Companies have been sending more funds to Brazil

Interest, exchange rate expectations may have favored flow of reverse investment in Q3, which reached $10.6bn

11/14/2022

Reverse investment, the sum of the funds sent by subsidiaries abroad to their headquarters in Brazil, pointed to a positive flow between July and September this year, after five consecutive quarters with a negative balance. $10.6 billion were sent in the period, the highest value since the fourth quarter of 2016 which registered $11.1 billion.

Among the economists’ explanations for this flow are the companies’ attempt to anticipate electoral uncertainties; the interest rate differential between Brazil and abroad; the perspective, at that moment, that there could be an appreciation of the Brazilian Real later on, which ended up not materializing, and the record payment of dividends by companies such as Petrobras.

Overall, the Brazilian net reverse investment is positive. Since the first quarter of 2021, however, this account has become negative, with the headquarters in Brazil sending more money to their subsidiaries around the world. Data from the Central Bank show that in the third quarter of 2021, the net result was negative by $2.5 billion, a loss similar to that recorded in the second quarter of this year, before the return to positive flow.

In 2022, the flow became positive from June to July, when a negative balance of $255.7 million turned to a positive $1.2 billion. In August, it advanced to $3.5 billion and, in September, it reached $5.9 billion. The Central Bank says it sees the movement as a natural process of normalization to what happened before the pandemic, but experts consider that the very abrupt change of direction draws attention.

Part of some experts thinks that the movement may be related to the payment of dividends by Petrobras. “The company’s financial situation has improved a lot in recent years, and profitability was super high in 2022. This allowed Petrobras to adopt a more aggressive policy in distributing profits,” says Antonio Madeira, an economist at MCM Consultores.

In addition to this is the “help” that President Jair Bolsonaro (Liberal Party, PL) asked the state-owned companies, pressing to move ahead with the distribution of those dividends, to resolve the expenses contracted during the frustrating campaign. “There was a meeting of interests: Petrobras had the capacity, and the government needed the resources,” says Mr. Madeira.

In July, Petrobras announced a record payment of R$87.8 billion in dividends for the second quarter, which were paid in August and September. “Petrobras has a lot of cash abroad, and these funds may have made the dividend payment operation feasible,” says the economist.

The oil company has already announced the payment of another R$43.6 billion in dividends related to the result of the third quarter of 2022, which will happen in December and January 2023. This way, the positive balance of the reverse investment will possibly happen again, “but not in the same proportion,” says Mr. Madeira.

Last Friday, Itaú Unibanco revised its projection for direct investment in Brazil (IDP) – line of balance of payments (record of all transactions between Brazilian residents and the rest of the world) which includes reverse investment – to 3.6% of GDP in 2022 from 2.9%. According to the bank, the IDP “continues at a high level, although at the margin very influenced by intercompany loans from the subsidiary to the parent company (probably explained by the reverse investment cash from local companies to pay dividends),” says the bank’s team in a report.

According to Mr. Madeira, one cannot rule out also some contribution of the interest differential between Brazil and abroad in the recent change in reverse investment. “The high-interest rate here is a high opportunity cost for you to keep dollars abroad. High interest in Brazil is a factor that stimulates the inflow of reverse investment,” he says.

There was also a prospect of an appreciation of the Real against the dollar at that moment, the economist from MCM Consultores recalls. The dollar went to a level closer to R$5, R$5.10 in August and mid-September from almost R$5.50 in the second half of July but has now returned to R$5.30.

Livio Ribeiro — Foto: Leo Pinheiro/Valor

Livio Ribeiro — Foto: Leo Pinheiro/Valor

For Livio Ribeiro, associate researcher at the Brazilian Institute of Economics (FGV Ibre) and partner at the BRCG consultancy, although the interest rate differential between Brazil and abroad is high, this was a scenario that was already in place. “I think it is a weaker argument. It was a very unusual [reverse investment] movement that we haven’t seen in a while. It’s a puzzle that I’m still putting the pieces together,” he says.

According to Mr. Ribeiro, companies may have brought forward the repatriation of capital due to the electoral cycle. “Not because of risk aversion, but because of the uncertainty of the direction the debate would take after the election, there was a discussion about changing the taxation of dividends. I think this is a reasonable hypothesis,” he states.

As the reverse investment falls into the category of intercompany loans, it is also impossible to know what companies will do with the repatriated capital, Mr. Ribeiro observes. “It’s not necessarily going to be productive. It is an exchange of financial flow, it is launched as a direct investment in the country, but it has little or nothing to do with buying a machine, for example,” he says.

*By Anaïs Fernandes, Larissa Garcia — São Paulo, Brasília

Source: Valor International

https://valorinternational.globo.com/
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South America under spotlight in grain market

Rabobank projects that production of soy in Brazil will reach 149 million tonnes in 2022/23, 21 million more than in 2021/22

11/11/2022

Rabobank projects a record-breaking production of soy in Brazil of 149 million tonnes in 2022/23 — Foto: Divulgação

Rabobank projects a record-breaking production of soy in Brazil of 149 million tonnes in 2022/23 — Foto: Divulgação

The recovery of global soybean stocks will depend on a full crop in South America in 2022/23, said Marcela Marini, Rabobank’s senior grain analyst in Brazil. In the 2021/22 season, drought caused losses in Brazil, Argentina, Paraguay, and Uruguay, which helped to increase prices in the international market and hurt the margins of crushers.

In an event held by the Dutch bank on Wednesday, Ms. Marini warned that La Niña is likely to continue to influence the climate in the 2022/23 cycle. According to the United States Oceanic and Atmospheric Administration (NOAA), there is an 80% chance of the phenomenon lasting until December.

“Last year the [climate] maps dried up starting in December, so we need to follow the development of the crops,” she said.

Rabobank projects a record-breaking production of soy in Brazil of 149 million tonnes in 2022/23 – 21 million more than in 2021/22 – as a result of a 4% increase in the planted area, to 43.3 million hectares, and the recovery of crop productivity.

The problems generated by the low flow on the Mississippi River may reduce the competitiveness of American soybean and open space for the Brazilian crop in the international market. The bank believes that Brazil will export 89 million tonnes next year, 13 million tonnes more than this year. The domestic crushing, in turn, may reach the historical mark of 49.5 million tonnes in 2023.

The high prices of raw materials put pressure on the margins of the industry in China, an important gauge of global demand. “We saw a reduction of 10 million tonnes in global soybean exports to China because of this,” said Ms. Marini.

For 2022/23, Chinese crushing is expected to total 93 million tonnes — the same level as in the 2020/21 cycle, and 6 million tonnes more than in 2021/22 — also boosting imports.

In the case of corn, the Rabobank analyst highlighted the fall in global exports in 2022. Besides having a reduced supply due to bad weather, the United States and Argentina ship less because of droughts in the areas of the Mississippi and Paraná rivers, respectively. Ukraine, on the other hand, has a hard time selling its products due to the war with Russia.

“With all those restrictions, we see room for Brazil to export more in this last quarter,” said Ms. Marini. The positive trend for corn shipments extends to 2023 when the country is expected to sell 45 million tonnes abroad, above the 42 million tonnes forecast by Rabobank for this year.

With strong growth in the second crop, Brazilian production in 2022/23 will be 126 million tonnes, according to the bank. “Climate models show La Niña losing strength in the first quarter of next year, which can be favorable for the second yearly crop,” said Ms. Marini.

The analyst highlighted that one of the main challenges for Brazilian grain production is internal logistics. “We see significant investments in ports, but they are not followed by investments in railroads, waterways, and so on. Freight [prices] was a limiting factor for our shipments at several times during the year.”

Another reason for the segment’s attention is the cost of production, which may go down next year. According to Rabobank’s senior analyst of inputs in Brazil, Bruno Fonseca, the amount invested to plant soybeans grew 45% this year, while corn crops faced a 25% increase. The strong appreciation of fertilizers, which gained traction with the war in Ukraine, is one of the main reasons.

“The margins are expected to continue at good levels due to the prices, but lower than last year,” he said. “We see a lot of last-minute deliveries because producers were expecting a reduction.” For 2023, he projects more attractive input prices with a recovery in global supply.

*By José Florentino, Érica Polo — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Kimberly-Clark to invest $80m in Latin America

Plan for next 10 years is to develop new products at innovation center in Brazil, said Gonzalo Uribe

11/11/2022

Gonzalo Uribe — Foto: Ana Paula Paiva/Valor

Gonzalo Uribe — Foto: Ana Paula Paiva/Valor

After selling the Brazilian operation of Neve toilet paper and professional paper towel for $175 million to Suzano two weeks ago, Kimberly-Clark now plans to invest $80 million in the next 10 years in the Latin American market, focusing on the innovation center in Brazil.

Owner of the diaper brands Huggies for babies, Plenitud for adults, and the menstrual pad Intimus, the company, over the last three years, has invested $300 million in plants and technology in Brazil.

The plan for the next 10 years is to develop new products, said Gonzalo Uribe, president of Kimberly-Clark for Latin America.

Kimberly’s plan was to sell the whole paper operation, called “tissue” in the sector’s jargon, in Latin America, according to what Valor found out on the last weeks before Suzano closed the deal. Now, asked if he intends to sell this area in other countries, Mr. Uribe said that “nothing changes in the other operations of the region.”

Suzano’s acquisition includes the tissue plant with a production capacity of 130,000 tonnes per year in Mogi das Cruzes (São Paulo) and Neve brand. The other brands, such as Kleenex and Scott, will be licensed to Suzano for a “determined term.”

As for sales in the second semester, the executive said that “both through research on consumer habits, and in an analysis of the business, we see that some hygiene and cleaning habits that intensified during the pandemic remained.”

The sales of personal hygiene and beauty products, according to Abihpec, the cosmetics and toiletry sector’s trade association, grew 10% in the first semester, without considering tax payments, driven especially by the makeup category, with a 20% high, and the fragrance industry, which increased 16%. Abihpec estimates to close the year with double-digit growth or real growth between 4% and 5%.

About the impact of the U.S. economic slowdown, and probable recession in 2023 in the world’s largest economy, the president of Kimberly-Clark for Latin America said that “in its 150 years in the world and 26 years in Brazil, the company has already gone through several challenges, in several aspects of the business, and has proven itself solid.” The executive works with a scenario of “a volatile operating environment,” but he trusts in the company’s ability to “deliver sustainable growth.”

In Brazil, Mr. Uribe said, the company will invest in Huggies innovation (diapers, personal hygiene products, moist wipes), Intimus feminine napkins, and Plenitud geriatric diapers.

With the sale of the paper products operation, the plant in Mogi das Cruzes, with a workforce of 1,000 people, will be transferred to Suzano in the first half of 2023. But Kimberly-Clark has two more plants in the country, in Camaçari (Bahia) and Suzano (São Paulo), which houses the company’s largest production unit and where the innovation center is located.

In the third quarter, the company’s global sales grew 0.9% to $5 billion, and the profit fell 0.4%, to $467 million. In North America, sales fell 5%, with lower volumes and higher prices. But in Latin America and Asia, according to the company, organic sales growth was strong.

*By Cynthia Malta — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Equatorial Margin is Petrobras’s new target

Region in the North and Northeast has potential for 7.5bn barrels

11/11/2022

Magda Chambriard — Foto: Leo Pinheiro/Valor

Magda Chambriard — Foto: Leo Pinheiro/Valor

Despite environmental sensitivities, Petrobras will release this month a business plan that reinforces its intention to open a new exploratory frontier in deep waters in the so-called Equatorial Margin. This is the region between the coast of Rio Grande do Norte and Oiapoque, Amapá, in the far north of the country, and includes the mouth of the Amazonas River, Pará-Maranhão, Barreirinhas, Ceará and Potiguar basins.

Petrobras’s goal is to ensure a new production front starting in the 2030s, to replace the loss of reserves with the advance of pre-salt extraction, which began 12 years ago. Experts assess that the cycle of great potential discoveries in the pre-salt is over, hence the priority given by the company to the Equatorial Margin.

“It is a very promising region,” says Magda Chambriard, former director general of the National Petroleum Agency (ANP) from 2012 to 2016. In her view, the environmental sensitivity of the Margin exists, but the environmental risks are reduced by the fact that the activities are carried out in a region far from the coast and with reserves in deep water. O Globo’s columnist Lauro Jardim informed on Wednesday that Ms. Chambriard would be a name to preside Petrobras.

Sought by Valor, Ms. Chambriard said that her name has been mentioned for the government transition by the president of the Legislative Assembly of Rio de Janeiro (Alerj), André Ceciliano. “André [Ceciliano] is my boss at Alerj and is interested in my participation in the transition for the benefit of Rio.”

Today, Petrobras’s production is concentrated in the Campos and Santos Basins, in the Southeast region, and eventual discoveries in the Equator region may expand the state-owned company’s presence in the North and Northeast regions. It is necessary to consider, however, the social and environmental sensitivities of the Equatorial Margin. The list includes the proximity to the Amazon rainforest and the existence of marine structures similar to corals, in addition to the flow of sea currents that, in case of accidents, may extend eventual leaks to neighboring countries, such as French Guiana.

The Margin is considered a new exploratory frontier since there is low geological knowledge compared to other more explored areas in the country. According to the former director of the ANP, Felipe Kury, the region may be “the new Brazilian pre-salt,” with the possibility of producing from 5 billion to 7.5 billion recoverable barrels of oil. He estimates an initial in situ volume in these basins of 20 to 30 billion barrels of oil, equivalent to almost half of the resources discovered in the pre-salt. With the exhaustion of the potential for new major discoveries in Campos and Santos, the Equatorial Margin becomes the candidate for a new production hub.

The new Petrobras planning for the years 2023 to 2027 is expected to have an update concerning the previous plan, released at the end of 2022, but without major changes in the ambitions drawn in the Equatorial Margin, for now. An expansion of activities beyond the South and Southeast regions is expected. One of the efforts to decentralize investments includes, for example, the start of deepwater production in the Sergipe-Alagoas Basin, which is not part of the Margin.

In the 2021 plan, the company said it intended to allocate $2 billion in investments to the Margin, 38% of the total set aside for exploration from 2022 to 2026. The goal is to drill 14 exploratory wells in this region by the end of the period. An environmental permit process is underway at Brazil’s environmental protection agency Ibama for Petrobras to start the first deepwater drilling off the coast of Amapá, in the mouth of the Amazonas Basin.

According to sources, the company has accelerated hiring for this activity and the permit is expected to be issued later this year so that drilling can begin quickly. “Petrobras is working technically for the permit to be issued, to meet [the requirements of] the characteristics of the place. The currents, for example, are different from other basins where the company operates,” said a source.

The definition of the company’s strategy in this area will depend on the results of this first well. Sources say that, so far, the licensing follows the normal Ibama procedures and there have been no requirements beyond the requests normally expected in those processes.

In September, units of the Federal Prosecution Service (MPF) in Pará and Amapá issued a recommendation that Ibama should not grant the permit under the current conditions. The prosecutors say there was no prior consultation with indigenous communities in Amapá and quilombola (descendants of escaped slaves) and riverside communities in Pará, which will be impacted. According to them, the Karipuna, Palikur-Arukwayene, Galibi Marworno, and Galibi Kali’na peoples will have their lands affected by the construction of an air base with an expected 3,000% increase in air traffic, while Para’s quilombola and riverside communities may suffer impacts on fishing activities and from the reception of waste.

Fernando Borges, the chief exploration and production officer at Petrobras, said in a conference call last week that the company is complying with the entire licensing process and has held three public hearings with local communities. Gabriela Câmara, a federal prosecutor in Amapá, says that the consultations had a low quorum and that it is necessary to hold new meetings with the traditional peoples. In the case of the people of Oiapoque, for example, there is a specific consultation protocol, which has not yet been followed.

The prosecutor also says that Petrobras must present a new Spill Dispersion Forecasting Model, a document that guides responses to potential accidents. The initial model was presented in 2015 and should be updated. “The MPF recommends that Ibama does not issue the permit under the current conditions. If this happens, the MPF will possibly take the issue to court,” she said. One of the next steps for issuing the environmental permit is to carry out a pre-operational simulation, which is expected to begin in the coming weeks.

Petrobras is betting on the ability to reduce costs and risks in the region with the use of technologies such as artificial intelligence and big data. Experts emphasize that the technological advance of the equipment also helps to better deal with the strong sea currents in that area. One of the main environmental controversies is related to the marine structures supposed to be corals. The Marine Geology professor at the Fluminense Federal University, Alberto Figueiredo, says that the structures found in the region are calcareous algae on granites, and not coral reefs, and that most of them are lifeless. The structures are even similar to those found in the basins where Petrobras produces, says Mr. Figueiredo.

The Brazilian Institute of Oil and Gas (IBP) points out that the structures are in depths of up to 120 meters, while the planned well-drilling activities will be far from these formations, more than 2,000 meters deep. The entity points out that oil spill modeling was done for more than 600 different scenarios and that there is no possibility of an eventual accident leading to leaks that reach the Brazilian coast. Daniela Jerez, an analyst of public policies at WWF, said there is still little knowledge about the region’s biodiversity, which increases the risks.

Allan Kardec, CEO of the Maranhense Gas Company (Gasmar) and a former director of the ANP, says that the states in the area of influence of the Equatorial Margin want to be listened to. “We want to take a stand to conduct the debate in a way that is not imposed by Brasília. We want to have a voice to dialogue and be able to encourage regional development,” said Mr. Kardec.

Production on the Brazilian Equatorial Margin is viable, in the view of specialists in the energy sector. So far, however, history points in a different direction. There are more than 600 wells drilled in the region, but most of the drilling in these basins took place before the 2000s and, among those drilled in the last 20 years, most did not find enough oil to make commercial activities viable.

In the past decade, oil companies other than Petrobras have become interested in the area again, but have been unable to proceed with exploratory campaigns. In 2017, British Petroleum even started logistical planning for activities in Pará, but the process did not move forward.

The following year, French oil company TotalEnergies had a request to drill in the mouth of Amazonas denied by Ibama. The environmental agency argued that the company failed to present appropriate logistical solutions for potential emergency scenarios. Sought about the possibility of returning to operate in the region, TotalEnergies declined to comment, and BP said it continually evaluates opportunities but does not comment on future investments. Ibama did not reply to a request for comment.

Last year, Petrobras took over TotalEnergies and BP’s stakes in five concessions where it was a partner of the companies in Margin. Executives with the state-owned company, however, have stressed that the company would not enter the venture alone and that it will seek the support of partners, should it develop discoveries in the region. It was precisely the presence of large international oil companies that made the activities on the Guyanese margin feasible.

Given the history of difficulties in issuing permits, there are doubts in the industry about the interest of oil companies in obtaining new areas on the Margin. The delay in issuing permits, however, has not been exclusive to this region. The Ministry of Mines and Energy has two working groups in progress to improve the environmental assessment process before the bidding for areas, to give more predictability and legal security to the licensing.

*By Gabriela Ruddy, Fábio Couto — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Gerdau sees positive steel demand in North America

CEO says U.S. government’s infrastructure package is likely to generate demand for 5 million tonnes of steel, which will translate into actual demand as early as next year

11/10/2022

Gustavo Werneck — Foto: Julio Bittencourt/Valor

Gustavo Werneck — Foto: Julio Bittencourt/Valor

Gerdau is optimistic about steel demand in North America and sees robust cycles ahead in the region, despite logistical and labor hurdles, CEO Gustavo Werneck told reporters in a conference call.

“The current level of incoming orders and available production capacity give us confidence for a solid demand next quarter and next year,” he said. He cited incentives to reshoring – the U.S. government’s initiative to regain industrial processes.

Earlier this year, Gerdau received many orders for industrial warehouses to deliver products online, he said. In the last quarter, however, the orders shifted to new plants built to transfer production capacity to the United States from other countries.

“The phenomenon of reshoring is already a reality in our orders,” he said, without citing numbers. Mr. Werneck said the U.S. government’s infrastructure package is expected to generate demand of 5 million tonnes of steel, which will translate into actual demand as early as next year.

He also said that no new capacities have started to compete with Gerdau, and that inflation and economic slowdown will have fewer impacts on the company’s business.

The executive cited logistics and labor as challenges. He said Gerdau has many open positions and did not need to paralyze operations. This phenomenon is expected to be solved in the short term, he said.

The logistical challenges are mainly related to labor, the executive said, citing the difficulty of finding truck drivers and concerns about truck driver strikes in North America, while the record low water level on the Mississippi River impacts scrap purchasing and, to a lesser extent, affects customer deliveries.

Mr. Werneck also said that he is following uncertainties regarding global economic growth, the inflationary impact on steel demand in the international market, and the potential slowdown in China as a result of the country’s zero-Covid policy. He is monitoring the impacts of the Russia-Ukraine war as well, particularly on production and energy costs.

“We highlight the company’s resilience in the face of uncertainties in the macroeconomic scenario and as a result of transformations experienced in recent years,” he said, citing record results in North America in the third quarter.

“Our strategy and positioning in the region have been successful in recent years, with high volumes and strong demand from non-residential, manufacturing and energy sectors,” he said.

He also highlighted strong demand for heavy-duty vehicles and energy in the specialty steel operation, as well as the gradual recovery of semiconductor inventories, favoring the resumption of the automotive industry with the Chips and Science Act in the United States.

In South America, demand remains strong for construction and industry in Argentina and Uruguay, with construction activity at a high level this year, while Peru sees a growing volume as well, especially with the construction sector.

*By Cristiana Euclydes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Shell bets on agave as alternative energy source

Company invests R$30m in innovation and signs partnership with Unicamp to study production of ethanol and biomass

11/10/2022

Shell will research the energy viability of agave, a typical crop of semi-arid regions, as an energy source. If the potential foreseen by the specialists is confirmed, the cultivation of agave can transform the Brazilian hinterland into a great production hub, with productivity similar to that found in sugar cane cultivated in other regions of Brazil.

The company has signed a partnership with University of Campinas (Unicamp) to implement a program of studies and development of technologies for the production of ethanol and biomass from agave – a plant used as raw material for tequila and, in Brazil, in the production of sisal.

Initially, the program, called Brave (Brazilian Agave Development), will receive investments of R$30 million from the research, development, and innovation clause of the National Agency of Petroleum, Natural Gas and Biofuels (ANP), and is expected to be completed in five years.

At first, the research will focus on aspects related to the productive potential of agave, such as genetics and types of the plant, then will evolve to studies of planting and harvesting mechanization on an industrial scale – today, agave harvesting in the country is still manual – to finally enter in the third phase, the implementation of ethanol and biomass pilot project.

The next stages are under negotiation between Shell and the partners, and the agreement is expected to be signed by early 2023, said Alexandre Breda, Shell’s low-carbon energy manager in Brazil.

In a preliminary estimate, Mr. Breda calculates a potential of 6 billion to 10 billion liters of agave ethanol, against 35 billion liters of sugarcane ethanol produced per year in the country, considering the planting of up to 2 million hectares in the semi-arid region (or 2% of the total area of 100 million hectares). In other words, the potential corresponds to almost one-third of the national ethanol production. Not all of this semi-arid area would be used because some portions of caatinga must be preserved.

The project started three to four years ago, based on the work of a master’s degree student at Unicamp. The talks with Gonçalo Pereira, the coordinator of Unicamp’s Laboratory of Genomics and Bioenergy, evolved last February.

The initial idea is that agave has a high energetic potential for ethanol production in semi-arid regions, with productivity as high as that of sugarcane. Agave can resist unpredictable weather because it can survive up to several years without rain, unlike sugarcane, which is more susceptible to climate variations. On the other hand, agave planting and harvesting cycle take five years, longer than that of sugarcane, which is annual.

The research was also stimulated by the fact that agave can be found in other countries, while sugarcane is more limited to Brazil and some regions of India. Agave is found in Central America, Mexico, Africa, and Australia, in addition to Northeastern Brazil, among other regions where there are also semi-arid climate areas.

“The research project will try to prove that these potential numbers are real and thus seek to develop a new industrial chain,” said the manager.

The executive pointed out that only 4% of the plant is used in sisal production, which makes the product even more attractive for energy production, reducing the waste generated in this industry. Besides ethanol, Shell intends to study the use of agave in the production of biomass, biochar (a type of charcoal that can be used as a bio-fertilizer, rich in carbon), and biogas, as well as in the production of second-generation ethanol. The agave project is one of several from a portfolio of initiatives being considered as part of Shell’s zero-carbon goal by 2050.

*By Fábio Couto — Rio de Janeiro

https://valorinternational.globo.com/
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Nestlé invests R$2bn in Brazil, bets on ‘ESG coffee’

Company will sell capsules made of paper and a biodegradable polymer that can be used in home composting

11/10/2022

Marcelo Melchior — Foto: Claudio Belli/Valor

Marcelo Melchior — Foto: Claudio Belli/Valor

When asked about what scenario he draws for 2023, the CEO of Nestlé in Brazil, Marcelo Melchior, raises his eyebrows, opens a smile, and says “next year in Brazil is never peaceful. I have been working at Nestlé for 34 years and it is that way. We are confident, though. We have great investments, in many fronts.”

Next year Mr. Melchior will run investments of R$2 billion. In 2022, he had planned to invest R$1.8 billion but will reach December having disbursed R$1.3 billion, due to delays in some construction works. The difference of R$500 million will be spent in 2023.

The company is expanding operations in several areas — from animal feed to coffee. And Mr. Melchior, who spoke to Valor this week alongside Nestlé’s top coffee executive Rachel Muller, is especially excited about Dolce Gusto, the coffee brand that debuted in Brazil in 2009, three years after Nespresso.

The company that invented the market for coffee in aluminum capsules to be used in its machines, and was copied by rivals, chose Brazil to launch its newest business in the coffee market: the sale of capsules made of paper and a biodegradable polymer that can be used in home composting. They break down in the ground in six months and have a watermark on the lid that can be “read” by the coffee maker, adjusting the machine to the type of coffee. This project in Brazil received investments of R$300 million.

The new machines, made in China by Wik, can be activated by the consumer’s cell phone, through an app. This way, Nestlé collects data and knows how the product is being consumed. “We can establish a closer relationship with the consumer,” says Ms. Muller. If the customer used to drink four coffees a day and now drinks one or none, the company can send him a message. The development of the machine and capsules took five years and was done by Nestlé technicians in Switzerland.

The executive notes that the Dolce Gusto Neo project was designed to be an environmentally friendly line, in line with ESG practices. The factory in Montes Claros (Minas Gerais) is the first Nestlé unit in the world to receive neutral environmental impact certification at all stages — it uses only reuse water, does not generate waste for landfills, and neutralizes 100% of its emissions. Women make up 50% of the workforce and some hold leadership positions.

The sale will start slowly, on December 1st, through Nestlé’s website. The marketing campaign will debut on November 20 on social media. “We will not make a massive sale because we do not know the size of the demand yet,” said Mr. Melchior. It takes 90 days for the machines shipped from China to arrive in the country.

Those who want to buy the novelty can sign up for a list on Nestlé’s website. On December 7, a megastore for Dolce Gusto Neo, as the new machine was named, is expected to be inaugurated. Also in December three kiosks are expected to be opened in shopping malls in the city of São Paulo.

This is not a cheap product. The machine, made from recycled plastic and metal, will cost R$899, and each capsule will cost R$2.8. There are 10 flavors of coffee from farms in Minas Gerais and Espírito Santo — six of the regular line, two organics, and two of Starbucks brand.

The Minas Gerais plant received new machinery to manufacture the capsules, certified by the non-governmental organization Forest Stewardship Council (FSC). The paper and polymer are imported, but Nestlé is already in talks to have local suppliers.

Melchior estimates that exports to other Nestlé units around the world will begin in 2023. His goal now is to map the Brazilian market. The consumer who likes coffee is concerned about the environment and has enough income to afford the machine and the capsules.

The executive says that this new biodegradable line is the future of the capsule system. The new capsule can be used in composting at the consumer’s home — mixed into the soil of a vase, for example, or it can go into the household’s regular organic waste. The paper and biodegradable polymer are gone within six months. The Nespresso line uses aluminum capsules. To recycle, consumers must take their capsules to the brand’s collection points.

Nestlé is not alone in this segment. The Swiss supermarket chain Migros announced two months ago for its CoffeeB coffee machines a biodegradable coffee capsule, covered by an algae-based film, which can also be used in home composting.

In Brazil, Nestlé says it is a pioneer in compostable capsules — made of paper and that can be composted at home, with certification. Other capsules on the Brazilian market “communicate the attribute of being biodegradable, however, they are made of plastic and require industrial composting,” Nestle says in a statement.

The new launch is being seen by the company as a way to get closer to customers — a concern that was put to the test a few weeks ago when Nestlé decreed a recall of Garoto brand chocolates. The sensor of a control equipment had broken on top of the production line and there was suspicion that glass fragments could have contaminated the product. The recall is now over, and the company has received no complaints from consumers.

When asked about what measures had been taken so that the accident would not happen again, Mr. Melchior said: “We are going to change the control and we are not going to use glass.” He was emphatic when affirming that the company is present in 99% of Brazilian homes and that it is concerned with the quality of what it produces. “We cannot disappoint. Otherwise, you buy another brand.”

*By Cynthia Malta, Ana Luiza de Carvalho — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Investors recalculate route after presidential election

Brazilian assets are attractively priced, says Xavier, from SPX; spending evolution concerns Stuhlberger, from Verde Asset

11/09/2022

Roberto Sallouti — Foto: Carol Carquejeiro/Valor

Roberto Sallouti — Foto: Carol Carquejeiro/Valor

After the electoral race, capital and investment market heavyweights are in “recalculating route” mode, based on the signals given by President-elect Luiz Inácio Lula da Silva about the design his administration may have as of 2023. The spotlight is on the transition team and the names that may take over the economy and state-owned banks and companies.

There are the optimistic ones, such as Rogério Xavier, founding partner and CIO of SPX Capital, who evaluates that the Brazilian assets “are for free,” while the team of Luis Stuhlberger’s Verde Asset points out concerns with public spending. Roberto Sallouti, CEO of BTG Pactual, still has doubts about how the fiscal policy will be conducted in Mr. Lula da Silva’s third term.

The price of Brazilian assets is attractive to investors and the economic scenario tends to be favorable for the country, in Mr. Xavier’s view. For this more benign environment to materialize, Mr. Lula da Silva must pick a highly-qualified economic team, he said. “I think Brazil is for free, prices (of assets) are good, and the exchange rate is in the right level. Brazil has no problems and is doing its role,” he told Valor during the Brazilian Private Equity and Venture Capital Association (ABVCAP) Congress in Rio.

According to him, the elections took place democratically in an appropriate manner, and surprisingly calm, considering previous expectations about political polarization. He reiterated his “relatively optimistic” view and believes that Mr. Lula da Silva knows that he was elected by forces that tend to the center and not by the “Workers’ Party’s flag.” If the president-elect wants to work only with the left, the government will be at risk, he said.

In Mr. Xavier’s view, the starting point of the economy is not bad, but the commitments made ahead are a problem. “What helped us in the last years will not help us from now on. We need people and policies in line with the strategy of taking care of the fiscal situation,” he said, adding that the president-elect is aware of this. He expects that Mr. Lula da Silva will compensate for the waiver he is asking from the National Congress to breach the spending cap by picking a good economic team.

In Mr. Xavier’s view, Brazil has fallen off the foreign investor radar in recent years due to some unfortunate statements by President Jair Bolsonaro. “On the Amazon issue, funds withdrew their support basically because of the government positions. Now they are returning expecting dialogue and a different stance towards the environment [under a new administration],” he said.

The executive also commented that Brazil is “completely alone” in the universe of emerging markets, in a privileged position to attract capital. “We don’t have to do spectacularly well, we just can’t mess up,” he said, adding that it is still necessary to show a sustainable trajectory for the debt-to-GDP ratio.

Mr. Sallouti, with BTG Pactual, confirmed that the economy is experiencing a moment of great uncertainty because there is no clarity about what the fiscal policy of the new administration will look like, and consequently the trajectory of public debt and the size of the tax burden. The lack of definitions regarding reforms and public concessions is also a factor.

“We don’t know what the posture of the state-owned banks is going to be. In the last six years, we have had a classic ‘crowd in’ effect, with private-sector banks gaining space,” he said during an earnings conference call. “I think that no matter the change in the agenda of the state-owned banks, it will not put an end to the growth that we have seen in recent years in the capital markets. The continuity of that growth curve will depend on those policies.”

Meanwhile, Mr. Stuhlberger’s Verde Asset multimarket team wrote in its monthly letter that the outcome of the second round of elections, with Mr. Lula da Silva’s rather narrow victory, went in the direction, though not to the magnitude, expected by most analysts, and that markets had already priced that somehow.

However, Verde Asset is concerned with the first fiscal signals and discussions of the new administration. “The so-called Transition PEC [proposal to amend the Constitution] is turning out to be (yet another) Brazilian uncontrolled spending spree. The suggested value, over R$200 billion, is something ‘completely unreasonable’,” they wrote.

The president-elect’s rhetoric, which assured during the campaign that he would have fiscal responsibility as in the previous two terms and that he would not need a spending cap or other framework, “this kind of ‘take-my-word’ approach risks to be very short-lived if not followed by decisions and behaviors that corroborate it.”

The days following the second round happen to encounter a friendlier global market, the Brazilian assets performed very well, and hedge fund Verde benefited from this rally.

The fund closed October with an appreciation of 3.51% and has gained 15.2% this year, compared with an interbank deposit rate (CDI) of 10% in 10 months. Positions in the Brazilian stock market, oil, currencies, global interest rates, and offshore credit have driven the good performance, thus offsetting bets in global equities, inflation-indexed bonds in Brazil, and gold, which performed poorly.

SPX’s Nimitz fund, on the other hand, lost 1.21% in October, but gained 26.4% this year. In Brazil, the fund bets on lower interest rates.

*By Juliana Schincariol, Álvaro Campos, Adriana Cotias — Rio de Janeiro, São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Outgoing minister plans to open markets for Brazilian farmers

Marcos Montes will travel to Mexico and Dominican Republic to sign agreements that will benefit pork producers

11/09/2022

Marcos Montes — Foto: Divulgação

Marcos Montes — Foto: Divulgação

Outgoing Agriculture Minister Marcos Montes wants to use the remaining two months in office to expand the number of markets open for Brazilian agribusiness products and get more funds for rural insurance.

Mr. Montes will travel to Mexico and the Dominican Republic to sign agreements to open those markets to Brazilian pork. The two countries are currently reliant on imports from the United States. He also mulls going to a business fair in the Middle East in December.

Other openings may materialize without trips. A mission from Indonesia will arrive in Brazil on November 19, two months after Mr. Montes’s visit to Jakarta. In September, Brazilian officials discussed the expansion of exports and the opening of markets for beef, bovine genetic material, and live cattle.

Despite a canceled trip to Asia last week, there are still chances to close agreements with South Korea for beef and pork exports this year, said the minister. The agreement with Japan, a country Brazil is trying to sell pork to from areas free of foot-and-mouth disease without vaccination, such as Paraná, will still depend on further talks led by the next administration.

Since 2019, 210 markets have been opened for agribusiness products and exports reached $122 billion between January and September this year. There is also great expectation with the conclusion of the United Kingdom’s technical mission, which visited plants and analyzed the Brazilian sanitary inspection system last month.

This is Britain’s first audit since the Brexit to recognize the equivalence of the agricultural defense services, which could open the doors for more beef and chicken slaughterhouses to be qualified to export there.

Although Brazilian trade with China continues to expand and the authorization given by the Chinese last week for the shipment of corn by 136 units is good news, Mr. Montes regretted that the Asians have not qualified more slaughterhouses to sell there. The latest list was approved in 2019.

“We are waiting, of course, for the opening of beef slaughterhouses. We keep talking, but it is difficult because of Covid there,” he said. “Maybe with a new administration they will change a little.” According to Mr. Montes, the pandemic blocked exports from plants that were already qualified. Seven slaughterhouses are still embargoed. Last week, two were authorized to resume sales. “I find it difficult to qualify any of them until the end of the year.”

Another mission of the minister until December 31 is to get more funds for rural insurance, but he indicated that it is up to the elected government’s negotiate the amount for 2023. He intended to get R$2 billion for next year, compared with R$990 million this year. “Our biggest concern is insurance. It has to be very robust.”

In July, the Board of Budget Execution (JEO), an advisory body of the president for the handling of the federal fiscal policy, approved an extra amount of R$200 million, then backtracked. Since early September, there are no extra funds for contracting subsided policies. “The JEO lifted the R$200 million previously approved vowing that it would release this amount until the end of the year, which would bring the budget to R$1.1 billion. But this is not enough,” he said.

The minister expects advances in the negotiations for the financing of national agriculture at the United Nations Framework Convention on Climate Change (COP27), in Egypt. Members of two secretariats of the Ministry are at the event, which started Sunday.

“COP will mix environment with hunger and food security. It will be a milestone in how the world sees sustainability. We all want to preserve the environment, but not in the way that France wanted to do, preventing Brazil from producing.”

Mr. Montes said he will support legal changes to open up even more possibilities for issuing rural producer bills (CPRs). In October, the stock of these securities reached R$204 billion. The goal is to double this number in the next four years with the new legal adjustments.

The minister also hopes to advance in a project on the traceability of production, especially beef. A working group has been created between the Ministry and the Brazilian Confederation of Agriculture (CNA).

*By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Ascenty invests R$1.5bn in five data centers

Company plans to expand in Brazil and Chile and enter in Colombia

11/09/2022

The data center infrastructure company Ascenty will invest R$1.5 billion in the construction of five new data centers in Brazil, Chile, and Colombia, starting at the end of 2023. “We are reinvesting 100% of our return in expansion,” CEO Chris Torto told Valor.

According to him, two thirds of the investments comes from the company’s own cash flow and contributions from controlling shareholders – the U.S.-based data center company Digital Realty and the Canadian asset manager Brookfield Infraestruture.

The remaining R$517.4 million ($100 million) come from a R$4.8 billion ($925 million) loan taken by Ascenty in March from Brazilian and international banks to expand existing data centers, increase its fiber optic network, and build new units in Brazil by 2024.

In 2023, the data center segment is expected to gross $3.8 billion in Latin America, said Luciano Ramos, research and consulting manager at IDC Brasil. “This means a growth of 9.2% compared to 2022,” he said.

This year, according to the CEO, the company will disburse R$1.4 billion for data center expansion. In 2021, R$1.5 billion were set aside to expand the structure.

The new data centers in São Paulo and Bogotá will start operating by the end of 2023. The company will activate the second facility in São Paulo, the second one in Bogotá, and one more in Santiago by the end of 2024.

With the expansion, Mr. Torto said, the company meets the demand of its three main customer profiles: cloud service providers, corporations, and telecommunications companies.

Ascenty’s focus is on the cloud computing service providers of large technology companies. “They are our flagship and are expanding worldwide,” Mr. Torto said.

In Latin America, the executive says he does not feel the impact of slower growth in cloud computing revenues of giants like Amazon, the market leader, and Microsoft in the third quarter.

“Maybe the United States and Europe will feel the slowdown because they are more mature markets, but in Latin America we won’t see that, at least in the next six to 12 months,” he said. “If we have a very strong global recession, demand may fall.”

Microsoft’s revenue from its Azure cloud computing platform grew 24% to $25.7 billion in the company’s fiscal first quarter. The advance was lower than the 36% rise in the third quarter of 2021. Amazon Web Services’s (AWS) third-quarter revenue advance of 27.5%, to $20.5 billion, meanwhile, was the slowest since 2014, when Amazon began releasing the earnings results for its cloud business.

Other customer profiles in Ascenti’s sights are corporations that usually use the structure to allocate their equipment, managing cloud services remotely, and telecommunications companies, which prepare their structures for applications such as the Internet of Things (IoT), artificial intelligence, big data, and virtual reality.

Born in Boston and settled in Brazil for more than 30 years, Mr. Torno also notes that the electoral race has not slowed down the local demand either. “It is the first time in 35 years that I do not see an impact of the election in the country,” he said. “Clearly, I see a more mature country.”

Ascenty’s CEO is concerned with the global shortage of semiconductors, which has extended the delivery deadlines of high-capacity generators, which are key to ensure that data centers remain active in case of power outage. With the shortage of components, he said, the delivery time for generators coming from China, Europe, and the United States, which used to be a few months, has risen to nine to 12 months. “If the equipment comes from China, the current impact is usually greater because of the pandemic control in the country, but equipment coming from Europe and the U.S. also face a 50% increase in delivery time,” he said.

Currently, the company has 23 data centers in operation, 19 of them in Brazil, two in Chile and two in Mexico, and more 10 under construction in Latin America, considering the operations announced Tuesday by the company.

Competitors Scala, Odata and Equinix are also among the large companies in the sector expanding in Brazil and other Latin American countries.

Scala Data Centers, from the U.S.-based group DigitalBridge, is advancing in the construction of new data centers in Brazil, Chile, Colombia, Mexico and Peru. On Tuesday, the company unveiled an agreement with Brazilian power distributor Enel to guarantee a supply of more than 1 gigawatt for its operations.

In March, Equinix announced a R$17 million investment in the expansion of its fifth data center in São Paulo by the end of the year, while Brazilian Odata received a R$181 million ($35 million) loan from the World Bank in August for data center expansion in Mexico. The loan comes on top of another one, of $ 30 million, announced in January for expansion in Latin America.

*By Daniela Braun — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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