Imported steel pits consumer industries against steelmakers

Mills are calling for an increase in the import tax on the material to 25% and for China to be investigated for “dumping”

02/26/2024

José Velloso — Foto: ATENÇÃO: DEFINIR CRÉDITO!

José Velloso

The tug-of-war between Brazil-based steelmakers and the steel-consuming sectors, which became personal between the end of 2023 and the beginning of this year, has returned to the sectoral arena, but with no less intensity. On one side, the mills are pushing to raise the import tax rate to 25% and are moving to have China investigated for “dumping” steel exports into the country. On the other side, industries led by the machinery and equipment sector accuse the steel mills of distorting figures to create a scenario worse than reality and call for the debate to remain “technical.”

At the center of this dispute, the federal government has implemented a few measures, which have not satisfied the mills and have been welcomed by the opposition. Recently, the Executive Management Committee of the Chamber of Foreign Trade (Gecex-Camex) announced the reinstatement of import tariffs on five steel products (tubes and bars), which had been reduced in 2022 to a range of 12% to 16%, in line with Mercosur’s Common External Tariff (TEC).

Both sides agree that this initiative did not fully address the steelmakers’ demands. “It was insufficient,” stated leaders of Gerdau and Usiminas, at a time when the sector is seeking more forceful measures. “We felt there were no surprises because the government has access to the consultants’ figures and can assess what is actually happening,” said José Velloso, president of the Brazilian Machinery and Equipment Industry Association (ABIMAQ).

The data shows a significant growth in imports, around 50% by 2023, reaching 5 million tonnes, according to a survey by the Brazil Steel Institute. In January, there was a slight decline of 3% compared to the previous year. Nevertheless, the volume entering the country remains above 350,000 tonnes per month. An increase of 20%, to 6 million tonnes, is expected in 2024.

The ABIMAQ claims that while there will be an increase, imports will not reach the highest levels ever recorded. In 2010 and 2021, significant jumps in foreign purchases occurred, driven by strong demand and a shortage of supply, respectively. The organization also highlights that in November 2023, steel in the Brazilian market was the most expensive in the world, only losing that position when Mexico recently increased tariffs on steel products. More countries have adopted quotas or a 25% tariff to protect themselves from Chinese steel.

According to the Platts index by S&P Global Commodity Insights, which ABIMAQ follows, the premium for domestic steel over imported steel rose again to 21% in January—$684.75 per tonne for hot-rolled coil from China, internalized, compared to $828.28 for the domestic price. “In mid-2023, the premium reached 42% and led to an increase in imports,” said Mr. Velloso.

The steelmakers argue that maintaining the current foreign trade policy with minimal correction in import rates will lead to more layoffs and capacity closures. Recently, Gerdau laid off 100 workers in Pindamonhangaba, in the state of São Paulo, totaling nearly a thousand cuts in recent months. “Imports continue because they are part of a Chinese state program, not an isolated action by one company,” said an industry source, noting that data is confirming that Chinese mills are operating with a negative margin of up to 56 dollars per tonne.

Meanwhile, the steel-consuming sectors argue that the same companies that shut down 13 blast furnaces at the start of the pandemic, fearing demand shortages, are now requesting safeguards from the government. At the pandemic’s outset, the occupancy rate of local mills dropped to 45%, compared to 64% today, amid weak demand, leading to the shutdown of blast furnaces.

“If the problem is Chinese steel, the steelmakers shouldn’t be asking for an increase in the rate for all origins. They should use the correct instrument, which is the dumping investigation, not the inclusion of dozens of products in LETEC [Mercosur’s list of exceptions to the common external tariff],” explained Mr. Velloso. He adds that the tax increase sought by steel companies will raise production costs, as Brazil doesn’t produce all the steel types it consumes. “If the invasion is Chinese, Brazil can adopt measures against Chinese steel. When [the mills] ask for LETEC at 25%, they are protecting themselves from the entire world, except Argentina.”

The construction sector also opposes the increase in rates despite only making “occasional” purchases of rebar from abroad, according to Renato Correia, president of the Brazilian Chamber of the Construction Industry (CBIC). He foresees a cascading effect on the price of Brazilian steel if imports become less competitive. The imported steel used in the sector primarily comes from Turkey, not China, due to specific technical requirements.

“This price is certainly passed on to the domestic market,” stated Yorki Estefan, president of Sinduscon-SP, the state of São Paulo builders’ union. The organization notes that steel represents between 5% and 8% of construction costs. Representatives from both organizations have observed significant increases in the price of rebar during the pandemic, with values stabilizing at a high level, impacting the cost of construction.

According to the Brazilian Institute of Economics (FGV Ibre), which calculates the National Construction Cost Index (INCC), the price of rebar has risen by 61% since the beginning of 2019, although there has been a 14% decrease in the last two years. “Steel consumers are benefiting from this drop, which reverses some of the previous price increases, while steelmakers are suffering from falling domestic prices due to the growth of imports,” explained Ana Maria Castelo, coordinator of construction projects at FGV Ibre. She recalls that the construction sector has been “traumatized” by the abrupt increases caused by the pandemic, noting that the price of rebar doubled between the end of 2018 and mid-2022.

“When there was a shortage of steel and a huge increase [in prices], both the construction sector and the machinery and equipment sector had to bear the cost,” explained Mr. Estefan. “We observed decapitalization of construction companies and a positive balance sheet for steel companies.” For him, calling for protectionist measures does not seem appropriate when there is an increased international supply of steel. According to the organizations, any rise in steel prices would have to be passed on to construction contractors.

In a statement, the Brazil Steel Institute explained that it has been involved in technical meetings with the government, highlighting the critical state of the sector. “We have demonstrated why it is necessary to temporarily and urgently raise the import tariff on steel from 18 NCMs (Mercosur Common Nomenclature), out of 273 existing, to 25%, in contrast to the 10.8% currently in effect. Any lower level is insufficient to counteract the influx of foreign steel, considering that major markets such as the United States, 27 EU countries, the United Kingdom, and Mexico have already imposed 25% barriers,” the statement reads.

*Por Stella Fontes, Ana Luiza Tieghi — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Companies speed up debenture issues in heated market

Banks boost allocations, eyeing secondary markets, as demand nearly doubles supply

02/26/2024

Renato Otranto — Foto: Gabriel Reis/Valor

Renato Otranto — Foto: Gabriel Reis/Valor

In the wake of the rally in tax-exempt debentures caused by the National Monetary Council’s restrictions on the issuance of real estate and agribusiness credit certificates and bills (CRIs, CRAs, LCIs, LCAs, and LIGs), another race has begun. To take advantage of the favorable window, with high demand and low rates, companies are bringing forward their funding, and there are already cases of companies that were going to launch ordinary debentures, for example, and have switched to incentivized debentures. In just the first 20 days of February, Renato Otranto, head of structuring at Daycoval Bank, calculates that the volume of operations, including both types of securities, has already surpassed the R$20.7 billion of January, periods that are usually seasonally weaker, and predicts that the month could close with R$30 billion in issues.

Compared to 2023, the increase is even more significant since, in the first days of the year, the market was in the throes of the Americanas debacle—the Brazilian retailer that filed for court-supervised reorganization in 2023. January 2023 still saw transactions totaling R$26.6 billion, but in February, the volume was restricted to R$16 billion. “ Investors are buying what they see in front of them in the expectation that the spreads [the difference between the rates paid for the bonds and the yields on equivalent National Treasury Notes Series B (NTN-Bs), which are the benchmark in the incentivized market] will fall further,” said Mr. Otranto.

He recounts the case of a frequent issuer who, three weeks ago, was formatting an ordinary debenture operation. Now, he says, he’s structuring it via Law 12,431, which created incentivized debentures. “Those who really need it are moving. Those who don’t have an emergency situation are assessing whether to go further.”

Two situations in recent days have been cited by asset managers as representative of the moment. One involves PetroRio, which has just issued R$2 billion in debentures in two series, of five and ten years, with rates of 11.1% and IPCA (Brazil’s primary measure of inflation) plus 6.5%, respectively. “The company didn’t need money now; it has a large cash position, it was a more opportunistic operation,” said Leonardo Ono, private credit manager at Legacy Capital. The other one concerns Aegea Saneamento e Participações, whose affiliates Águas do Rio 1 and 4 are about to issue R$3.4 billion in two series (10 and 18 years).

Ricardo Ara, co-manager of Legacy, said that after the company’s successful R$5.5 billion fundraising in August 2023—which caused a furor after it was revealed that almost R$1 billion had gone to the coordinating banks’ commission, a level rarely seen—it was uncertain whether there would be demand for a new issue. To guarantee the funds, the Brazilian Development Bank (BNDES) had secured a loan for the company. “But with strong demand for incentivized debentures, Aegea preferred to go to the market.” Market sources, however, say that this time, Aegea has renegotiated the commission with the banks to lower levels.

Cemig is on the roadshow for a R$2 billion issue in two series, one at the Interbank Certificate of Deposit (CDI) rate plus 1.22% (ordinary, five years) and the other at the NTN-B plus 0.45% (incentivized, 10 years). According to Mr. Otranto, public companies with the highest credit rating (“AAA”) were issuing at 0.5% above the NTN-B before the rally. There is also CCR— Brazilian infrastructure, transportation, and services concession company, one of the country’s main highway management companies—, which will raise R$1.25 billion through 18-year notes paying NTN-B plus 1.5%; and Águas do Sertão (R$1.1 billion through 19-year notes paying NTN-B plus 2.65%).

Despite being in the infrastructure sector, Sabesp has announced a R$2.5 billion offering in ordinary debentures, which are experiencing high demand, notes Marcos Garcia, superintendent of capital markets at Banco BV. However, the market’s primary focus remains on incentivized debentures. Mr. Garcia notes that the spread on ordinary debentures has decreased by 30 to 40 basis points for AAA-rated securities.

“The market has been shaken up. The high demand for tax-exempt corporate debt and from institutional investors has piqued the interest of companies,” said Mr. Garcia. According to him, it started to make sense for issuers who were waiting for a favorable window or for the new regulations on infrastructure debentures in January. “Demand for the obvious names has increased. The impact on incentivized and simple debentures was immediate,” said Thiago Lobato, head of capital markets at Inter DTVM.

At the end of January, the Autopista Planalto Sul concessionaire, a part of the Arteris group, issued R$650 million in debentures in two series, one incentivized and the other ordinary, with terms of seven and four years, respectively. The offer, therefore, hit the market before the rally that compressed spreads by between 0.3 and 0.8 percentage points and came out at IPCA plus 6.88% per year and CDI plus 2.55%, respectively. Demand for the CDI series was 1.5 times the value of the issue and for IPCA, 1.8 times, according to Mr. Otranto.

Águas do Sertão’s offering had also already been priced and, according to an asset manager interviewed by Valor, with the high demand, the acceptance of offerings was discretionary, which is unusual in the market. “The coordinator gave preference to requests from partner institutions,” the source commented. Additionally, with the rush for the papers, in the very first days of trading, the spread on the debenture fell from 265 basis points to 190.

Reports among asset managers also indicate that the coordinating banks are increasing the amount they absorb. In this way, they guarantee gains in the secondary market, which is also very active. “Retail banks are able to stock up on paper and take advantage of the rate,” Mr. Otranto explained. The treasuries of these institutions are already recording gains on paper they had placed in their portfolios, especially between October and December, when there wasn’t enough demand for operations after successive large offers, recalls Mr. Ono from Legacy. “The big banks are aware that this is a sustained demand.”

Felipe Wilberg, head of fixed income and structured products at Itaú BBA, notes that a significant number of incentive bonds are entering the market. However, due to the scarcity of bills and credit certificates, individual demand will also be high. “On the other hand, the institutional debenture market, which is euphoric because of incoming money, faces a smaller supply and a shortage of bonds, compressing spreads. Additionally, banks and funds are showing an appetite for these allocations in the absence of many new bonds. There will come the point when banks don’t buy any more if the rate is too low, and then the market will start to balance out.”

Data from the Brazilian Association of Financial and Capital Market Entities (ANBIMA) indicates that incentivized issues totaled R$14.2 billion up to July and surged from August to December, reaching R$53.7 billion. In contrast, ordinary issues totaled R$76.5 billion and R$92.1 billion, respectively. In October, transactions with tax-exempt papers (R$16.7 billion) exceeded those with ordinary securities (R$12.6 billion) for the first time in the year, with intermediaries and other participants subscribing to 59%. In November, they accounted for 41.2%, and in December, 65.6%.

The impact of the National Monetary Council’s (CMN) restrictions may already be evident this month. According to the Securities and Exchange Commission of Brazil (CVM), in January, there were 12 registered offerings of agribusiness receivables certificates (CRA) totaling R$2.2 billion, and in February, up to last Thursday (22), there were 10, totaling R$1.1 billion, indicating a dominance of smaller projects confined to the sector. For real estate receivables certificates (CRIs), from 43 offerings last month totaling R$3.6 billion, the volume decreased to 22 for a total of R$2.1 billion.

Mr. Garcia, from BV, explains that before the CMN’s restrictions on February 2, two factors had already been influencing the market, albeit not as acutely: the taxation of exclusive/restricted closed funds, which will start paying quotas this year, but, in the third quarter of 2023, when discussions in Congress began to advance, stopped receiving new money; and the remodeling of infrastructure debentures, whose tax incentive will shift to the issuer, potentially diverting resources from the incentivized ones.

Eduardo Correa, vice president of solutions at Ártica, remarks that at this stage, frequent issuers are more common, as they can quickly adapt. In the sector where Ártica primarily operates, medium-sized companies, programs have accelerated, and in the coming weeks, the company plans to bring four offers to market totaling R$200 million. Mr. Lobato, from Inter DTVM, mentions that the institution is revising the rates of operations already in the pipeline and anticipates that newcomers or less frequent issuers will benefit in a subsequent phase.

Mr. Wilberg, from Itaú BBA, believes that this rally is unhealthy. “We’re cautiously optimistic about individual behavior but a bit concerned about the euphoria, which is not beneficial. A balanced market is preferable.”

*Por Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Regulation of AI may be postponed until after election

Senate rapporteur promises to send text in April, but analysis face challenges

02/26/2024

Senator Eduardo Gomes — Foto: Edilson Rodrigues/Agência Senado

Senator Eduardo Gomes — Foto: Edilson Rodrigues/Agência Senado

Pointed out by Senate President Rodrigo Pacheco as a priority for the first half of the year, the bill authored by him that regulates artificial intelligence is expected to advance soon in the Upper House. The rapporteur of the matter, Eduardo Gomes, promises to deliver the report for voting in April. From there, lawmakers’ assessment is that the challenges of the text will only be beginning, and the conclusion of the analysis in Congress may be postponed until after the municipal elections to be held in October.

The regulation was advocated at the beginning of the year not only by Senator Pacheco but also by Chamber of Deputies Speaker Arthur Lira and the president of the Superior Electoral Court, Alexandre de Moraes, who urged Congress to act, claiming there are risks to the elections.

Eduardo Gomes said that it is not possible to improvise in the face of a topic that is still unknown to many. For him, it will be up to the electoral court and the regional courts to regulate the 2024 election based on the current legislation. “Voting before the elections doesn’t make sense. Maybe it makes sense to solve minor clashes, but it won’t solve the important issue of a safe law. What defines the time is the security to do it,” he said during an event last week.

To Valor, Mr. Gomes emphasized that other countries have been cautious about the topic to preserve their innovation capacity. “The text will undergo several changes. We have to define where Brazil will be, whether as a consumer or formulator of AI policies. Speed is needed, but not in a way that makes legislation inefficient. The intention is for everything to be resolved in the second semester, until COP-29 [in November],” he said.

The feeling is shared by other lawmakers. Senator Nelsinho Trad said that it is necessary to respect “the rapporteur’s time” due to the complexity of the issue. “The debate can be exercised and move forward in parallel,” he said.

There are more than 50 bills to regulate AI in Brazil. The initiatives are recent—the oldest one date back to 2019.

Among the main points of the proposals is the use of AI during the electoral period. With the advancement of technology, it is now possible to produce extremely convincing fake audiovisual content, the so-called “deep fake.”

In one of the most recent cases, an audio file created by artificial intelligence falsely portrayed the mayor of Manaus, David Almeida, swearing at teachers to harm him. The case is being investigated by the Federal Police.

As the minority leader in the Lower House, Congresswoman Bia Kicis wants to hold public hearings on the subject parallel to those of the Senate and is studying the possibility of creating a joint parliamentary front on artificial intelligence. The aim is to be prepared when the proposal from the other Upper House arrives.

“It will be a theme that will govern the next decades. We don’t need to talk only about fraud. AI has to go far beyond that, in education, medicine, there’s so much that will be impacted by it. I want to get into this topic so that we [from the opposition] don’t remain oblivious, because otherwise, we’ll be bulldozed,” said Ms. Kicis.

The lawmaker criticized the lack of regulation in Congress, which, in her view, allows the TSE to create the rules.

The Lower House has already passed a bill in 2021 to regulate the use of AI. However, the text has been stalled in the Senate since then. Senator Pacheco’s proposal, currently seen as the one with the greatest chance of advancing, was formulated based on a commission of legal experts in 2022 to consolidate the various initiatives on this matter in Congress.

“Now we have to wait for the bill to be approved [in the Senate]. It’s no use doing another one,” said Ms. Kicis.

For lawyer Renata Schuch, a specialist in regulatory law, the indiscriminate use of AI can shape the outcome of elections. “Congress’s rapid regulation is imperative. The wording brought by the bill is already capable of regulating and punishing certain behaviors that may be seen as contrary to the fairness of the electoral process,” she said.

Gabriel Cosme de Azevedo, a specialist in digital law, emphasizes that although the bill has a one-year validity after publication, its effects “have room to be immediate” in terms of awareness and search for future compliance by AI operators. “The law would expand the possibility of gathering cases and improving provisions involving AIs in the electoral context.”

Ticiano Gadêlha, a lawyer specializing in Intellectual Property Law, said that, as in other countries, AI can be used by the TSE itself to ensure greater accessibility in the electoral process and even combat fake news by identifying and blocking such information. “It is necessary to ensure that the technology is used fairly and safely, respecting the rights and, of course, the privacy of voters.”

For him, “technology, as a rule, progresses more rapidly than the law, which means that regulation has a great risk of being obsolete from the start.” “The versions we call intelligent are updated at a very fast pace, so we must have a non-prohibitive regulation and one that punishes any excesses.”

*Por Julia Lindner, Caetano Tonet — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Antitrust regulator likely to release Petrobras from selling refineries

Case may be brought before agency for deliberation at end of March

02/23/2024

The antitrust regulator CADE is likely to accept Petrobras’s request and release the state-owned company from the obligation to sell refineries and remaining assets in the natural gas distribution and transportation market, sources involved in the negotiations say. The sales are foreseen in the agreements signed in 2019, which aim to reduce the company’s participation in the two sectors. The CADE is expected to impose “behavioral remedies,” which are lighter restrictions than the sale of assets. The case could come before the agency at the end of March.

At the end of 2023, the current management of Petrobras requested a review of the two Terms of Cessation Commitment (TCC) signed in 2019, the first year of the Bolsonaro administration. The state-owned company had committed to sell eight refineries to open up the refining market and three gas pipeline networks. The divestments were part of a broad government program to privatize the company.

Petrobras has sold four refineries and two gas pipelines ever since, after repeatedly requesting postponements on the grounds that it couldn’t find interested buyers. Petrobras’s current CEO, Jean Paul Prates, who has been a critic of the operation since his days as a senator and was involved in the negotiations with the antitrust regulator, asked for a review late last year.

Valor has learned that the CADE tends to replace this structural divestiture measure, without major disagreements, with behavioral remedies that would include, for example, non-discrimination against competitors, a guarantee of market prices, and others.

They are also discussing whether governance measures should be adopted to ensure independent action in the event that the third gas unit is not divested. The gas negotiations are more advanced than the refinery negotiations, but the idea is to analyze the two cases together for approval by the board members. This is the general dynamic of TCCs—they are negotiated by the General Superintendence and ratified by the agency.

Sectors of the government also believe that, with the majority of the agency recently appointed by President Lula, the tendency is for the path for Petrobras to be easier—four members took office earlier this year. Depending on the terms of the review, experts say there could be legal uncertainty in the sector.

There is still no finalized proposal. Sources involved in the negotiation process say that contacts with the CADE have been very dynamic, with many “comings and goings” and the acceptance of proposals from the state-owned company itself. However, the talks are well advanced. At the very least, Petrobras could still be fined if the council deems it has violated the agreements, which is not on the table at the moment.

Pedro Rodrigues, head of the Brazilian Center for Infrastructure (CBIE), told Valor that releasing the company from the commitment to sell refineries could create legal uncertainty, both for the buyers of the four sold refineries and for possible players looking to enter Brazil. “There was a lack of enforcement of the agreements signed by the CADE. As a result, there was uncertainty for investors who might have been interested in the assets,” he said. “The change in direction of Petrobras’s policy is legitimate. The questionable point is a government agency like the CADE changing an agreement that gave security both to agents who had already invested and to future investors,” he said.

The TCCs were signed to conclude an investigation opened by the antitrust watchdog in 2018 into the company’s activities in these markets. In refining, the competition defense agency received a complaint from the Brazilian Association of Fuel Importers (Abicom), which claimed that Petrobras was charging prices below international parity, which would have affected the expectations and continuity of investments made by importers based on the company’s previous signals.

Concerning the gas market, it suspended three different cases brought against Petrobras for monopoly abuse. In the asset sale proposal, the agency considered that the company had made an “irrefutable” offer to the CADE at the time, which was aimed at eliminating its dominant position. This put an end to any illegal practices.

At the beginning of the negotiations, the sale of the assets was not an imposition by the CADE, as alternative measures could have been adopted, such as the behavioral remedies now under discussion, according to sources. They claim that the agreement was open to revision from the outset, depending on several factors, including a change in strategy.

There are still interpretations among members of the panel that the recent change in pricing policy, which changed the PPI model, could justify the obligation to sell the refineries.

Sergio Araujo, president of Abicom, believes that if the CADE accepts Petrobras’s request, it will have to establish robust alternative remedies. “With the revision of the contract, anyone who invests in refining will be competing with the dominant player (Petrobras), which may have a pricing policy that doesn’t conform to the market,” he said.

Petrobras did not reply to a request for comment.

*Por Beatriz Olivon, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Upper buys Adora Pet; increases earnings

Manufacturer with R$550 million in sales exports 80% of what it produces and bets on acquisitions

02/23/2024

Upper Dog has become a best-seller for dog chews on Amazon in the United States — Foto: Divulgação

Upper Dog has become a best-seller for dog chews on Amazon in the United States — Foto: Divulgação

In the fiercely competitive pet market, a Brazilian company has made significant inroads among both local and American consumers. Upper Dog has become a best-seller for dog chews on Amazon in the United States with its Natural Farm brand and has recently expanded its portfolio with another acquisition.

At the end of January, it acquired Sergipe-based Adora Pet for approximately R$40 million (including the acquisition and investment in the factory). Adora positions Upper to serve the Northeast region, as its operation in Imperatriz, in the state of Maranhão, was more focused on the North and Midwest. In the Southeast, products come from the factory in São Sebastião do Paraíso, in the state of Minas Gerais, while the administrative operation is based in Sorocaba, in the state of São Paulo. The company also has international distribution centers in Atlanta and Miami.

Upper had previously purchased Petiscão in Minas Gerais and is negotiating with a company in Canada, which could be its first international acquisition. “We’re open to new acquisitions. M&A has incredible power,” said Marcelo Barbosa, the Pará-born founder and CEO of Upper. He notes that upgrading the factory in Imperatriz saved two years in construction and production expansion.

The growth in domestic manufacturing is primarily aimed at supporting exports, the primary sales channel, accounting for 80% of the business—driven by the United States, Canada, and Australia. Upper is also preparing to make its debut at specialized fairs in Europe, seeking distribution in that market. “Our production criteria, from natural ingredients to recyclable packaging, align closely with the European consumer profile,” the CEO remarked.

The brand’s portfolio also includes Dogfy, Mr. Dry, Mr. Clean, and Caninosso, and the company operates in the white label model, producing for third-party brands. In 10 years of operation, it has become one of Latin America’s leading suppliers of natural food and chews, snacks, and hygienic mats for dogs and cats.

Growth continues rapidly. In 2023, with a 45% increase, it achieved revenues of R$550 million. For 2024, the projection—a conservative one, according to the owner—is R$700 million, representing a 27% increase. At this rate, the company will reach its first billion in two to three years before the founder turns 30.

Mr. Barbosa has been an entrepreneur since childhood, purchasing watches at the market and selling them in raffles to employees of his father’s company in Belém do Pará, strategically close to payday. However, it was at 17, when his then-girlfriend and now wife became pregnant, that he realized the need to establish a formal business.

“We got married, and that teenage responsibility to become a man kicked in,” he recalled. He began managing the logistics area of the family business, which produced tanned leather, and identified an opportunity to utilize a by-product of the industry: chewable leather. Without a structured business plan, he established a production plant with 20 employees.

Sales started to grow, and Upper acquired a disused plant in Imperatriz, relocating production from Belém—the company’s initial market, which no longer has an operation. Leather was replaced by healthier options for pets, such as rebar and bovine esophagus, previously unused in the meatpacking industry.

The chewables line accounts for almost 85% of Upper’s revenue, followed by snacks and hygiene products. Adora’s acquisition adds tens of millions to the main category. In 2023, the revenue of the Sergipe factory reached R$20 million, but Upper aims to increase that to R$50 million this year.

Upper was already valued at R$1 billion during a private equity approach, but with its rapid growth, it decided to wait. The company is collaborating with Bradesco BBI to explore potential prospects for future capitalization. “We’re open to talks, but we’re in no rush. Today, the focus is more on acquisitions,” he asserted.

The original story in Portuguese was first published on Valor’s business news website, Pipeline.

*Por Maria Luíza Filgueiras — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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023 tax offsets reach record; lower federal revenue by R$242bn

Volume represents an increase of more than 130% compared to 2019, according to data from Brazil’s Revenue Service

02/23/2024

Breno Vasconcelos — Foto: Rogerio Vieira/Valor

Breno Vasconcelos — Foto: Rogerio Vieira/Valor

Tax offsets significantly increased in the first year of the Lula administration, reducing the federal government’s revenue last year by R$242 billion, equivalent to 2.2% of the Gross Domestic Product (GDP). This figure is a record and represents an increase of more than 130% compared to 2019, marking the start of an escalation verified by Brazil’s Federal Revenue Service, according to data obtained through the Access to Information Act by Valor.

Since May 2003, the start of the historical series, the federal government has failed to collect R$1.6 trillion from offsets, a target of the Finance Ministry for achieving fiscal goals.

More than a third of the volume in 2023 refers to credits from court decisions. There were R$82.7 billion offsets, the third highest amount since the recording began. In 2018, they accounted for just over 5% of total settlements. Since 2019, they have made up more than 20% of this volume—the peak was in 2021 when judicial credits accounted for almost half of the total offset with the Federal Revenue Service. However, in the last two years, they have slightly fallen, between 5% and 10%. Valor PRO, Valor’s real-time information service, reported this information on Thursday (22).

The high volume of tax offsets from lawsuits was the leading cause for the government to issue Provisional Presidential Decree 1202/2023, which limited the right to offset tax credits from court decisions to R$10 million. Another Federal Revenue Service spreadsheet indicates that, in the last five years alone, credits above R$10 million have frustrated tax collection by R$320.5 billion.

According to the Finance Ministry, the offsets for the “thesis of the century” alone—the exclusion of ICMS (similar to the Value-Added Tax) from the PIS (tax to fund a cash transfer program) and Cofins (social security tax) calculation base, cost the federal government more than R$60 billion last year. This was one of the main reasons, according to the government’s economic team, for the R$230 billion deficit recorded in 2023.

In 2024, Finance Minister Fernando Haddad has the task of increasing revenues to achieve the goal of zero primary results in public accounts. The limit on offsets, according to the Federal Revenue Service, could generate an extra R$20 billion inflow in 2024 and help the government reach this goal.

However, the limit has not yet produced results. Figures released on Thursday (22) show that in January 2024, even with the effects of Provisional Presidential Decree 1202/2023, they amounted to R$27 billion. Nonetheless, the Federal Revenue Service estimates that this impact will positively affect tax collection throughout the year.

Although it didn’t take effect in January, the Independent Fiscal Institution (IFI) projects that the limit on offsets could generate a revenue gain for the government of R$26.2 billion in 2024, R$40.1 billion in 2025, R$55.6 billion in 2026, and R$72.6 billion in 2027, in nominal values.

Offsets allow taxpayers to use their credits with the Federal Revenue Service to offset their debts. They use overpaid taxes or amounts obtained through court decisions to offset other federal taxes they owe.

The tax office’s data also shows that in 2023, the total number of offsets was 11% higher than in 2022, when this type of revenue loss reached R$215 billion. The “other credits” category set a record in 2023, totaling R$73.5 billion.

Lawyers suggest that this category likely includes credits from the exclusion of ICMS from the PIS and Cofins base. The Finance Ministry states that it is impossible to know which tax the credit refers to or the legal thesis behind them, as this information is not stored “in a structured way in the information systems.”

Compared to the last decade, there has been an annual surge in offsets: since 2013, the volume has more than quadrupled, given that 10 years ago, offsets amounted to R$54 billion.

The significant growth began in 2019 due to the so-called “thesis of the century” (a landmark legal decision in which the Federal Supreme Court ruled that the ICMS tax should not be included in the PIS and Cofins tax bases, significantly impacting businesses with potential substantial tax refunds), and peaked in 2021, when the Federal Supreme Court ruled on the motions for clarification in the case and established that the ICMS should be highlighted on the invoice. Secondary legal arguments and interpretations, known in Brazil as “teses filhotes,” also contributed to the increase in offsets, albeit to a lesser extent.

Until this second Supreme Court ruling, many cases were on hold, awaiting the position of the justices, which explains the “late” peak since the merits of the case were judged in 2017, said tax lawyer Leandro Augusto, a partner at AleixoMaia law firm.

Mr. Augusto notes, however, that after the peak, the volume of judicial credits, the subject of the restriction in Provisional Presidential Decree 1,202/2023, has decreased over the past two years. “There is a downward trend, especially when compared to tax collection,” he said. For him, that demonstrates the fragility of the argument supporting the Provisional Presidential Decree. “There has been an increase in offsets due to administrative and not judicial measures, both in absolute and relative terms,” he added.

Breno Vasconcelos and Maria Raphaela, partners at Mannrich e Vasconcelos Advogados, note that when all PIS/Cofins issues are considered, credits arising from payments of these contributions represent, across the entire historical series, 19.38% of total general offsets and 29% of judicial offsets.

“This data, coupled with previous analyses, confirms the diagnosis of those proposing the reform of taxation on consumption, that these contributions are very complex, subjecting taxpayers to dozens of special regimes and with disputes involving even the use of credits in the non-cumulative system [a topic that represented the largest PIS/Cofins litigation for publicly traded companies in 2021],” they stated.

Lawyer Fabio Calcini, from the law firm Brasil, Salomão e Matthes Advogados, notes that the majority of offsets in 2023 are for taxes overpaid by taxpayers. Following the “other credits” category, the largest amounts are for Cofins and IPI (tax on industrialized products) refunds, negative Corporate Income Tax (IRPJ) balances, and other undue payments.

Together, these categories accounted for R$128.5 billion last year, corresponding to 53% of the total offset by taxpayers with the Federal Revenue Service. “The system is flawed in several respects and ends up charging the taxpayer, then authorizing a refund as an offset. It’s not abuse or fraud on the part of the taxpayer; it’s their right to receive what they paid unduly,” stated Mr. Calcini, who is also a professor at the Getúlio Vargas Foundation (FGV).

*Por Guilherme Pimenta, Marcela Villar, Beatriz Olivon — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Mubadala takes control of Burger King operator in Brazil

Arab fund buys 16.8% stake from Fitpart

22/02/2024

Zamp operates Burger King and Popeyes restaurants in Brazil — Foto: Divulgação

Zamp operates Burger King and Popeyes restaurants in Brazil — Foto: Divulgação

Changes in the shareholding position of partners in Zamp, the operator of Burger King and Popeyes restaurants in Brazil, should bring forward a move involving the future of the company.

On Tuesday evening (20), Zamp announced the definitive withdrawal of funds from Fitpart Fund Administration Services. FitPart reduced its 16.8% share to zero.

According to sources familiar with the matter, the asset manager was against the decision to remove Zamp from Novo Mercado, the strictest governance segment of B3. This was something advocated by the Arab fund Mubadala Capital and supported by RBI, a company partly owned by 3G Capital, and in this scenario FitPart decided to step down.

Controlled by billionaires Jorge Paulo Lemann, Marcel Telles, and Beto Sicupira, 3G Capital owns 29% of RBI, which controls the Burger King brand worldwide.

With the votes of RBI and Mubadala, Zamp’s withdrawal from Novo Mercado was approved at an extraordinary shareholders’ meeting in January.

However, Fitpart (a family office of former Banco Garantia shareholders), on the side of the minority shareholders opposed to the measure, decided to sell its position in the company, which according to sources passed into the hands of Mubadala, as Valor reported on Tuesday.

Mubadala announced to the market on Wednesday the purchase of American Depositary Receipts (ADRs) representing 16.8% of Zamp’s capital.

In addition to the ADRs, Mubadala now holds 2.9% of the capital in derivative instruments, which increased its position in the company to 58.3% from 38.5%.

In this way, the Arab fund took control of the Burger King operator—and began to decide on the company’s next strategic steps.

“The acquirers [funds and companies linked to Mubadala] will begin to act actively in their meetings,” it said in a statement on Wednesday.

RBI, through the vehicle Burger King do Brasil, holds 9.4% of the shares, with 34% available for trading on the open market.

It was also announced to the market on Tuesday evening that Hugo Segre Junior, a member of the board of directors of Zamp and linked to Fitpart since 2018, had decided to resign. This was expected by the market, given the asset manager’s disagreements with the position of Mubadala and 3G.

These changes, which took place in the last 48 hours, come on top of another in progress that could give Zamp a new direction.

Mubadala is negotiating directly with the American parent company of Starbucks to acquire the chain’s license in Brazil, as Valor reported on Wednesday.

Zamp confirmed Wednesday morning that it was negotiating an agreement with Starbucks involving the brand and operations. Currently, around 130 stores are operated by SouthRoch Capital, which has filed for court-supervised reorganization in November, but the company has lost its license.

Now that Zamp is outside the Novo Mercado, it can make an acquisition—and be included in a transaction—without much difficulty. Companies on the Novo Mercado cannot be merged with others outside that segment of the exchange.

FitPart declined to comment on the matter.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras initiates trials for breakthrough decarbonization technology

A $1.5bn investment fuels launch of Hisep pilot project

22/02/2024

Carlos Travassos — Foto: Gabriel Reis/Valor

Carlos Travassos — Foto: Gabriel Reis/Valor

Petrobras revealed on Tuesday that it has initiated trials for an innovative technology designed to separate oil from CO2-rich gas directly on the seabed. This technology, known as Hisep, is a creation of the Petrobras Research Center (Cenpes) and represents a significant advancement in the field. The development is supported by a substantial investment of $1.7 billion from the consortium responsible for the Libra block in the pre-salt Santos Basin. This consortium includes Petrobras itself, along with industry giants Shell, Total, and the state-owned Pre-Sal Petróleo (PPSA), as well as Chinese entities CNPC and CNOOC.

Out of the total investment, $1.5 billion fuels the launch of the Hisep pilot project. The remaining $200 million is earmarked for the establishment of the Brazilian Pre-Salt Technology Center (CTPB), a collaborative effort with the Federal University of Itajubá (Unifei), located in the state of Minas Gerais.

The Hisep technology is set to undergo pilot testing in the Mero 3 field within the pre-salt Santos Basin. Following this testing phase, Petrobras anticipates that the technology will be operational by 2028. Positioned within the Libra area, the Mero field is recognized as the third-largest in the pre-salt region.

Petrobras’s Engineering Director, Carlos Travassos, highlighted the significant advantages Hisep technology is set to bring to the company’s operations. With its implementation, Petrobras expects not only to streamline efficiency but also to unlock substantial value. The innovative technology is projected to slash the weight of platforms by an impressive 65%, leading to a consequential reduction in the number of personnel required onboard. Furthermore, the potential for commercializing this technology to other entities in the oil sector presents an additional revenue stream.

“By integrating Hisep, we anticipate a transformation in the layout of the Floating Production, Storage, and Offloading (FPSO) units, particularly the ‘topside’ or upper part of the FPSO, which can reduce the cost of the platforms. This technology allows for a significant portion of the processing plant to be relocated from the FPSO to the seabed,” says Mr. Travassos. The FPSO platform produces, processes, stores, and drains oil.

In a strategic move to advance the Hisep project, Petrobras entered into an agreement with FMC Technologies do Brasil, a TechnipFMC subsidiary, in January. This partnership is tasked with developing the necessary infrastructure for Hisep. The initiative will kick off with the FPSO Marechal Duque de Caxias, which is designed to process up to 180,000 barrels of oil and 12 million cubic meters of gas daily.

Jean-Paul Prates, CEO of Petrobras, emphasized the environmental and operational benefits of their latest technological advancement, Hisep. He said that the primary advantage of this innovation lies in its capacity to mitigate the environmental impact of polluting gases at the source. “Decarbonization is crucial for the sustainability of oil extraction activities, enabling us to continue utilizing hydrocarbons,” Mr. Prates said. After separation, Hisep allows for the immediate reinjection of these gases back into the subsea wells.

“In the near future, Hisep will significantly reduce the need for personnel in high-risk areas of the platform, mirroring our successful efforts to eliminate diving operations by reallocating staff to safer roles. This strategic move bolsters our production efficiency,” he said.

*Por Kariny Leal — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Government, Parliament agree to maintain payroll relief

The issue will be dealt with by a bill of constitutional urgency

22/02/2024

Senate President Rodrigo Pacheco — Foto: Roque de Sá/Agência Senado

Senate President Rodrigo Pacheco — Foto: Roque de Sá/Agência Senado

Government and congressional leaders have confirmed an agreement to maintain the payroll tax exemption for 17 labor-intensive sectors. Following a meeting on Wednesday (21), Senate President Rodrigo Pacheco and Finance Minister Fernando Haddad stated that the proposed reintroduction of taxes on these sectors, which was suggested by the Executive branch at the end of last year, will be removed from the provisional presidential decree addressing the issue. Any changes will be suggested through a bill.

“The political negotiation is done, and any changes to the program will not be made through the presidential decree. The government has already agreed to this premise,” said the senator. “The tax relief on the 17 sectors has been maintained. That’s how it will be, and any changes will be matured through a bill,” he added.

The statement was made hours after a lunch attended by Mr. Pacheco, Senate leaders, Mr. Haddad, and the minister of Institutional Relations, Alexandre Padilha.

Mr. Haddad confirmed that the issue will be addressed through a bill of constitutional urgency. “That’s what we’re going to do,” the minister said when asked about the plan.

According to Mr. Pacheco, the government has promised to issue a new provisional presidential decree that removes the reintroduction of taxes from the text published in December.

The payroll relief system allows companies in some labor-intensive sectors to replace the 20% tax on wages with a rate of between 1% and 4.5% on gross revenues. According to businesspeople and trade unionists, this model contributes to job creation by reducing hiring costs.

Last year, Congress extended the measure until 2027. President Lula vetoed the bill, and then legislators overrode the president’s decision. At the end of December, the government issued another provisional decree to phase in the reintroduction of taxes.

The text set a 90-day deadline for the new rules to take effect. According to Mr. Pacheco, this made negotiations easier.

“Since there was a provision for this ninety-day period for discussion, there was the time needed for political negotiation, without rupture, so that there could be an understanding between the government and the legislators,” he said.

According to the agreement, the cap on tax compensation also included in the December presidential decree, will remain in the text. The government is still considering whether the end of the Emergency Recovery Program for the Events Sector (Perse), another point dealt with in the proposal, will continue in the text or will also be dealt with through a bill.

The agreement was signed on the same day that lawmakers and representatives of the productive sector called a press conference to defend the payroll relief.

The president of the National Federation of Call Centers, Installation and Maintenance of Telecommunications and IT Network Infrastructure (Feninfra), Vivien Mello Suruagy, also said that “it is past time to discuss” the issue. “This situation is causing us to hold back on all investments,” she said.

Lawmakers and businesspeople also presented figures from Desonera Brasil—a movement that brings together representatives from the 17 sectors. According to Desonera Brasil, companies in these sectors formally employed 9.14 million people last year—an increase of 17.7%, compared to the 13.5% growth in other sectors during the same period. According to the study, more than 728,000 jobs would not have been created since the beginning of 2012 without the payroll-tax cut. In addition, the average salary in the 17 sectors was 41.8% higher than in those without the relief. The calculations were based on figures from the Ministry of Labor.

The author of the bill passed in 2023 that extended the payroll relief until 2027, Senator Efraim Filho, argued that “the government had 10 months” last year to propose an alternative to ending the tax cuts.

*Por Caetano Tonet, Julia Lindner, Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
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G20 Rio opens with war criticism; member countries target Russia

The meeting addressed major global tensions; Russian Foreign minister faced criticism over the war in Ukraine and the death of a dissident in prison

22/02/2024

Brazil’s Foreign Minister Mauro Vieira speaks during the G20 foreign ministers meeting in Rio de Janeiro, Brazil, Wednesday, Feb. 21, 2024 — Foto: Silvia Izquierdo/AP

Brazil’s Foreign Minister Mauro Vieira speaks during the G20 foreign ministers meeting in Rio de Janeiro, Brazil, Wednesday, Feb. 21, 2024 — Foto: Silvia Izquierdo/AP

The G20 foreign ministers’ meeting in Rio opened with Brazilian Minister Mauro Vieira emphasizing the need for reforms in global governance. In his Wednesday (21) speech, he criticized high military spending worldwide and the stagnation of multilateral organizations, aligning with President Lula’s past administrations’ traditional foreign policy.

The main agenda for the 41 delegations present—21 G20 members and guests—was current international conflicts, particularly the wars in Ukraine and Gaza. As anticipated by diplomats, Russia faced significant scrutiny, with its Foreign Minister Sergei Lavrov present at the meeting.

Valor sources privy to the closed-door discussions reported that the G7 countries (Germany, Canada, the U.S., France, Italy, Japan, and the UK) were particularly vocal in their criticism. They focused on the Ukrainian war and the death of Alexei Navalny, an opponent of Vladimir Putin, in an Arctic prison.

Other foreign ministers also expressed their concerns about the conflicts in Ukraine and Gaza. Regarding the Israel-Palestine conflict, most supported a two-state solution. Argentina, which has prioritized Israel in its foreign policy, also backed the creation of a Palestinian state. However, Foreign Minister Diana Mondino emphasized Israel’s right to self-defense.

On Thursday (22), discussions will shift to potential reforms in organizations like the UN, IMF, and World Bank. These reforms, along with combating hunger and climate change, are key priorities of Brazil’s G20 presidency.

In front of other foreign ministers, Mr. Vieira expressed concern over the annual military expenditure of $2 trillion, contrasting sharply with the meager contributions to humanitarian aid and climate change efforts. He pointed out that funds allocated for social assistance and development are barely $60 billion a year, approximately 3% of what is spent on arms.

“The disbursements for combating climate change under the Paris Agreement are barely $100 billion a year, which is less than 5% of military spending,” stated the Brazilian minister. “I can’t help but feel a lack of concrete action on these issues.”

Mr. Vieira, under the observation of his counterparts, reminded them that the G20 was originally intended to address economic and development issues but has become one of the few forums where countries with differing views can come together. Despite that, he urged for concrete action and critiqued the “unacceptable paralysis” of the UN Security Council regarding global armed conflicts.

Criticizing developed nations, he emphasized that the “Global South” demonstrates greater initiative in peace and cooperation. “The successful cases of peaceful cooperation in Latin America, Africa, Southeast Asia, and Oceania suggest that these regions’ voices should be given special care and attention in relevant forums,” he asserted.

Regarding Brazil’s stance on global tensions, Mr. Vieira declared that the country “rejects the pursuit of hegemonies, whether old or new.” He also encouraged fellow G20 members to reaffirm their commitments to the UN, “publicly rejecting the use of force, intimidation, unilateral sanctions, espionage, and mass manipulation of social networks.”

Debates on Brazil’s other G20 presidency priorities, such as fighting hunger and climate change, are slated for future group meetings. Throughout the year, numerous ministerial-level meetings will occur in Brazil, with most in Rio. Next week, São Paulo will host discussions between finance ministers and Central Bank presidents.

The G20 heads of state summit is scheduled for November in Rio. Typically, the G20 issues a joint statement only after the summit, so it’s unlikely there will be an official group statement at the end of today’s meeting. Mr. Vieira is expected to give a statement after the meeting concludes.

Notably absent from Rio are the main diplomatic representatives of two global powers: China and India. However, Brazil has received indications that Chinese President Xi Jinping will attend the leaders’ summit.

On Wednesday, after more than four hours of meetings at Marina da Glória on Rio’s south side, the ministers went to a dinner at Palácio da Cidade, which is the headquarters of the city hall. The dinner, hosted by Mayor Eduardo Paes, who is championing the slogan “Rio – Capital of the G20,” featured elements of Rio’s local culture. At the Marina da Glória event, a local vendor, known as a “mateiro,” served mate (a traditional South American drink) and Globo cookies—snacks that are iconic to Rio’s beaches—to the attending diplomats and journalists.

*Por Murillo Camarotto, Caio Sartori, Paula Martini — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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