is to make a tax overhaul together with a spending overhaul, and a fiscal overhaul. This is my vision. If this is done, I think Brazil can grow by 3%, maybe even 4% a year.

Valor: You don’t believe in relevant reforms in either scenario?

Mr. Ázara: The taxation of dividends is the only measure likely to pass. Discussion in Congress is ripe, it is likely to be voted on. I think it is the only one. There is, in fact, an asymmetry, where business entities don’t pay taxes. Journalists, the financial market, lawyers, and engineers are the ones who most fit into these special tax situations. I worked for years in asset management and did not pay income tax because I received everything as dividends. I think it is a fair discussion.

Valor: Tax collection has been surprising along with economic activity, and has given the government room to maneuver. Can this situation persist in 2023?

Mr. Ázara: I believe so. We need, obviously, that the initial fiscal conditions are not bad. The winner of the runoff vote will have to ask for a fiscal waiver for next year’s target. If it is something north of R$100 billion, I think we will start off on the wrong foot. I like the idea of starting with R$50 billion, leaving more R$50 billion contingent on the approval of a new fiscal rule. But if this new rule keeps things out of the spending cap as if there was no limit, the market will misread it. It has to be a consistent rule that embraces everything: it can have some flexibility, and it can allow some additional spending contingent to the level of debt/GDP – if debt drops, for example, the government can spend more. This discussion is likely to last for the first six months of the administration.

Valor: To what extent can this more pessimistic scenario for the economy abroad affect Brazil?

Mr. Ázara: I was this month at the meeting of the International Monetary Fund (IMF) and the consensus is that Brazil has become the darling but in a relative “ugly contest.” The world is very concerned about a recession caused, mainly, by an excessive monetary tightening in the United States and a slowdown in China. The main reason Brazil suffers less is that Brazil always suffers less because it is a large and closed economy. We only export 10% of what we produce, we only import 10%. Besides this, the percentage of debt in the hands of foreigners is at a historic low, and the Central Bank, starting the year with fiscal and elections challenges, normalized the monetary policy earlier. Another question is whether the risk premium on the fiscal policy dominates the external risk.

Valor: Doesn’t growth fueled by the services sector, while industry and retail are falling, signal a worse quality GDP?

Mr. Ázara: I believe not. We spent a long time with a greater demand for goods. It was reasonable to have this adjustment. I don’t think it means a forecast of worse growth ahead. Investment is a very positive story. It is what rules the rest. Everybody is a little concerned and thinks that the situation is bad, but is investing. The general perception is worse than the sectorial situation, specific to each company. I believe that investment can be maintained for a while longer, contingent upon responsible fiscal choices. If it is irresponsible, it will fall to 10%, the same as it was during the Dilma Rousseff period. It has nothing to do with the ruler, but his choices will determine this.

*By Marcelo Osakabe — São Paulo

Source: valor International

https://valorinternational.globo.com/
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Foreign trade reaches record levels, exposes Brazil’s weaknesses

Situation of external account expected to remain benign, but in less relaxed picture than previously estimated

10/31/2022

David Beker — Foto: Silvia Zamboni/Valor

David Beker — Foto: Silvia Zamboni/Valor

Brazil’s foreign trade is at record levels, with flows increasing considerably. Although analysts view the country’s trade opening positively, it also results in greater exposure of the economy to global fluctuations amid the prospect of an increasingly unfavorable external scenario.

The worsening terms of trade (a measure of a country’s export prices relative to its import prices) and the cooling demand in major markets negatively impact the country’s trade balance and its current account, which shows the transactions of goods, services, and income of Brazil with foreign countries. The situation of the external account is expected to remain benign, but with less room than previously estimated.

Using Central Bank data, Bank of America (BofA) shows that Brazil’s two-way trade, measured by the weight of exports and imports over the country’s GDP, renewed a record in September this year, reaching 37.41%, up from 31.84% in the same period last year and 22.92% in September 2019, before the pandemic.

Brazil has historically been an exporter of commodities, with increasing trade opening since its re-democratization in the late 1980s, notes BofA. At the same time, as the country has grown, imports have also increased.

“The scope of the Brazilian economy opening, however, seems to have accelerated considerably in the last four to five years, as the country’s international trade, in terms of GDP, has increased from less than 20% to almost 35% of GDP in that period,” said David Beker, David Hauner and Claudio Irigoyen, with BofA. “Such a development, while generally positive, results in a greater exposure of the Brazilian economy to global fluctuations.”

Monthly data show that the most recent gain in the representation of trade flows over activity is explained by both rising import and export levels. On the export side, however, most of the growth comes from higher prices, while imports are driven by both higher quantities and values.

Commodity prices soared at the beginning of the year – with a slowdown in recent months, pondered BofA – influenced by the conflict between Russia and Ukraine, which benefited exports.

Manufactured items, which are the bulk of Brazil’s imports, also saw large price increases because of persistent problems in global chains after the Covid-19 shock.

Price changes, however, were asymmetric, BofA points out, with import values growing significantly more (30.1%) than export values (16.3%) when comparing the period of January to August with the same period in 2021. “As a result, the terms of trade fell by 10.5% over this period, hurting the balance of trade results,” the bank’s team said.

In addition, Brazil’s relative economic performance has also been stronger, they say. Increased domestic consumption drives up imports, exacerbating the already adverse price movement. “In the third quarter, the quantity imported was the main highlight and showed important growth, even when we take into account the positive surprises with the GDP,” said Bradesco’s economists Rafael Murrer and Myriã Bast, in a report.

The deterioration of the global scenario, as major economies continue to show signs of slowing and central banks around the world adopt a more aggressive stance in their interest rate hike cycles, also plays a role, BofA said. “This has reduced demand for Brazil’s exports from key markets such as China,” the bank’s team says.

All these combined effects are driving more imports than exports and have led to lower-than-expected trade balance figures, consequently leading to revisions in the projections for the current account of the balance of payments.

BofA increased its projection for this year’s current account deficit to $32.5 billion (1.7% of GDP) from $10 billion (0.5% of GDP). The new figure reflects a lower-than-expected trade balance, which went to $55 billion from $65 billion. Bradesco, which expects a $40 billion deficit (2.1% of GDP) in the current account in 2022, projects a trade balance of $58 billion this year, which would be equivalent to $47 billion in the balance of payments.

The Economy Ministry’s foreign trade statistics use a different methodology than the Central Bank’s to calculate trade transactions, since the ministry only accounts for the physical movement of goods, while the Central Bank considers any transaction where ownership is transferred between residents and non-residents.

In its latest Quarterly Inflation Report (RTI), published in September, the Central Bank lowered its projection for the trade balance in 2022 to $42 billion from $86 billion, after raising the forecast for imports and reducing that for exports. With this, its estimate for the current account went from a slight surplus of $4 billion (0.2% of GDP) to a deficit of $47 billion (2.5% of GDP). In the Focus, Central Bank’s weekly survey with economists, the median of forecasts indicates a smaller deficit, of $32.3 billion.

Also weighing on the recent changes in the current account projections are new estimates for the balance of services and primary income. The Brazilian balance of services – which accounts for expenses with international travel and equipment rental, for example – is traditionally in deficit. In the pandemic, as global mobility was halted, it reached the lowest negative figures since the 2008 crisis, of $17.1 billion in 2021. Now it is expected to return to something closer to pre-pandemic – in 2019, the deficit was $35.5 billion. Bradesco projects a $32.1 billion deficit. BofA has increased its deficit forecast to $30 billion from $25 billion.

“For primary income, the main highlight is high profit and dividend remittances, which have been higher than previously expected,” said Mr. Murrer and Ms. Bast, with Bradesco, forecasting a $58.4 billion deficit. BofA adjusted its projection to a negative balance of $57.5 billion from a negative balance of $50 billion. The growth in remittances may reflect, according to economists, both stronger activity in Brazil and greater uncertainty about the country’s future.

Even with the downward revisions to the current account balance, Brazil’s external accounts remain at a comfortable level, because the deficit is largely financed by inward direct investment (IDP), whose projections have even been revised upwards.

The strong flows took Bradesco’s IDP estimate to $75.1 billion this year (4% of GDP), influenced mainly by the improvement in domestic activity and the high level of interest rates. BofA raised its projection to $70 billion from $60 billion in 2022.

“Brazil maintains a comfortable condition in relation to its external account, even if the picture is less ‘loose’ than originally estimated. According to our projections, we will continue to be better positioned than some emerging peers,” said Bradesco’s economists.

Livio Ribeiro, a partner at BRCG consulting and associate researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV), ponders that the aggregate financing level, however, is low.

“The sources of funds in the balance of payments go far beyond direct investment. There are fixed income flows, portfolio flows, and loan rollovers. And what we have seen is an outflow of fixed income, a big decrease in portfolio flow, and roll-over rates of less than 100% – that is, the pace of taking new loans is lower than the amortization of the old ones,” Mr. Ribeiro explains.

This general structure of less abundant financing, according to him, reflects a world that is more challenging and occurs simultaneously with the process of faster acceleration of the current account deficit than was assumed. “By no means do we have an external constraint problem, but the slack that was thought to exist in the current account is smaller, and the aggregate financing slack is smaller still,” he said, projecting a current account deficit of $45 billion (2.5% of GDP) in 2022.

*By Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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