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
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.
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
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, 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.
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, 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.
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
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.
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
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.
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
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%.
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
“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.
Brazil’s second-largest food retailer is seeking to recover share in the premium segment
09/29/2022
Marcelo Pimentel — Foto: Carol Carquejeiro/Valor
In his first interview since taking over Brazil’s second-largest food retailer GPA (Grupo Pão de Açúcar), six months ago, CEO Marcelo Pimentel has a clear perception that there is a short window open for the group to start changing its numbers and start presenting better results to the market.
Mr. Pimentel says that the attention of investors right now is on the opportunity to monetize the Colombian group Éxito, a business that is part of GPA today but is likely to be spun off. This buys GPA time to put the house in order.
GPA seeks to regain the market lost in the premium segment in recent years, in addition to trying to accelerate the occupation of spaces in minimarkets, a terrain of strong competition. “Today, the focus of expansion is 90% in Pão and Minuto Pão de Açúcar,” he said. Of the 300 stores to be opened by 2024, 250 will be of brands such as Minuto and Mini Extra.
Between April and June, GPA posted R$4.4 billion in gross sales, up 4.6%. Margins fell and the R$65 million profit a year earlier turned into a R$135 million loss in the second quarter.
Besides the announced plan to spin off Éxito, there is still information in the market about the possibility of the controlling shareholder Casino getting rid of assets in the world, including Brazil. GPA has already manifested itself about it week ago, denying knowing anything like that. “The agreement I have with the board and with my peers is of total transparency about everything we have done. We have been careful to talk to the team beforehand and explain the reason for each movement, including showing the future path”, he says.
Read below the main excerpts from the interview.
Valor:What is the biggest challenge of the group today?
Marcelo Pimentel: I started talking to the group in December 2021 and the main issue was to understand the decision of leaving hypermarkets, an extremely brave decision and a turning point for us. Extra was a model that generated cash flow, but not results, and the decision was to focus again on our DNA. My mission at the new GPA is to focus on proximity stores, supermarkets, and multichannel, digital sales. I say it is like a plane with two wings, with the Pão de Açúcar and Minuto Pão de Açúcar chains on one wing. And the Minuto is no longer something disconnected, but something complementary to Pão, and the message of both must be the same. It has to have the same convenience DNA, the quality of the products.
Valor:And what about the other chains in the group?
Mr. Pimentel: On the other side of the wing of this plane are our mainstream brands: Mercado Extra, Compre Bem, and Mini Extra. But in the short term, looking at two to three years, our focus is absolutely on rescuing Pão de Açúcar [supermarkets]. This is where we need to get back to being a reference in the premium market for the upper classes, and Minuto talks about this with Pão de Açúcar. We are not actively focused on Mercado Extra and Mini Extra. And how are we going to do this? We have reviewed, in the last five months, since I joined the company, everything that was happening. All the strategic vision and, in practice, all the projects.
Valor:Can you give examples?
Mr. Pimentel: I came in and asked to make an inventory of all the projects that were happening in the different areas, and the fact is that we were with a lot of things in this process of trying to win, and in the best of intentions, we were trying to create solutions. The fact is that we canceled all the projects and decided what the strategic priorities would be. Today there are six strategic pillars, and under them, we have at most 25 projects. So, the first step is to say what we are not going to do so that we can be clear about what we are going to do. The first of the six pillars is the return of sustainable growth, of sales in trademarks, and especially in Pão.
Valor:What do you call sustainable growth?
Mr. Pimentel: As sustainable growth, I cite three points. We are finishing a project with the consulting company Bain & Company to align the ideal assortment. A lot of what happened recently was the insertion of an assortment without the coordinated control of category management so that the setup talked to the client’s needs. And working on the on-shelf availability, and the supply chain of the product, with our team and suppliers. We have to make sure that the product is there, that the customer finds it and comes back next week. This was one of the points of complaint from our customers, and it affects our NPS [a kind of store satisfaction score]. Inconsistency leads to doubt in the experience. The third point is the increase in the share of perishables [vegetables, fruits], which has always been a strength of the chain. Perishables have lost share, and one of the 25 projects is to resume the share of perishables in the total sale.
Valor:What is the share of perishables today and what is your goal?
Mr. Pimentel: Our ambition is, in the next two years, to reach more than 50% of perishables in the total sale of the store. It is around 41%, [it was below 40% at the time when the company operated Extra]. And it brings better margin, recurrence, and experience expectations because we will focus on improving product quality. The second part of sustainable growth is to recover premium customers, through a work of intelligence and segmentation to ensure that we do not just bring new customers, but increase the portion of premium customers, which have a much higher purchase frequency and profitability. To achieve this, we have to work, for example, on the queue experience at the checkout. Pão has lost the excellence of the experience, our clients do not want to queue up. We have already trained 100% of our employees so that all of them know this last semester how to operate the cash register. We already see an improvement in NPS in this.
Valor:What about the other points?
Mr. Pimentel: The second point is to improve specialized services, such as fish markets, butcher shops, and bakeries. And the third pillar is multichannel. Today we are already leaders in digital food in Brazil, if we look only at food, based on Ebit data [Carrefour is the leader in total online and leader if you include the cash-and-carry arm Atacadão].
Valor:What else is being done to try and turn the results around?
Mr. Pimentel: One of the things we have done is to integrate everything that was happening. There are many good things in Pão, but we have to organize them. Our app needs to be a big hub for connecting the retail experience. Part of what we do today already has a very good experience, but there are still some friction points. For example: if you go to pay with Stix [a loyalty program platform], you are directed to the app. If you want to know more about our store brands, there is a store brand website. James Delivery had its own app. In November, we will launch a new app to connect everything, to be one big integrated food hub. It’s not a super-app because I’m not going to sell everything there. By integrating, we want to go, in James, to an 80% delivery rate of same-day purchases after November from 40% now.
Valor:The point is that you compete with other apps which are more agile and competitive.
Mr. Pimentel: And they are getting faster. Our ambition is to have all this running in a more integrated way after January and February 2023, in the first quarter, running completely, and we are testing this.
Valor:Which other pillars are a priority?
Mr. Pimentel: They are the NPS level, multichannel, store expansion, profitability, and culture/ESG. We need to strengthen the vision of multichannel and the role of the store. Today more than 40% of our digital sales are made in the click-and-take-away model. In other words, it starts in the digital channel and ends in brick-and-mortar stores. Today, a project in the rollout phase is to place an “aquarium” for customers to take their orders, in front of the stores, to reduce friction and improve fluidity. We have 50% of our 1P sales [of items in the chain’s stock] and 50% are from partners, so we tested new things like the opening of the first dark store [an area that works only for online delivery] with iFood in the Morumbi store [in São Paulo] for express delivery. And in 30 stores we are also having express delivery, in 30 minutes, with iFood. In these stores, sales more than doubled. Self-checkout accounts for more than 35% of sales and is present in 91% of our stores.
Valor:You have already mentioned to analysts that you do not expect EBITDA at double-digit levels this year. As for sales, the market calculates, excluding Éxito, something between R$19 billion to R$20 billion in 2023, and smaller annual investments, in the range of R$600 million to R$700 million. What are the numbers of this new company?
Mr. Pimentel: Pão needs to recover sales, which it still hasn’t been doing, and grow more than inflation. We believe that in two to three years we will get closer to the inflation rate. But not yet above it. It will be one step at a time. One reason for the focus on Minuto is because it shows growth above inflation.
Valor:How is the plan to invest again?
Mr. Pimentel: The company has been organizing itself to increase its investments and this includes the conversions of 24 Extra stores into Pão de Açúcar, Mercado Extra, and Compre Bem supermarkets. And that was concluded in the third quarter, and in the fourth quarter, we will benefit from that. This year we have already transformed more than 40 stores to Generation 7 of the Pão [new store model], which are performing above the company’s average. What we want is to accelerate by 2023 to have 100% of the Pão stores converted to G7. The G7 model we are talking about now is from 2019.
Valor:The new generation has gained relevance in your plan, but there has been a slowdown in the transformation of old stores into G7. By 2020, the group had only 25% of the total stores in the model. Could the slow transition be affecting the growth rate today?
Mr. Pimentel: Not all stores were remodeled for Generation Seven. We will finish that next year, in the new generation model of 2021, already with adjustments from the previous model. Looking at the total chain is important because, really, if you start mixing generations, you can’t have a view of what was done. Today we have around 60 stores in the G7 that consistently perform better in all fundamentals.
Valor:When will adjustments reach a normalized level?
Mr. Pimentel: The first quarter of 2023 will be the moment. We are making an effort to finish 2022 this work with costs, which is in progress, to have a normal year in 2023. It is a work of reviewing operational expenses, of logistic optimization. And we will soon show the improvement in losses, or products thrown away, lost. That affects margins. We have had three quarters with lower losses. And there is still the negotiation with the industry, of rethinking logistics, because we closed four distribution centers [after selling Extra] and we have 12 centers now, and there is a new logistic network being created. This has advanced in the physical arm, it is a little better, but it is a process. We are close to the end, but there are still adjustments in the logistic network to ensure fluidity.
Valor:About the opening plan announced a few days ago, to 300 stores from 200 by 2024, how is it being planned?
Mr. Pimentel: The previous plan was to open 100 Pão stores, including the 24 conversions, and 100 proximity stores. I wanted to give myself the right to see if that would make sense for the current moment. Looking at the real estate opportunities, access to a more cost-effective plan, and focus on certain markets, I realized that it would make sense to focus on Minuto. So, we reduced the opening of 100 Pão stores to 50, and these 50 will be in São Paulo, not in the capital, besides Rio de Janeiro and the Northeast region. But where we already have a brand presence. We are not going to break new regions, trying to gain space where we would have to start building the brand. The conversions in new squares were done because it was Extra’s store that was converted into Pão.
Valor:From this forecast of 100 stores to be opened in 2023, and 125 in 2024, how is the division between brands?
Mr. Pimentel: There are 12 Pão and 88 Minuto stores, and in 2023, the proportion is similar.
Valor:In this new phase, which projects have been put on the back burner or canceled?
Mr. Pimentel: I will cite examples. The plan with James Delivery we didn’t cancel, but we are using it for the greater good. I stopped focusing on it as a separate thing and integrated it into the food hub. We have suspended internal real estate projects because it is not core. We didn’t move ahead with the Fresh model, but I will keep stores. We halted a lot of things. We had hundreds of projects distracting our focus.
Valor:You have mentioned in conversations with analysts the issue of the culture of the new company after the end of Extra, to change the mindset and not lose the commitment of the team. What do you do to maintain this?
Mr. Pimentel: We are going back to face-to-face work. Although it is not a popular decision, we are in a turnaround, and you must have people here. We have been working with transparency, to understand where we are, share the pillars, see what is going well, and change what is not. On Mondays, we have a meeting with the leadership team in the auditorium. This used to be more random and with a smaller audience. And we have created “coffee with the president” rituals, where once a month I have coffee with teams. And every Friday, we have “Viva Loja,” where the office team goes out to the store. We also instituted a monthly results meeting, which also did not exist.
Valor:Transitions always create insecurity in teams, because the doubt remains: will the company continue, or will it find another way? How to deal with this together with the team, and even deal with their limitations, since the decisions about the future of the company are the controlling shareholders’, not yours?
Mr. Pimentel: The agreement I have with the board and with my peers is of total transparency about everything we have done. For all the movements that have been happening, we have been careful to talk to the team beforehand and explain the reason for each move, including showing the future path. One reason for coming here is to have an incredible belief in the potential of Pão and because this brand has a connection that no other has, and we are going to rescue it. I have been very careful to have this transparency, that this is not an overnight project. And part of my agreement is that this is a medium and long-term project. And as you said, what is not in my hand, well, it is not in my hand, there is no point.
Valor:There is no point in asking you if the controlling shareholder will sell the company, as it is not up to you…
Mr. Pimentel: There is no point in worrying about it now. What I can say, however, is that all the interaction I have with the board of directors is focused on recovery and strategic plans. At no time have I spent time talking about anything else but this. And that is exactly what I will continue doing.
Valor:The market seems to be giving the company some time. Because there is an agenda of monetization with the Éxito spin-off, which is the focus of investors today. There is a short window for the company, and that it needs to take advantage of it to show improvements. Do you need to take advantage of this window?
Mr. Pimentel: That’s it. Absolutely. And the focus of the market at this first moment is on the great opportunity of monetization of Éxito with enormous value generation to be done. In this context, we have to be wise in using this time, in doing the basics well and let’s remember that the back to basics of the Pão is a more premium back to basics, and we have to be clear about this. I understand that the market has this expectation and I understand that it has been said before because we are talking about retail. There are no great inventions. What is needed is consistent execution of a value proposition offered, which in the case of Pão needs to be rescued.
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