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Drop in commodities prices to affect revenues

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

29/09/2022

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

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

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

Gabriela Joubert — Foto: Divulgação

Gabriela Joubert — Foto: Divulgação

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

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

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

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

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

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

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

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

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

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

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

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

*By Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/business
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War boosts commodities, trade balance may have record

Lia Valls — Foto: Leo Pinheiro/Valor
Lia Valls — Foto: Leo Pinheiro/Valor

The effects of the Russian invasion of Ukraine on commodity prices have prompted a wave of upward revisions in bank and consultancy forecasts for this year’s trade surplus. The new estimates in many cases show the prospect of a new record balance in 2022, with projections reaching more than $80 billion. An expected slowdown in the global economy, the greater appreciation of the real against the dollar and the fall in the terms of trade, however, differentiate this year’s scenario from that of 2021, highlight experts, which maintain some projections with a surplus still below $50 billion in the year, although they also followed the upward trend of revisions after the war started.

In a scenario released this month, already considering the effects of the war, Itaú Unibanco updated its trade surplus projection in 2022 to $74 billion from $67 billion. With a similar estimate, Bradesco projects $75 billion, compared to an estimate of $61 billion published in February. If the banks’ projections materialize, the trade balance will have a new historic milestone this year. Last year, with export values driven mainly by the rise in iron ore, it reached a record $61.4 billion, according to the Secretariat of Foreign Trade (Secex).

AC Pastore has estimates that indicate even larger surpluses in two scenarios. A more optimistic one, with a surplus of $95 billion for the year, for a scenario in which the war would affect world growth, but the volume of global trade would not be so impacted and would grow 6% in 2022, as estimated by the International Monetary Fund, at the beginning of the year, explains Paula Magalhães, chief economist at the consultancy. In an “alternative” scenario in which the impact of the war on trade is greater, the estimated surplus for the Brazilian trade balance drops to $85 billion. Both scenarios consider calculations based on Secex criteria.

The projections, says Ms. Magalhães, consider favorable effects on the balance of the high prices of commodities exported by Brazil, mainly foodstuffs. The various factors that influence the estimates, such as new supply shocks, whether due to the war or due to new waves of Covid in China, she says, are being monitored and the estimates are expected to be readjusted as the conflict evolves and its effects.

Bradesco’s new estimate also considers the effects of commodity prices. In a release by the bank, economists Rafael Martins Murrer and Fabiana D’Atri point out that until the third week of March, the balance accumulated a surplus of $10.1 billion, a result about $3 billion above the same period in 2021. The war in Ukraine, which began on February 24, they say, intensified the upward movement of commodities such as oil, natural gas, wheat, nickel, soybeans, corn and iron ore.

The bank points out that Brazilian trade is likely to be impacted by the Russia-Ukraine conflict, but direct exposure to these countries is low. The biggest exposure to Russia, ponder the bank’s economists, is in fertilizers, since we import about 85% of all fertilizers consumed domestically and 25% of this total is of Russian origin, used mainly for soy planting. This, however, would be a risk for the next season, since the current one has already been planted, even though there is a stock of the product that was not used in the current season.

Some experts in foreign trade, however, signal caution in relation to the effects of rising commodity prices. For Silvio Campos Neto, with Tendências, there is expectation of a more dynamic performance of exports, although imports are likely to feel part of the global inflation. Tendências highlights the high uncertainty regarding the duration of the conflict and its consequences. For now, the surplus expected for this year, he says, is $61.8 billion, in an estimate already revised against the $58.5 billion projected until the beginning of March.

The scenario for this year has important differences compared to last year, when iron ore prices reached the historic peak and ensured a record trade surplus, says economist Livio Ribeiro, partner at the BRCG consultancy.

José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB), highlights that one of the differences this year is in import prices, which began to grow more rapidly in the last months of 2021 and maintain a strong pace at the beginning of 2022, which should pressure imports upwards and the balance downwards. For him, the effects of commodity prices on exports can also be restricted, in part because higher base 2021 iron ore prices limit average price growth this year and could see export volume affected by China’s slowdown. Soybean prices have increased, but we will have limited shipments due to the crop failure, he says. “And we also don’t know if oil will have the breath to continue rising or stay at current prices.” New preliminary estimates by the AEB point to a surplus of $49 billion for the year. The initial projection was $34.5 billion.

Lia Valls, a research associate at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV), highlights the declining trend in terms of trade, more recently accentuated by the faster rise in prices for imports than for exports. The terms of trade in the first two months of the year, she points out, were 13.5% below the same period last year, according to data from the Indicator of Foreign Trade (Icomex) released by Ibre.

Average import prices in January and February of this year grew 33.9%, twice the rate of 15.9% in which average export prices fluctuated. “And the rise in import prices is not restricted to commodities, but also affects non-commodity items,” she points out. According to Icomex data, average commodity prices of imports, in the same period, increased 51.8% while non-commodities grew 32.2%.

These high import prices also in non-commodity goods make the debate more complicated and require more care, points out Mr. Ribeiro. “The memory of this import acceleration tends to be longer as it reflects the pass-through of costs in industrial goods.”

When this is added to the appreciation of the real against the dollar and a deceleration of the world economy expected as a result of the war, although the impact is still uncertain, says Mr. Ribeiro, it is not very obvious that this set of vectors is positive for the balance. More contained than the market average, BRCG projects a surplus of $45 billion in revision in the last week, compared to $38 billion in the previous estimate.

The more recent global prices rise, as in wheat and oil, says Ms. Valls, adds to ongoing pressures since 2021 and represents new cost shocks to inflation in Brazil. At the same time, she says, there is a global trend towards protectionist measures to discourage exports and ensure food security, which could also lead to further supply shocks. She cites Argentina, which raised export taxes on soybean meal and oil, and Indonesia, with restrictions on the sale of palm oil.

Source: Valor International

https://valorinternational.globo.com

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Commodities dominate exports even in São Paulo

Commodities: o que é e como funciona?

Commodities are grabbing an increasing share of exports across nationwide. In all regions, products related to agribusiness or the extractive industries ended the year dominating foreign sales. Soybeans have become the champion of shipments in ten states, crude oil or oil products are in the lead in three federative units and iron ore is now the main product exported in three others.

According to data from the Secretariat of Foreign Trade (Secex), the share of the manufacturing industry in Brazilian exports shrank to 51.3% in 2021 from 63% in 2010. This category also covers agribusiness products that undergo some type of industrial processing, such as meat, pulp and refined sugar.

Even São Paulo, Brazil’s most industrialized state, has its export basket led by commodities. Sugar ($5.6 billion last year) and crude oil ($4.3 billion) — whose production has soared in recent years because of the pre-salt layer — are the two goods most sold abroad. Embraer aircraft, the first purely industry item, came in third and contributed $2.3 billion.

In Paraná, passenger vehicle — which come at the front among manufactured goods outside agribusiness or extractive industry — are only the eighth most exported product. Also in eighth are shoes in the state of Rio Grande do Sul. Both states had soybeans as a prominent product in 2021.

For economist Paulo Gala, professor at the School of Economics at Fundação Getulio Vargas, the fact that the Brazilian map is now dominated by commodities allows for two thoughts. First: no state manages to have a sufficiently sophisticated exports agenda to have highly technological products — instead of grains, oil or minerals — as sales champions. Second: the Brazilian industry is predominantly focused on the domestic market and still lacks greater global competitiveness.

In his view, only a few micro-regions of the country — around cities like Campinas, Piracicaba (both in São Paulo), Caxias do Sul (Rio Grande do Sul) and Betim (Minas Gerais) — managed to transform themselves into “islands” of innovation and productivity, with leading industries. No wonder, he adds, they are among the municipalities with the highest per capita income.

“Only a few hubs have sophisticated export-oriented industries driving the local economy, but these hubs don’t come to dominate a entire state,” Mr. Gala said. “What brings jobs, income and reduced inequality is the production of complex goods. They require research and development, technology, patents. Embraer, WEG and Marcopolo are counterexamples of our incapacity for commercial insertion in the world,” he said.

According to the professor, not even the weakened real since the beginning of 2020 has been enough to avoid the loss of space of the industry in exports, compared to agribusiness and mineral extraction. “The weakened real helps price competitiveness, not quality competitiveness. The real exchange rate is at its lowest level in the last 20 years, but we need a much heavier science and technology policy and industrial stimulus,” he said.

The domination of commodities has intensified, said José Augusto de Castro, head of the Brazilian Foreign Trade Association (AEB). He estimates the deficit in manufactured products at $70 billion to $80 billion. On Monday, Secex unveiled a record balance of $61 billion in the balance of trade last year – obviously counting all kinds of products, not only those related to industry.

In his view, Brazil is now excessively dependent on three products (soy, oil and iron ore), which represent around 40% of total shipments, and on a single market (China) that buys 32% of our exports.

“In the 1980s, people complained a lot about the dependence on the United States, but the American market absorbed around 25% of Brazilian exports and there was more product diversification. At that time, eight of the ten main export items were manufactured goods. Now, the top 15 are commodities.”

In descending order, the 15 main products sold by Brazil last year were: iron ore, soybeans, crude oil, refined sugar, beef, soybean meal, fuel oils, chicken meat, pulp, semi-finished products or ingots of iron and steel, coffee, gold, corn, cotton and copper.

Therefore, Mr. Castro links the recent trade balance surpluses to the favorable price environment, not to the support of public policies. “The Brazil cost is still very high and the government has ended Reintegra [a program that reimburses companies for part of the taxes paid along the production chain], in addition to having reduced resources for financing exports, under Proex.”

Source: Valor international

https://valorinternational.globo.com/

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