Brookfield’s new car rental business expected to gross R$3.3bn

New company operates under brand Unidas, bought with divestiture package

10/04/2022

Claudio Zattar — Foto: Carol Carquejeiro/Valor

Claudio Zattar — Foto: Carol Carquejeiro/Valor

Under the Unidas brand, Brookfield’s new car rental business is expected to gross over R$3.3 billion this year, in addition to an EBITDA of over R$1.2 billion, said Cláudio Zattar, the chief executive of Unidas.

The new company was created by the merger of Ouro Verde – which was controlled by the fund – and some assets of the company formerly known as Unidas. Mr. Zattar, who was Ouro Verde’s CEO, took over the new business, which started to operate in an integrated way on Monday.

“Our shareholders are excited about the acquisition and there are good expectations of what this combined business will generate,” said Mr. Zattar. The financial perspectives for the year are basically the minimum of what Ouro Verde and Unidas’s slice that was bought last year posted – a scenario expected to repeat itself this year, since the synergies of the two companies together only start to happen in fact now.

The new Unidas arose from a pragmatic need: the demand from antitrust regulator CADE for a competitor in the sector to then approve Localiza’s plan to incorporate Unidas – the two were Brazil’s first and second-largest car rental companies. Localiza’s move was approved by CADE in the middle of this year. For the divestiture, Brookfield paid around R$3.5 billion

Before, Ouro Verde had a business focused on the B2B operation and planned to approach individual customers through the expansion of its car subscription branch. With the acquisition, the new company took a large step forward and now has good representation in the market. In total, there are 90,000 assets (trucks, cars, machinery, and equipment), of which 77,000 are light vehicles. Localiza, the leader, has about 440,000 cars (after incorporating the former Unidas) and Movida has 190,000 cars.

The divestiture package purchased by Brookfield took nearly 49,000 cars and 182 car rental stores (Unidas had closed the second quarter with 245, considering its own network and franchises). Ouro Verde, focused on B2B, had no stores and focused on representatives across the country.

The sale of used car stores was not within the obligations pointed out by CADE, but the regulator gave Localiza freedom to negotiate the conditions with the company interested in the asset. This way, the group got 22 second-hand vehicle stores, said Mr. Zattar. Until then, neither Ouro Verde nor Localiza had disclosed details about the divestiture package – the only thing known for sure was the volume of the fleet, which had been previously rumored in the market.

The Unidas brand and sub-brands – such as Unidas Frotas and Unidas Livre – were also acquired. The Unidas brand was recognized as one of the 50 most valuable in Brazil according to the Brand Finance Brazil ranking.

“It’s hard to get into a rent a car business from scratch. The barriers are big, the scales are big. You would have to undergo a period of maturity. And now we are among the three largest in the country and with high potential that the market is providing us,” said Mr. Zattar, who before taking over Ouro Verde was Localiza’s head of logistics and car purchases.

Companies also saw the need to have cash on hand and decided to have fewer assets – thus looking at fleet management and outsourcing options.

“The rent-a-car market is a segment that continues to grow. And it doesn’t grow more for lack of cars,” he said, in reference to the semiconductor crisis. Even with the difficulties of buying a car, the scenario is expected to be much better than last year.

“We get availability from automakers. We are already treated as a major rental company,” he said. Even so, the executive said he does not expect a total normalization of vehicle production next year, with problems still in place in the delivery of semiconductors and chips – equipment required not only by the automotive industry.

One change in the market today is that rental companies have been forced to operate with older vehicles. In 2019, the average age of Localiza’s operating fleet in the rent-a-car segment was 7 months. In the second quarter of this year, the age was 17.4 months – the scenario was similar at Unidas. According to Mr. Zattar, the fleet purchased is in line with the average portfolio of the two rental companies.

Mr. Zattar pondered that the older fleet has its pros and cons. On the one hand, the company tends to have higher maintenance costs. On the other, the high price of cars helps companies to sell the vehicle well, and this has been a positive reinforcement in the earning reports. In addition, the strong demand has kept the average daily rates at record levels.

One movement adopted by Localiza and Movida has been internationalization. Recently, Movida bought a small business in Europe, its first step in the region. Mr. Zattar said that the new Unidas, on the contrary, has a strategy designed to be a rental company focused on Brazil. “Our strategy is here. We will continue doing the best for the Brazilian consumer,” he said.

The new Unidas will continue to disclose its results to the market and plans to maintain fundraising through debt issuance. Mr. Zattar was asked if there is a scenario to have shares traded on the stock exchange and if Brookfield would be interested in seeking partners, but he defended that, for now, there are no talks along these lines. “It is still very early … In the future, a larger capital structure aimed at accelerating the need for capital expenditure and growth [would make sense] … But it is a strategy of the controlling shareholder. We haven’t discussed [the topic],” he said.

*By Cristian Favaro — São Paulo

Source: Valor International

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Industrial cost slows down but inflation will still be high

Central Bank’s median projections for industrial goods inflation are 9.2% for 2022 and 3.8% next year

10/04/2022

Fábio Romão — Foto: Silvia Costanti/Valor

Fábio Romão — Foto: Silvia Costanti/Valor

Inflation of industrial goods, especially those linked to the economic cycle, accelerated again recently, reinforcing the perception among economists that the cooling of industry costs will help bring the country’s official inflation (IPCA) down this year. This will still be a gradual process, though, and industrial prices are still expected to remain historically high in 2022.

With the disorganization of the global production chains after the pandemic shock, the cost of the local industry ranged from 1.46% in the year to May 2020 to 36.37% in May 2021, a record acceleration since records began in 2006, a study by Bradesco shows. Based on a methodology suggested by the Central Bank, the bank’s economists have built an index of the cost of inputs in the Brazilian manufacturing industry.

According to the Brazilian Institute of Geography and Statistics (IBGE), a little more than 80% of the costs with inputs are local goods, but even in these cases, several of them have a defined price in the global market, notes Bradesco. This is the case of oil and its products, whose weight is almost 15% of the total cost of industry inputs, notes the bank. “In this period, from May 2020 to May last year, the price of oil, its products, fuels in general and semi-finished products, rolled products and steel pipes were the main causes for the rise in costs,” Bradesco economists Marcelo Gazzano and Myriã Bast wrote.

In August 2022, the industry’s cost still varied by almost 21%, they calculate. “We are seeing a normalization, but coming from a very high base,” said Mr. Gazzano. “At the point it is, it’s not enough. It must keep improving, it should not stagnate now,” said Ms. Bast.

September data from Bradesco’s proprietary survey of 3,000 companies indicate that this improvement continued last month, said Ms. Bast. In another metric for the industry cost index, considering a six-month period and a year, the variation in August is already lower, at 15%, said Mr. Gazzano.

In the September forecast, industrial goods inflation accelerated again to 0.32%, against 0.28% in the August IPCA-15, according to MCM Consultores. Underlying industrial goods, which do not include items with more volatile prices such as ethanol and cigarettes, went to 1.02% from 0.91%. In 12 months, the general inflation of industrial goods even decreased to 11.88% in September from 12.77% in the August preview, but the underlying inflation went to 13.83% from 13.48%.

In the Focus bulletin, the Central Bank’s survey with market analysts, the median projections for industrial goods inflation are 9.2% at the end of this year and 3.8% next year.

Bradesco projects industrial goods inflation at 9.2% this year, from 12% in 2021, but believes it could be just under 3% in 2023. “If nothing changes and it follows a trajectory like we are seeing in the fiscal year, we could have the industrial IPCA settling around 5% next year. But in our scenario, this will continue to adjust, so this is not our official projection,” said Mr. Gazzano.

The “stress indicator” of global chains drawn up by UBS’s global research team and Evidence Lab was 1.2 standard deviations from normal in August this year, the Swiss bank said in a report. By October 2021, this indicator had reached 5 standard deviations. The UBS BB team that follows Brazil highlights that August was the fifth consecutive month of improvement of the global indicator, signaling future normalization of goods inflation also in the country.

According to UBS BB’s calculations, the deceleration of goods prices accounts for more than 1 percentage point of the expected deceleration of the IPCA until the end of the year. UBS BB projects IPCA at 5.7% in 2022 and 4% in 2023, with industrial goods at 8.4% and 0.7%, respectively.

“Everything that happened in the pandemic and also because of the war between Ukraine and Russia is hindering a clearer deceleration of industrial goods. More recently, in the second half of the year, we are seeing partial rearrangement of the production chains and commodity prices losing strength. This contributes to a less arid formation of industrial prices,” said Fábio Romão, an economist from the consulting company.

He projects 9.8% for industrial inflation in 2022 and 5.4% in 2023. “There is the prospect that global economic activity will lose strength next year, which signals that industrials will slow down. We may have from 2023 onwards a rate of evolution of industrial prices that is not so different from the index,” he said.

In the September Inflation Report (IR), released last week, however, the Central Bank estimated that the normalization of production chains in Brazil was slower than the global average as of May this year, even though it maintains the rebalancing trend. In addition, the monetary authority warned that new shocks, especially lockdowns to combat the transmission of Covid-19 in China or problems arising from the war between Russia and Ukraine, may interrupt the normalization trajectory in the world and Brazil.

*By Anaïs Fernandes — São Paulo

Source: Valor International

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Battle between Oi, mobile business buyers heats up

Telco obtained injunction ordering Telefónica, TIM, Claro to deposit R$1.5bn in court; trio sought B3 arbitration chamber

10/04/2022

The battle between Oi and the buyers of its mobile business – Telefónica, Telecom Italia’s TIM and América Móvil’s Claro – over the value and agreements on the transaction intensified on Monday. Oi obtained an injunction ordering the three companies to deposit in court R$1.5 billion within 48 hours for services provided to them.

On the other hand, the three telcos also filed for an arbitration proceeding in the Market Arbitration Chamber of B3 on Monday. The companies ask for a R$1.73 billion correction in the value of the asset purchase by revenue metrics that should be met by Oi, but claim that the company has not proven to have achieved them.

In the case of the injunction, the determination for Telefónica (owner of Vivo), TIM and Claro to deposit the amount was granted Monday by Judge Fernando Viana, from the 7th Business Court in Rio de Janeiro.

The amount refers to about R$600 million that would be paid by the three telcos as part of a contract for services to be provided by Oi in the agreement to buy the mobile business, in a judicial sale in 2020, for R$16.5 billion.

On September 19, Telefônica, TIM and Claro charged Oi for a correction of the purchase contract worth R$3.18 billion. Of this total, the three operators retained R$1.44 billion as collateral when closing the deal. The R$1.73 billion difference is what they are asking Oi.

Oi did not reply to requests for comment. B3 said that every process in the arbitration chamber is secret and does not comment on the subject. Telefónica, TIM and Claro published a statement to the market on Monday about the decision to appeal to B3, but declined to comment further.

*By Ivone Santana, Rodrigo Carro — São Paulo, Rio de Janeiro

(Felipe Laurence contributed to this story.)

Source: Valor International

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Brazil imports more from China driven by solar power, agricultural inputs

Growth of 35.1% between January and August exceeds average rise of foreign purchases

10/03/2022

Taking advantage of the expansion of solar power in Brazil and the demand for agricultural inputs, Chinese imports this year have advanced more than the average of Brazil’s total imports. From January to August this year, imports of products made in China totaled $39.74 billion, up 35.1% compared to last year and 63.8% compared to 2019, the pre-pandemic period. The average of total Brazilian foreign purchases grew 32.3% and 44.3%, respectively.

Data from the Foreign Trade Secretariat (Secex/ME) show that imports of Chinese products were driven by solar panels and equipment and agricultural inputs. These two groups totaled $8 billion in foreign purchases from January to August, or 20% of Chinese products that arrived in the period. That means $5.12 billion more in imports of these Chinese products, nearly half of the growth of $10.3 billion in purchases from the Asian country this year compared with the same period last year.

The first in the ranking of Chinese items most imported by the country are electrical and electronic equipment and devices that total $3.55 billion, of which 95% are solar or photovoltaic modules or panels. The amount represents 8.9% of the total bought from China in the first eight months of this year. It is also more than double the $1.43 billion imported in the same period last year, and five times the $700 million of 2019, always considering the January-August period.

More than increasing exports, China is virtually the only foreign supplier of these items for now. It sold Brazil 95% of what the country imported from January to August in photovoltaic modules and panels.

Chinese suppliers take advantage of a moment of expansion of renewable power sources in Brazil at the same time that the Asian country has sought to diversify its own power generation mix, said José Augusto de Castro, head of the Brazilian Foreign Trade Association (AEB). With the plan of becoming carbon neutral by 2060, China bets in solar power within a plan to foster the development of technologies in this field and the diversification in exports of products linked to renewable sources, Mr. Castro said.

Data from the Brazilian Electricity Regulatory Agency (ANEEL) and the Brazilian Photovoltaic Solar Energy Association (Absolar) show the advance of solar power in Brazil. The country’s installed capacity in this source jumped to 18.65 GW in August from 13.82 GW in 2021. Photovoltaic energy currently accounts for 9.1% of Brazil’s power generation mix. According to ANEEL, Brazil surpassed 185 GW in power generation capacity in August. Of the 650.14 MW of power increase this month, 57% came from solar plants.

Rafael Cagnin — Foto: Silvia Costanti/Valor

Rafael Cagnin — Foto: Silvia Costanti/Valor

Rafael Cagnin, an economist at the Institute for Industrial Development Studies (Iedi), also recalled the so-called taxation of the sun should come into effect as of 2023, bringing taxation that does not exist today for those who install solar panels at home. This may have accelerated the installation of the photovoltaic system in 2022, not only because of the tax benefit foreseen for those who adopt the source until January of next year, but also stimulated by the high cost of energy in Brazil. “We must remember that China has an almost unbeatable competitiveness in the production of solar panels in the world.”

Another group that draws attention in Chinese imports this year is insecticides, fungicides, herbicides, fertilizers, and their raw materials. Imports of these agricultural inputs totaled at least $4.46 billion between January and August, three times the amount seen last year ($1.45 billion) and more than four times the amount seen in 2019 ($1 billion) in the same period.

Mr. Castro considers surprising that China, a major destination for Brazilian soybeans, now stands out in the supply of agricultural inputs to Brazil. The picture, said Mr. Cagnin, is explained by the shortage of these products in the world, intensified by the war between Ukraine and Russia, and by Brazil’s great dependence on these items. According to government data, cited by the economist from Iedi, 85% of the internal demand for fertilizers is met by imports.

*By Marta Watanabe — São Paulo

Source: Valor International

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Effects of health crisis will challenge next president

Brazil’s public healthcare system needs more funds to meet pent-up demand generated during pandemic; country also must increase vaccination coverage against diseases that are again seen as threats

10/03/2022

The worst phase of the pandemic was left behind last year, but whoever takes over the presidency in January will still have to face several effects of the crisis that still persist in the health area.

Experts say that Brazil’s public healthcare system, Unified Health System (SUS), will need a budget reinforcement in order to meet the pent-up demand from the most acute years of the pandemic – which have not been completely solved so far.

The agenda seen as a priority also includes the universalization of basic health care, more funds for science, technology, and innovation, and a nationwide effort to recover vaccination coverage for diseases that are once again seen as threats to Brazilians.

In relation to the SUS and the pent-up demand for care, these refer to elective surgeries, appointments with doctors, exams, and treatments that were not carried out between 2020 and 2021, when health care was congested with cases of Covid-19 patients.

Due to lack of beds and schedules, or due to many people’s fears of being exposed to the coronavirus in crowded health care units and hospitals during the worst moments of the pandemic, a substantial slice of patients across the country who would have needed to undergo these exams, appointments, and surgeries in the two critical years of the pandemic chose to postpone the procedures.

Until the beginning of this year, the number of health care visits at SUS was still at a lower level than in 2019.

“The pandemic produced an extremely delicate situation for health, an increase in demands that were not met in that period and that have not yet been treated,” said Adriano Massuda, a public health physician and a professor at the think tank Fundação Getulio Vargas.

The National Council of Health Secretaries (Conass) estimated that an additional budget of R$8 billion would be needed in the health area to meet the demand that was not met during the pandemic. And also to solve pending accreditations of ICU beds, family health teams and even ambulances of the Mobile Emergency Care Service, known as SAMU.

Increasing the salaries of doctors and nurses and also the value of the transfers to hospitals is also a point considered important to improve health services nationwide.

The secretaries say that an agenda of urgent measures must be put in place or, at least, addressed in the first 100 days of government.

Besides an emergency agenda, Conass defends the creation of a nationwide public health plan. And also a 10-year plan, as already exists in education.

“During the pandemic, SUS started to be perceived as an extremely relevant system. Both the right and the left started to defend the system. And we need an agenda to modernize the SUS,” said Nesio Fernandes, head of Conass and state health secretary of Espírito Santo.

This modernization agenda involves setting aside more public funds for the system, Mr. Fernandes said. He cites that public spending on health in Brazil is currently 3.8% of GDP. The Pan-American Health Organization (PAHO) indicates that the appropriate level of spending on public health is 6% of GDP.

The Oswaldo Cruz Foundation (Fiocruz), an agency linked to the Ministry of Health, also insists on the need to increase public funding for SUS. The institution defends spending 7% of GDP in the system.

Among the points that Fiocruz listed in a letter to the presidential candidates is the universalization of basic health care coverage, mainly through the expansion of the family health program.

This measure, according to calculations made by Fiocruz, could quickly generate 2 million jobs for health professionals. Plus, it would have a direct effect on the country’s health indicators.

Another point in the letter is the defense of increased funds for science, technology and innovation – which would open doors for reducing the country’s dependence on foreign manufacturers of medicines, inputs, and medical equipment, for example.

Brazil spent about $20 billion on importing medicines and medical equipment last year and $15 billion in 2020, according to data compiled by Fiocruz.

Carlos Gadelha — Foto: Leo Pinheiro/Valor

Carlos Gadelha — Foto: Leo Pinheiro/Valor

Carlos Gadelha, coordinator of Fiocruz’s Center for Strategic Studies, advocates a tax overhaul that includes taxing the super-rich and the reduction of inefficient tax breaks. Mr. Gadelha, a trained economist, said that the government could collect extra R$40 billion with both measures and, as a result, fatten funds for healthcare.

That would be an antidote to a practice that has been established in recent years of parliamentary amendments for several fields, including health. One risk in the healthcare field is that these amendments end up financing fragmented actions, said Mr. Gadelha.

In addition to setting aside more public funds for SUS, science, and technology and addressing the pent-up demand generated by the pandemic, the next president also has the challenge of recovering the vaccination coverage against diseases that are again seen as threats.

Carla Domingues, an epidemiologist and coordinator of the national immunization program of the federal government between 2011 and 2019, says this should be priority zero of the next administration in the health area.

If one were to do a prioritization ranking, vaccination, she said, would be the most important item for the next administration.

“The country faces the risk of reintroduction of diseases that were already eradicated,” she said, reiterating a warning that is a consensus in the medical profession and that refers to the risk of reappearance of poliomyelitis, measles, diphtheria, pertussis, and meningitis outbreaks, among other diseases.

*By Marcos de Moura e Souza — São Paulo

Source: Valor International

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OECD to be strict with Brazil

Convergence of Brazilian policies with normative instruments will have to be more than promises

09/30/2022

Brazil submitted its application to join the OECD in May 2017 — Foto: Divulgação/OCDE

Brazil submitted its application to join the OECD in May 2017 — Foto: Divulgação/OCDE

The Bolsonaro administration is expected to present this Friday to the Organization for Economic Cooperation and Development (OECD) — on the eve of the first round of the presidential election — the memorandum necessary to effectively begin negotiations to join the body.

Sources in the private sector believe there is resistance from the Workers’ Party (PT) candidate, Luiz Inácio Lula da Silva, to work for Brazil to join the OECD. The annoyance with this position — together with an eventual plan to reopen the Mercosur-European Union agreement and to create an export tax on agricultural products — would have been taken to Mr. Lula da Silva, who publicly has not talked about the subjects any further. However, neither is it clear what his administration would do.

Brazil submitted its application to join the OECD in May 2017. It waited five years to receive the invitation letter in June of this year to start negotiating the conditions for becoming a member.

Now, the government will present the so-called initial memorandum on Friday. This is a report in which Brazil answers about the degree of convergence of Brazilian policies with 230 of 262 normative instruments of the OECD.

Basically, the country has to say whether it has already implemented or how it intends to align with all these OECD practices or recommendations. The entity then distributes the report to 26 committees, which will send out questionnaires, and make visits to the country, among other things.

What is apparently a technical job is, however, becoming increasingly political. Member countries have already made it clear to Brazil that, this time, no candidate country will leave any measure for later, based on future promises. In other words, there is no admittance with a “debt,” unlike what happened to countries like Chile and Colombia, which continued to justify why they did not complete the implementation of certain commitments years after they became partners.

So, Brazil will first need to reduce deforestation in order to be accepted. It is not going to be possible just to present a deforestation reduction target.

Besides this, member countries expect greater common engagement, which pushes the “like-minded” issue into the political arena. In other words, foreign policy will enter strongly into the negotiations for Brazil to join the OECD, unlike what happened with other countries that are already inside the organization today.

An example happened in March when Brazil abstained from a vote to condemn Russia at UNESCO — which has nothing to do with the economy and the OECD. European countries showed intense annoyance. Brazil’s Foreign Affairs Ministry, known as Itamaraty, argued that it had already voted in the UN Security Council against Russia, but that it considered that Unesco was not the forum for that kind of initiative. It took a lot of explanations until the path was reopened for the OECD invitation, in June. But the message was clear to Brasília, whoever the president.

*By Assis Moreira — Geneva

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Brazil tells WTO it is ready to expand rice exports

Rice Industry Association says country can reach 3.5 million tonnes in exports, including the stocks from Mercosur neighbors

09/30/2022

While India, the world’s leading rice exporter, has restricted shipments of the grain, Brazil signaled Wednesday, in an event at the World Trade Organization (WTO), that it is ready to expand its exports and contribute to global food security.

The Brazilian Rice Industry Association (Abiarroz) says that the country, which already exports 1.5 million tonnes per year, has the capacity to add more 2.5 million tonnes, including the stocks coming from Mercosur neighbors.

“The cost of rice production in Brazil is much higher than in the Mercosur partners,” said Abiarroz’s director Andressa Silva, in reference to costs involving environmental, labor and logistical issues, among others.

“Uruguay, Paraguay and Argentina export rice at a lower price to Brazil, which ends up generating a surplus, because our production is adjusted to consumption. And Brazil is working to become a rice export platform in Mercosur, with domestic production and the volumes it absorbs.”

This week, at a meeting of G20 agriculture ministers, Qu Dongyu, director-general of FAO, the UN’s Food and Agriculture Organization, stressed that persistent high consumer food prices and inflation have “devastating implications for global food security.”

“While we witnessed improvements in the forecasts for wheat and soybean markets, the outlook is less positive for maize and rice, and fertilizer markets remain supply-constrained and volatile,” he said.

In the panel led by Abiarroz at the WTO Public Forum, specialists once again pointed out the risks arising from restrictions on food exports. Peter Draper, with the University of Adelaide (Australia), mentioned WTO data that indicated that in April, 61 export bans on food products were in force in 32 countries. As of last week, 46 measures remained in place in 27 countries.

Professor Renata Amaral, with the American University (Washington), indicated that further restrictions on shipments may be adopted, also due to the cascade effect, with consequent shortages in supply.

India, which exports rice to 150 countries boosted by subsidies, recently banned shipments of the so-called “broken rice,” considered second category and widely used in animal feed, but which is bought by several African countries for human consumption because it is cheaper. In addition, the country restricted the sale of various types of the product (white, brown, and others), maintaining shipments of basmati rice.

Ms. Silva, with Abiarroz, pointed out that consumers are harmed when governments boost agricultural production with subsidies, distort the market, and ban exports. And, in this scenario, an increase in Brazilian exports could help in the efforts to strengthen global food security.

Carolina Matos, Abiarroz’s export manager, said there are opportunities to expand exports to Central and North America, Europe, the Middle East, and Africa. Brazil is the tenth largest world producer (2% of the total) and the largest producer outside Asia. Currently it is the 12th largest exporter of processed rice, of better quality.

Alexandre Parola — Foto: Ailton de Freitas/Agência O Globo

Alexandre Parola — Foto: Ailton de Freitas/Agência O Globo

The Brazilian ambassador to the WTO, Alexandre Parola, highlighted sustainability aspects in Brazilian production. According to Abiarroz, Brazilian rice has the lowest levels of arsenic, thanks to the soil, and is not transgenic. In addition, 80% of the production is in the South region, therefore far from the Amazon. In 45 years, the size of the cultivated area has plummeted in the country, but production has doubled, with significant gains in productivity.

*By Assis Moreira — Geneva

Source: Valor International

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Employment growth is likely to be short-lived, study suggests

Itaú survey shows that the decoupling of activity may bring down the occupation rate at the end of the year

09/30/2022

Natalia Cotarelli — Foto: Divulgação

Natalia Cotarelli — Foto: Divulgação

Both the labor market and economic activity in Brazil have surprised to the upside this year, but the recovery in employment has been sharper than it would be consistent with the evolution of the country’s GDP growth itself, economists say. Beyond some structural change that would make some of this gain permanent, the finding suggests that this very positive trend for employment may be short-lived.

In economic theory, there is an inverse relationship between GDP and the unemployment rate (the so-called Okun’s Law). A study by Itaú Unibanco shows that until the third quarter of 2021, the variation in unemployment was consistent with the performance of the economic activity, but since the fourth quarter of 2021, the data seems to have become decoupled. “The unemployment rate ended up falling much more than the GDP growth would suggest, according to the rule,” said Natalia Cotarelli, an economist at Itaú and a co-author of the study, along with Matheus Fuck and Claudia Bruschi.

The seasonally adjusted unemployment rate fell to 8.8% in the three months to July from 11.5% in the January quarter, despite the strong recovery in the labor market participation rate, which rose to 63.5% from 61.7% in the period, notes Itaú. In other words, the growth of the employed population more than offset the return of part of the people looking for work.

For Itaú, a labor market stronger than activity would suggest reflects a sectoral composition effect of growth — with the reopening of the more labor-intensive service sector in the post-pandemic — and some impact of the 2017 labor reform.

In the first and second quarters of this year, GDP expanded 1.1% and 1.2%, in that order, on a seasonally adjusted quarter-over-quarter comparison, with the services sector accounting for more than half of the growth (0.7 and 0.8 percentage points, respectively), Itaú notes. “The recovery of the employed population in these very labor-intensive sectors was stronger in late 2021 and early 2022,” said Ms. Cotarelli.

In this scenario, the average productivity of the economy (which jumped during the pandemic because of the resilience of capital-intensive sectors, which are more productive) started to decelerate and seems to have returned to the pre-pandemic pattern, the bank said. This, according to Itaú, indicates that the labor market is likely to return to growth more in line with the evolution of GDP ahead.

“The outlook now is for a labor market moving basically sideways in the second half of the year,” said Ms. Cotarelli. Itaú expects the unemployment rate to rise to 9.1% in December from 8.8% in the July quarter, and to rise to 10.1% by the end of 2023.

The impact of the labor overhaul on the economy is more uncertain, Itaú acknowledged, but some data and academic studies have pointed out that the changes may have generated positive effects on the market, for example by reducing the filing of labor lawsuits and, therefore, costs. All other things being equal, this fall may increase the demand for labor without raising the cost of labor, which tends to reduce the non-accelerating inflation rate of unemployment (NAIRU) — the rate beyond which there is pressure on inflation.

After the labor overhaul passed in Congress in 2017, the proportion of formal employment in relation to the total seems to have stopped the downward trend that had taken place since 2015, notes Itaú. “In 2018, it became stagnant, which could indicate some effect of the overhaul. The pandemic came and everything became very distorted, but now it seems that this proportion has stabilized at the level close to 2018, suggesting an impact of the reform for formal jobs,” said Ms. Cotarelli.

Bráulio Borges, a senior economist at LCA Consultores and an associate researcher at the Brazilian Institute of Economics (FGV/Ibre), said that the real “outlier” in the relationship between GDP and unemployment rate in Brazil was the second quarter of 2022.

Mr. Borges reweighted the participation of the GDP sectors not by their value added to the total economy, as statistics agency IBGE does, but by the number of people employed in those segments. In the first half of 2022, this “GDP from the point of view of occupation” rose 5%, compared to the equivalent moment in 2021, almost twice the official GDP advance in the period, of 2.7%. Since 1995, never in a two-year period has the GDP been so “pro-employment” as in 2021-2022, notes Mr. Borges.

This difference between the GDP reweighted by occupation and the official one happens, according to the economist, because the sectors that are growing the most this year are labor-intensive, such as services and construction, but, in general, of low productivity – that is, they generate many jobs, but add relatively less value to the economy. “I have more employment than GDP,” said Mr. Borges.

By submitting this reweighted GDP to Okun’s Law — which Mr. Borges further divides by the working-age population (14 or older), to add a notion of labor “supply” — the economist managed to maintain the relationship between GDP and unemployment rate even in the fourth quarter of 2021 and the first quarter of 2022. “But it is not possible to understand the behavior of the labor market in the second quarter merely by sectorial composition,” said Mr. Borges.

In the period, 4.4 million new jobs were created, or 18 million in annualized terms, which would be compatible with a GDP varying around 5%, according to the economist. In the first half of the year, however, GDP grew 2.5% year over year, and the median of the Central Bank’s Focus survey with analysts indicates a growth of 2.7% for the year.

According to Mr. Borges, a more structural change could be taking place in the relationship between activity and the unemployment rate because of the greater flexibility introduced in the market after the 2017 labor overhaul. For him, however, the signs in this direction are not yet so robust, so Mr. Borges bets more on an early effect of hiring.

Mr. Borges recalled that at the end of the second quarter, the government signaled that it would make other stimuli near the elections. “This may have prompted hiring in sectors of the economy due to the expectation that activity would still be strong in the third quarter,” he says.

This is a hypothesis that will be “easily verifiable” or not as the data are published, says Mr. Borges. For every percentage point that the GDP grows above the working-age population (PIA), unemployment in Brazil drops 0.5 points. For demographic reasons, the PIA has been growing 0.8% per year, while the Focus indicates 0.5% growth for the GDP in 2023. “There is an indication that unemployment may rise next year,” said Mr. Borges.

In Mr. Borges’s projections, GDP from the perspective of occupation should still advance 4.5% in 2022, for an overall GDP growth of 2.8% estimated by LCA. In 2023, however, this difference would be eliminated, with both rising 0.4%.

*By Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Drop in commodities prices to affect revenues

Cheaper iron ore and oil will start to reflect in second half results

29/09/2022

Brazilian companies dealing in commodities had been in an exceptional operating moment since the second half of 2020, with the recovery after the first wave of the pandemic. The rapid recovery of the world economy has caused iron ore, oil and pulp prices to soar, boosting revenues. In this second half of 2022, however, the basis of comparison with previous periods, associated with fears of economic recession that put pressure on prices, are expected to begin to reflect on results.

Iron ore prices tumbled 36.4% in comparison to the average in the third quarter of 2021, according to the S&P Platts index, and 24.5% over the average in the second quarter of this year, considering the average of $103.83 a tonne in the current quarter through Thursday. Less appetite from China, the commodity’s main buyer, has also pressured steel prices in Brazil and in foreign markets.

If since 2020, the restrictive circulation measures in the rest of the world as opposed to the moment closer to “normal” in China have led to shortages, now the circulation restrictions in the Asian country and the deceleration of the local economy affect prices. “What lifted prices in the post-pandemic period was the restriction in supply, with mining and steel companies still struggling to meet pent-up demand,” says Daniel Sasson, analyst with Itaú BBA. “Today we have a fairly challenging scenario in terms of economic activity in China, with initiatives to boost it not doing very well.”

Gabriela Joubert — Foto: Divulgação

Gabriela Joubert — Foto: Divulgação

“The expectations for mining companies is that revenues will be lower because prices are lower, even with a recovery in sales volume, both in annual and quarterly,” says Gabriela Joubert, chief equity analyst with Inter. In steel, she believes that the domestic market will not feel the drop in international prices as much because of recent readjustments in the companies.

Mr. Sasson sees different impacts for each company. “The concerns we see today is with this synchronized global deceleration, although short-term pressures are evident, the bigger question is to understand where profitability and margin levels will stabilize,” he says. The executive points out that companies like Gerdau, less exposed to ore, will sustain better results than Vale, CSN or Usiminas in the quarter.

Oil prices also felt the drop in the current quarter. The Brent barrel, used as a reference by the Brazilian companies, has an average price of $95.67 in the quarter, which represents a 12.8% drop compared to the second quarter. In the annual comparison, however, there was an increase of 31.8%.

“In these last quarters we have seen growing doubts about the global demand for oil, with expectations of lower-than-expected growth in the economy, amid accelerated inflation and high interest rates to contain these effects,” explains Ilan Abertman, analyst at Ativa Investimentos. He points out that the uncertainties about supply end up sustaining the price near $100 a barrel.

Ms. Joubert recalls that the member countries of the Organization of Petroleum Exporting Countries (OPEC) are having difficulty in raising production levels, which creates more triggers than in the ore case to maintain prices. “We will see a quarterly drop in revenues, but still above historical levels. What is likely to happen is a balancing of expectations,” she says.

Mr. Abertman does not see very big changes in the companies’ fundamentals even with the quarterly drop in oil prices. “On the revenue side we won’t have oil at $110 per barrel anymore. At $90, however, is still higher than a year ago, and in the case of Petrobras, there is a pre-salt premium that ends up offsetting the price,” he says.

In terms of costs for the companies, the drop in oil and ore prices should not necessarily translate into relief in this line on their earnings reports. Analysts remember that there is an equity equivalence accounting effect that in which items are only posted in the financial statements when they are used, and not when they are purchased.

“A steelmaker still uses more expensive coal or ore bought at the beginning of the year, for example, which limits cost relief effects, at least in the quarterly comparison,” says Mr. Sasson. According to him, in the fourth quarter the cheaper basic materials are expected appear more strongly in the results.

The scenario for pulp is different. A survey by BTG Pactual shows that hardwood pulp (BHKP) traded in China closed at $863.95 a tonne last Friday, which represents a rise of 2.57% over July 1th and 44% over October 1th, 2021. Prices still at the top are expected to boost the revenues of the companies in the sector, analysts say.

“Demand remains very strong, and we had a bigger supply shock than in other commodities because of the suspension of certification of Russia’s wood with the sanctions,” says Ms. Joubert, with Inter. She points out that the shortage of wood used to manufacture pulp, together with the still high demand for paper and packaging in Brazil and abroad, help keep prices high.

Mr. Abertman, with Ativa, says the market is already pricing in a contraction in pulp in Suzano and Klabin securities, wondering if the current price above $800 a tonne is sustainable. “But from an operational point of view, the two companies had no operational downtime in the third quarter, which will end up generating higher revenues in the year-on-year and quarter-on-quarter comparisons.”

“We may even see signs of a more significant drop in the fourth quarter, but it is difficult to see it in the companies’ results,” says Mr. Sasson, with Itaú BBA. He points out that the dynamics of the pulp market, with more spaced contracts than those of ore and oil, increases the temporal space in which price variations are actually captured by the companies in their earning reports.

*By Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/business
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