Posts

Even with war, oil sustains trade surplus

Oil market outlook: Expectations and realities - Crystol Energy

In the first quarter of the year, Brazil saw a trade surplus of $3.7 billion in oil and oil products, 31% of the total trade balance of the period, even though, under pressure resulting from the war between Russia and Ukraine, the prices and import volumes of this group of products have grown at a faster pace than exports. The picture, according to specialists, shows that the commodity and its products are still expected to play an influential role for a few more years in the country’s foreign trade, even with the expected transition to other energy sources.

The figures of the Indicator of Foreign Trade (Icomex), organized by Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre/FGV) from government data, show that Brazil has seen a surplus in the balance of oil and oil products since 2016, and for four years the balance of this group has contributed at least one-fifth of the country’s total trade balance.

In 2018, the trade of these products resulted in 20.8% of the total Brazilian trade surplus, advancing to 27.8% in 2019. Last year, the trade surplus in exports and imports of oil and oil products was the highest since Icomex records began, in 1997, with a balance of $14.31 billion, equivalent to 23.3% of the total surplus, of $61.4 billion.

In the first three months of this year, the weight of oil and oil products in the balance was a little less representative compared to the same period last year. From January to March 2021, net exports totaled $3.24 billion, or 40% of the total trade surplus for the same period. In the first quarter of 2020, oil and oil products totaled $3.62 billion, above the total trade surplus for the period, of $2.8 billion. From January to March 2019, oil and oil products totaled $2.1 billion, equivalent to 46.2% of the trade surplus for the period.

Lia Valls, an economist and researcher at Ibre, points out, however, that there is no marked trend in the first months of the year. The values of oil exports and imports may oscillate throughout the year and several factors influence both volumes and prices, from domestic demand, which impacts the amount of fuel imported, to the policy of foreign purchases by Petrobras and oil prices, which more recently have also been under greater impact from the war between Russia and Ukraine. What can be said, she says, is that the energy transition to less polluting sources is likely to change the impact of the oil and oil products group on the trade balance as a whole, but this is a process likely to take time.

For now, says Ms. Valls, the prices and volumes of imported oil and oil products started the year faster than those of exports. From January to March this year, the quantity imported in this group rose 25% against the same period of 2021, with a 71.1% rise in prices. In exports, the volume increased 10.2%, and prices, 53%. The different composition for shipments and foreign purchases in this group of commodities helps explain the difference in pace at both ends.

Data by the National Petroleum Agency (ANP), which publishes import and export data for oil and oil products under other criteria, show that this group closed 2021 with a surplus of $19.03 billion. Of the $38.43 billion exported, 80% were oil and only 20% were oil products. In imports, the ratio is almost reversed. Of the $19.4 billion in imports, 79% were oil products. Also according to ANP data, the export of oil and oil products totaled $7.34 billion in the first two months of 2022 while imports were $3.31 billion.

Welber Barral, a former foreign trade secretary and a partner at BMJ Consultores, says Brazil could be taking much more advantage of the impact of high oil prices with more intense effects on the balance as a whole, if there were not structurally a still large dependence on imports of oil products.

Besides the difference in the composition of imports and exports, the type of oil sold and bought by Brazil is also different, said José Augusto de Castro, head of the Brazilian Foreign Trade Association (AEB). Oil is still one of the three most important items on Brazil’s export list, along with iron ore and soybeans, he said. But, although we have increased our production of oil and also exports in recent years, the ability of Brazilians to negotiate prices is limited, he said.

The three big world oil producers today are the United States, Saudi Arabia and Russia, said Caio Carvalhal, a partner at Atmosphere Capital, specialized in investments abroad. He explains that the Russia-Ukraine war and, more recently, the new lockdowns in China due to Covid-19 have interrupted oil price adjustments. For him, even if there is a disruption in oil supply from Russia – something that seems to be starting to happen now – there are pockets that can normalize supply. He exemplifies with production from Saudi Arabia and the UAE, already-stocked oil from Iran, and U.S. shale production. This can happen in a period of six to nine months after an eventual rupture, he points out. With this, the expectation, he says, is that prices will remain around $100 even if momentary price spikes occur.

Source: Valor International

https://valorinternational.globo.com

/by

War, weak growth slows down M&A activity

Gustavo Miranda — Foto: Silvia Zamboni/Valor
Gustavo Miranda — Foto: Silvia Zamboni/Valor

Mergers and acquisitions are down sharply this year in light of the economic instability abroad and in Brazil and the uncertainties caused by Russia’s war against Ukraine. In total, 134 deals were announced this year to April 10, down 14.6% year over year. The slowdown is greater when the combined amount involved is considered: it’s down 57% to $12.2 billion, according to a survey by Dealogic.

The partial data points to uncertainties about the trend for M&As in 2022, when Brazil holds a presidential election. “What we have seen so far shows that the year will be more difficult than the market predicted at the end of last year,” a source familiar with the market said, asking not to be named.

According to the snapshot presented by Dealogic, the market saw a lower participation of foreign groups than in 2021. Only 20%, or $2.4 billion, involved investors from abroad.

Although the flow of foreign capital has increased in the stock market, foreign groups are waiting for a clearer scenario to define where to allocate their funds. With the war, many investors have put plans for acquisitions on the back burner.

Gustavo Miranda, head of investment banking at Santander in Brazil, says that the market volatility has an impact on the price references of the assets traded. “We have a scenario of inflation and monetary tightening here and abroad. Economic uncertainties also affect multiples of listed companies.”

According to the executive, the cost of raising new money has also increased as a result of rising interest rates. This factor influences how companies finance deals.

The business environment at the beginning of this year in the country was more turbulent compared to the same period last year. At that time, although Brazil was still under the strongest effect of the pandemic, the expectation regarding the recovery of the economy was more optimistic than now. In 2021, the country saw record volumes in the capital market, as IPOs and secondary offerings totaled R$130 billion. M&A transactions ended the year at around $90 billion, the highest level in a decade.

At the beginning of last year, key deals were closed – the merger of Intermédica and Hapvida created a new company valued at R$110 billion at the time the deal was unveiled, in early March last year. Another important deal in early 2021 was the spin-off of Itaú Unibanco’s stake in XP, which helped boost the value of the business. “This is not exactly classic M&A, but it was computed by Dealogic in the first quarter,” Mr. Miranda said.

According to another source in the financial market, a good part of the M&A deals, especially in the technology industry, face lower reference prices than those seen last year due to the devaluation of some stocks in the U.S. “There is a substantial correction in the valuation of technology companies,” he said.

This source also points out that the definition of asset prices in mergers and acquisitions also occurs in companies from other sectors in Brazil. With the fall of shares of Brazilian companies listed on the stock exchange, the difference between what the seller asks and what the buyer is willing to pay has increased this year. This factor also helps explain the drop in volumes of deals announced in the first months of this year. Assets linked to commodities (mainly minerals), agriculture and metals, as well as oil and gas companies, are the exceptions.

One of the largest transactions unveiled in 2022 was Rede D’Or’s transaction with healthcare group SulAmérica. The hospital network valued the insurer at R$15 billion. Another important deal underway in the healthcare field is the sale of a stake in Hospital Care, which has Crescera and Abaporu funds, owned by the family of businessman Elie Horn, as shareholders. Bradesco Saúde and private-equity funds are among the interested parties.

Major deals may be closed in the coming months, especially in the power industry. Among them is the sale of Quantum, which gathers Brookfield’s assets in this field, evaluated in R$7 billion. Dommo Energia, resulting from the restructuring of OGX, was also put up for sale, as reported by Pipeline, Valor’s business website.

The sale of the petrochemical company Braskem is also among the most expected by the market. However, the negotiation is considered more complex but may total R$40 billion.

According to Mr. Miranda, with Santander, many private investments, especially from private-equity funds, can be made in companies that failed to go public last year.

If, on the one hand, it is more difficult to draw a scenario for M&A at the beginning of this year, the picture is clearer for the capital market. Given the uncertainties in Brazil and abroad, and the volatility caused by the presidential elections, the market is unlikely to see any IPO in the first half. The projections are more focused on secondary offerings. The market awaits the Eletrobras deal, which may total R$30 billion.

Source: Valor International

https://valorinternational.globo.com

/by

War creates chance for Brazil to integrate into global chains

Lia Valls — Foto: Leo Pinheiro/Valor

The weakening of globalization intensified by the war in Ukraine opens a good chance for Brazil to reduce its economic isolation and connect to global production chains for goods and services. But the opportunity will be lost without opening the economy and comprehensive economic reforms that make Brazil more attractive to international companies.

The thesis that the conflict in Eastern Europe opens a “once-in-a-century opportunity” for Brazil was recently raised by Central Bank President Roberto Campos Neto in an event at public spending watchdog TCU. “Brazil has not inserted itself into global chains,” he said. “Now it has an opportunity with the redivision of global chains.”

For geopolitical reasons, the United States and Western Europe would be interested in reducing their dependence on inputs and products not only from Russia, but also from China. Brazil, at least in theory, could benefit, both because of its geographical proximity and because of shared values, such as democracy. Mr. Campos Neto says that, for this to materialize, the country must be “in the right place, with the right policies.”

Experts told Valor that, in reality, the war is a new chapter in the process of “corrosion of globalization,” as defined by economist Adam Posen, from the Peterson Institute, a Washington-based research organization.

“The deglobalization process is not new,” said Lia Valls, an associate researcher at Fundação Getulio Vargas (Ibre/FGV) and a senior fellow at Cebri, a center for studies on international relations. This trend emerged after the 2008 global financial crisis, which hit the working class in the United States, leading it to question the income inequality caused by globalization.

Since then, there have been several attacks on world economic integration, from Brexit to China’s five-year plan focused on the industry to dominate the high value production chains, from U.S. President Donald Trump’s retaliations against the Asian country to the foreign policy of his successor, Joe Biden, aimed at reindustrializing the U.S.

The pandemic intensified this trend, with the restrictions that several countries imposed on exports of health products and equipment. It also led to disruption in global value chains, such as chips and electronic goods, encouraging companies to rethink supply chains and prioritize secure access to inputs over costs and productivity.

In the war, the problem impacts mostly energy, food and minerals supplied to the world by Russia and Ukraine. But the case raises more general concerns about the risk of disruption in the supply of inputs and final products due to geopolitical risks.

“The U.S. and the European Union will not be the ones to guide the revision of global value chains. These are decisions made by the companies themselves,” said Carlos Pio, a professor of international political economy at the University of Brasília and a former executive-secretary of Brazil’s Foreign Trade Chamber, known as Camex.

In the companies’ decisions about where to produce each input used in the value chain, it matters a lot if the country has an open economy, which reduces costs to move products and capital, and if the business environment in general is competitive. “What the Brazilian government can do to better position the economy as a whole is having a pro-market reform agenda,” Mr. Pio said. He is in favor of a unilateral opening of the economy, since the negotiation of trade agreements with other countries generates slow results and our level of protection is high, according to him.

A criterion widely used to measure the level of integration of an economy into global value chains is the share of imported components in exports of industrial goods. In the case of Brazil, this indicator is at 14%, well below Mexico, with 38.4%, according to data compiled by the World Bank.

In a 2020 report on global value chains, the World Bank highlights some government decisions that have hindered integration into global chains. One is the Inovar-Auto program, put in place during the Rousseff administration, which protected the industry and required a high percentage of local content, causing the industry to stop focusing local production on exports.

But integration into global chains has not made any tangible progress during the Bolsonaro administration despite the pro-market economic view. Economy Minister Paulo Guedes has been criticized for his strategy for trade. He has been publicly arguing for a plan to first give equal competitiveness to companies, with the approval of a tax overhaul, and only then substantially lower import tariffs.

Mr. Pio, who was part of Mr. Guedes’s team until July, believes that the Bolsonaro administration has moved in the direction of trade opening by cutting tariffs, although he considers that this process must be accelerated.

Ms. Valls ponders that Brazil’s disconnection from global value chains, although true, has some nuances. First, Brazil is not outside all chains, but rather of some of the most valuable ones. In the case of food, for example, Brazil has a large footprint. And there are some cases where the country is a major player in a high value chain, she said, citing planemaker Embraer.

Brazil has a greater integration, according to data compiled by the World Bank, as a supplier of inputs for industrial exports from other countries. In this case, the percentage is 17.7%, reflecting the export of basic products used in industrial processes in other economies.

Comparisons of international indicators of participation in production chains can show some distortions. Small countries, such as Chile, have few alternatives other than integrating into trade.

“Our internal market is large, and multinational companies historically come to Brazil to take advantage of it,” Ms. Valls said. The question mark is how to get companies to look beyond the domestic market. The geopolitical environment favorable to the relocation of global value chains is not enough. “If you don’t have the conditions of attractiveness, companies will not come.” This includes commercial issues, such as tariffs trade agreements with other economies, but also factors such as macroeconomic stability, clear and stable rules, infrastructure and quality of human capital.

The Ibre/FGV researcher ponders, on the other hand, that Brazil’s greater connection with global chains is not a panacea, which would bring only gains or solve all development problems. “The discussion over the search for productivity has no end,” she said. “If I want to avoid the so-called middle-income trap, I have to invest in development, human capital.”

It is also necessary to ensure that the gains from globalization are not captured only by companies and, therefore, are also shared with consumers. Another concern is to avoid that, in this process of integration into global chains, standards like the preservation of the environment are loosened.

Source: Valor International

https://valorinternational.globo.com

/by

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

/by

War, fuel put new pressure on retail

Food sector faces new escalation of cost inflation after bad end of year for supermarkets — Foto: Divulgação
Food sector faces new escalation of cost inflation after bad end of year for supermarkets — Foto: Divulgação

After a 2021 full of volatility and uncertainties, retail will not have an easy life in 2022. Major retailers in the country have been signaling, in conferences call on results in recent days, that the sector was already managing greater pressures on expenses, such as rents and labor, in addition to the escalation of costs of products in recent months. And the advance of the war in Eastern Europe once again concerns executives about results in the short term.

A survey carried out by Valor Data based on data from most traditional public retailers (18 reports were analyzed) shows that sales advanced less than costs and expenses at the end of 2021, while net income and profitability fell. Net revenue rose 5.3% in the fourth quarter of 2021, in nominal terms, to R$97.3 billion, compared with the previous year, with the cost of selling goods rising a little more, 6%.

When that happens, gross profit loses steam and gross margin drops — the rate fell to 25.8% in retail in the fourth quarter of 2021, compared with 26.6% in the same quarter of 2020.

Operating expenses grew 8.4%, in part, due to a weaker comparison base — the pandemic closed offices and reduced rents in 2020, but administrative and rental expenses are returning to market levels.

Summing up, this means that, when they entered 2022, companies were already dealing with more expensive inventories from purchases from industries – a reflection of the escalation of input prices, especially in food and electronics in 2021 – and also a return of expenses to higher levels. And that with sales even shrinking, in real terms.

“We had forecast the beginning of ‘normality’ after 2022. And I speak of normality in quotes, considering that it is an election year and sales are still recovering. But now we are very clear that inflation will not give in, and it should even go up, and the input and fuel costs, which affects retail distribution, tends to get worse,” said Gustavo Oliveira, partner at Tower Three (T3), with shares of retail chains in the portfolio.

For Breno de Paula, a retail analyst at Inter Research, this scenario puts more aggressive plans for store openings this year on the back burner in segments like durables retail and part of the fashion chains. “It is no wonder that, in the earnings conference calls in February and March, there was almost no mention of much more openings [in relation to 2021], because this weighs on the operating expenses, and soon affects EBITDA in a really bad time.”

“The focus now is to monetize the structures they already have, especially the marketplace, which a good part of the chains already operates. The name of the game is raising fees for sellers and charging more services to try new revenue and dilute costs,” said Iago Souza, an analyst with Genial Investimentos.

The food sector is already going through the first half of 2022 in a new escalation in cost inflation after a bad end of year for supermarkets. The year-end was better for the cash and carry segment. The combined sales of GPA, Carrefour, Grupo Mateus and Assaí rose 5.7% at the end of 2021, for a rise in costs of goods of almost 8%, and a high of up 10% in expenses. As a result, net income declined by 14%.

For an executive with 30 years of experience in cash and carry chains, with more expensive agricultural commodities and fuel, due to the war in Ukraine, inputs are already more expensive in some markets, which will weigh on the stores’ costs. “We were already dealing with a 10% food inflation in the 12 months until December, but still in this low double-digit range. But it’s up more than a point since January,” he said.

“The good news is that wholesale purchases from suppliers have grown. The corporate client is increasing inventory to protect itself from the inflation that comes from the war. February and March were better than January. The risk is that we’re basically just anticipating sales, but that’s part of the game,” he said.

According to XP, inputs such as oil, synthetic rubber, metals, grains and cotton have already risen by nearly 60%, 20%, 10%, 40% and 5% since the beginning of the year, respectively, which is expected to put further pressure on retailers’ costs. “However, the appreciation of the real against the dollar (by 10% in the same period) is expected to partially offset this effect,” said XP analyst Danniela Eiger.

At this beginning of the year, electronics chains have to focus on revising expenses as their supply chains are less pressured than the food retail. “I think that for us, unlike food, the biggest concern of the sector is with operational expenditures and reduction of stock purchased at higher exchange rate,” says the vice president of a traditional chain.

The fourth-quarter figures show that Americanas, Magazine and Via closed from October to December with total sales just 1.4% above 2020 and the biggest drop in profit among all the segments, of 36%. Sales dropped, but the cost of goods (which includes the inventory account) was stable. For Mr. Oliveira, with T3, the results of durables retail had already been declining since the third quarter, due to the effect of high interest rates and with the high exchange rate, but companies took a long time to adjust.

“In addition to the 2021 inventories that Via and Magalu must be reducing now, they carry a lower employee turnover after the crisis. The point is that this change of employees always helped to reduce labor costs naturally.”

Magazine, Via and Americanas highlighted the improvement in sales since February in a conference call. “Seeing the half full glass, the stock that will enter the chains after this reduction of the old stock will be cheaper, because we don’t see movement of transfer of the industry today, the exchange rate even fell and the war is not yet making components more expensive. So, this can help in the gross margin or we can pass it on to the customer,” the chain’s vice president said.

Some factors can help to balance this equation a little, such as the new injection of funds into the economy, with government measures, which could reach R$86 billion in the coming months, and the electricity bill, which stopped rising as in the past, one of the main lines in the sector’s cost bill.

For fashion retail, the scenario was of sales growing faster at the end of 2021 – partly due to the weak base of comparison the year before, when it was more affected by store closures –, with revenues rising 17%, gross margin gains and profit advancing 5%. Despite this scenario, as they sell non-essential goods, they have less room to pass on higher costs in times of crisis.

XP calculated in a report in March that for each 1% increase in the cost of raw materials, C&A’s EBITDA falls 3%. At Renner, the decline is 1% to 2%. “The premium chains ended 2021 under protection and will remain so this year, but the rest will face a more difficult landscape,” Mr. Souza said.

Source: Valor International

https://valorinternational.globo.com

/by

War intensifies battle between fertilizer giants in Brazil

Fertilizer issues coming from every angle

The unfolding of the war in Ukraine blared a warning for the global operations of the Norwegian Yara, one of the largest suppliers of fertilizers in the world — and a company that competes for the leadership of the Brazilian market with U.S.-based Mosaic. Brazil is among the biggest consumers of fertilizers in the world, as well as the Unites States, China and India.

This year, the global geopolitical scenario forces the company to race against the clock to serve Brazilian farmers in the final stretch of the first half of the year, when they make stocks for the next harvest. Yara has one of its largest subsidiaries in Brazil, where it delivered 8.8 million tonnes of products in 2021 — on the European continent, where it is headquartered, deliveries totaled 9.2 million tonnes in the period.

“Yara is a strong company, and very professional, but it is now poorly positioned in terms of its own supply,” said a source in the chain. Mosaic and Yara are almost isolated leaders in Brazil, with 22% and 18% of the market in 2021, according to data prepared by consultancy StoneX. Paraná-based Fertipar is the third, with 10%.

According to sources in this chain, Yara is in a “delicate strategic situation”, since the company buys phosphates and potassium while the main competitor, Mosaic Fertilizantes, is holding its production. “Mosaic has its own phosphate fertilizer in the U.S. and is part of an operation in Saudi Arabia. In addition, it also has potash mines in Canada,” the source said.

With the war and other geopolitical issues facing Belarus, Yara International has restricted its raw material procurement origins. In early February, the company had already announced the interruption of potash purchases from Belarus, a country sanctioned by the U.S. and EU last year.

Last Friday, Yara expanded the list of restrictions by announcing the interruption of all purchases from suppliers linked to Russian entities and individuals included in the reprisal lists.

Western countries sanctioned officials and businesspeople close to the Russian government in response to the invasion of Ukraine, in February 24. “As a result of the additional European Union sanctions implemented on March 9, 2022, Yara has stopped all purchases from Russian suppliers linked to entities and persons sanctioned [by the bloc],” the company said in a statement.

The company said it intends to ensure the continuity of its supply chains through its operations in other countries. Despite this, it reiterated its concern for global food security and called for government actions to reduce Russia’s dependence on this segment.

“It is crucial that the international community come together and work to ensure world food production while reducing dependence on Russia, although the number of alternatives today is limited,” said Svein Tore Holsether, CEO of Yara International, in a recent article.

Among Russian businesspeople sanctioned by the EU on March 9 are Andrey Melnichenko (EuroChem), Andrey Guryev (PhosAgro) and Dmitry Mazepin (UralChem) and his son Nikita Mazepin. The three companies are major suppliers of nutrients for fertilizers. According to a Brazilian businessman, Yara is a customer of all of them.

Yara’s list of suppliers includes Russian company Acron, which recently negotiated the purchase of a Petrobras unit in Mato Grosso do Sul. Russian companies removed the executives, according to statements posted on websites on March 10.

“Without buying potash from Belarus, and now without Russia, there will be a strong impact on Yara’s business here in Brazil,” says a top sector executive. In nitrogenous products, the company has a good part of its production of ammonia, the raw material of this group of nutrients, concentrated in Europe. However, on March 9, it announced that it would reduce the volumes in two plants due to the escalating prices of natural gas – which gives rise to ammonia.

Source: Valor International

https://valorinternational.globo.com

/by

War already impacts M&A in Brazil

Daniel Wainstein — Foto: Divulgação
Daniel Wainstein — Foto: Divulgação

The Russia-Ukraine war has already started to impact M&A operations, according to investment banks and firms consulted by Valor. In these first 20 days of conflict, no deal has been canceled, but there are already discussions about repricing of assets for sale, especially in the segments of oil, gas and agricultural commodities, due to the uncertainties generated in recent weeks.

With the rise in oil prices, the market is trying to understand what the new price level for the raw materials will be. “What is the peak?” — this is the question that needs to be answered to define the prices of assets, notes Gustavo Miranda, head of investment banking at Santander. “We are watching the unfolding [of the war] to start defining the next steps.”

There is also a discussion about how Brazil may be affected by the war. “There is an understanding today that Latin American countries would be less affected because they are far from the battle area and also because they are important commodity producers,” Mr. Miranda said.

“I’m not seeing anyone postponing transactions and the interest in Brazilian assets remains solid,” said Ricardo Lacerda, a partner and CEO of investment bank BR Partners. “But we have already seen price disruption, especially for energy assets. Nobody wants to run the risk of mispricing.”

In late January, when the war was still a geopolitical tension, Petrobras and power company Eneva communicated the closure, without agreement, of the negotiations for the sale of Polo Urucu — belonging to the state-owned company, in the Solimões Basin, in Amazonas. In a statement, Eneva said that, despite the efforts between the parties, it was not possible to converge on an agreement. Petrobras, on the other hand, informed that it decided to terminate the current competitive process and would evaluate the best alternatives for the asset.

The rise in oil prices was determinant for the end of the negotiations. When Eneva started negotiating the purchase of the asset in February last year, the price of a barrel of oil was around $40. At the end of January, the price reached $90. On Monday, the barrel closed at $107 — the peak in the war was at $130 last week.

Russian investors who have been prospecting in the country may have to revise their strategies. In early February, for example, the Russian company Acron announced an agreement with Petrobras to buy a fertilizer unit in Três Lagoas, Mato Grosso do Sul. Market sources are waiting for the outcome of the negotiations.

Russian companies may have greater difficulty in creating liquidity and making payments between international banks, a source said.

Gas assets under negotiation are also likely to undergo price revaluation, according to M&A experts. They were already valued before the war, and deals on renewable energy projects will also continue to draw the interest from investors, particularly foreigners. “We will see a lot of deals in solar and wind power projects, as well as carbon credits,” said Mr. Lacerda.

According to an investment banker, two clients with mandates to sell assets (one energy and the other retail) wished to close the deal in the first half, to avoid greater price and term volatility in the second half, with the elections. Now, with the conflict, both have asked the bank to extend the process, even if it stays until 2023.

For Daniel Wainstein, a partner at Seneca Evercore, it is important to note that the country’s scenario before the war was of demand-based inflation, rising interest rates and low growth prospects. “Now you have more inflationary pressure from supply and the outlook now is for interest rates and inflation rising in Brazil and globally.”

“We are in a moment in which the investor is adopting a wait-and-see approach, without much haste, in expectation in what will happen in the coming weeks,” he said. Seneca closed four deals this year. “The appetite for Brazil has not reduced. With the war, we are holding on.”

The executive says that Brazil is among the countries that will benefit from the conflict. “The B3 in relation to other stock exchanges in the world suffered a low impact because a good part of the companies operate with commodities.”

The war between Russia and Ukraine has a special meaning for Mr. Wainstein. The Seneca Evercore executive’s maternal grandparents were Ukrainian. “My grandfather was a Bolshevik and fought in the Russian revolution. He fled there when Stalin started persecuting the Jews,” he said.

In the capital market, the short term is also uncertain. “The environment is one of volatility here and overseas. We won’t be able to see IPO operations in the short term. It is also challenging for secondary offerings,” said Mr. Miranda, with Santander, noting that the movement in the capital market was already weak because of the election year.

For Bernardo Parnes, a partner at One Partners, the capital market activities are more affected than the pace of acquisitions, especially considering the full year. “The M&A adapts terms, changes price, solves problems with clauses such as MAC or with a guarantee account. But it happens one way or another,” said Mr. Parnes.

Consulted by Valor, Eneva maintains the same position as the one communicated on January 28. Petrobras declined to comment. Acron did not immediately reply to a request for comment.

Source: Valor International

https://valorinternational.globo.com

/by

Scania halts exports from Brazil to Russia

Home

Scania has suspended exports of trucks from the São Bernardo do Campo plant to Russia. The Brazilian subsidiary follows the decision of the parent company in Sweden, which halted sales in the Russian market after President Vladimir Putin decided to invade Ukraine last week. The company did not inform how many vehicles will no longer be sold, nor the impact on production at the plant in the São Paulo state. Scania was the only manufacturer that exported vehicles from Brazil to Russia.

After changing its internal strategy, four years ago, the company stopped disclosing production and sales figures. But it is known that the Russian market was among the company’s foreign markets a few years ago. Three years ago, the company announced an investment plan of R$1.4 billion, aimed mainly at modernizing the São Bernardo plant, which employs 4,000.

The unit was modernized to continue to be an export hub. The latest investment program includes adapting any model to the clean energy defined in each country. A statement from Scania Latin America reproduces the company’s worldwide position regarding the conflict in Ukraine.

“Scania’s values of democracy, free trade, human rights and respect for the individual guide all company decisions.” About the recent events in Ukraine and Russia, the Swedish manufacturer said that it is continuously monitoring it closely and since last week has decided to stop deliveries of trucks and spare parts to Russia. “We continue to prioritize the safety of our employees and have been in close dialogue with our customers, suppliers and other partners to assist them in any way we can at this difficult time for humankind,” Scania said.

Some auto parts manufacturers also export from Brazil to Russia. But, in their cases, Russia is a less important destination. According to data from the National Union of the Components Industry (Sindipeças), the Russian market is in 26th place, with $26 million out of a total of $6.5 billion earned by companies in the sector with foreign sales in 2021.

The Russian vehicle market is smaller than the Brazilian one. Yet it is among the 15 largest in the world, with annual sales of around 1.7 million units. This is more than the United Kingdom or French markets sell. The Russian vehicle fleet is, however, larger than that of Brazil. There are almost 52 million vehicles on Russian roads, according to data from five years ago, while the Brazilian fleet was around 46 million in 2020.

Like Brazil, Russia is an important vehicle production center. Brazil is in the eighth position among the world’s largest producers. Russia ranked 13th in 2019.

Also like Brazil, most of the automakers active in Russia are multinationals, mainly European ones. Some have alliances with local manufacturers. As foreign companies have already chosen to suspend business in the country since the beginning of the conflict in Ukraine, the activity of the automobile industry in that country tends to be quite compromised.

French Renault, German Volkswagen and Stellantis (which includes Fiat, Chrysler, Peugeot and Citroën) have the largest operations in Russia. General Motors had stopped producing in the country a few years ago as a result of a global reorganization. Some cars produced in Brazil have already been inspired by models developed in Russia.

Volvo Cars was one of the first to react to the invasion of Ukraine, suspending the shipment of cars to Russia. In the case of the brands that produce locally, there is also a lack of components that, in good part, were supplied by Ukraine.

German company BMW will halt exports and production at its plant in Kaliningrad, on the Baltic Sea, “due to the geopolitical situation,” the company said in a statement.

According to news agency reports, Honda has suspended the shipment of cars and motorcycles to the Russian market since this Thursday. The company follows decisions already taken by Mercedes-Benz, Jaguar and Land Rover. Mercedes announced the donation of one million euros to the Red Cross in Ukraine.

Source: Valor International

https://valorinternational.globo.com

/by

Russia-Ukraine war to drive up prices of chemical products

Fatima Giovanna Coviello Ferreira — Foto: Claudio Belli/Valor
Fatima Giovanna Coviello Ferreira — Foto: Claudio Belli/Valor

The costs of the Brazilian chemical industry, which were already under pressure from the Covid-19 pandemic, tend to rise further with the Russia-Ukraine war amid rising oil and natural gas prices, said Fátima Giovanna Coviello Ferreira, head of Economics and Statistics at the Brazilian Chemical Industry Association (Abiquim).

Naphtha, a petroleum product that is the main petrochemical raw material in the country, cost $772 per tonne in January, up 56% in one year in dollars terms. Compared to December, in reais, the appreciation was 8.7%. With the oil barrel above $110, a new increase will materialize in the coming months.

“It is a different scenario from 2014, when oil prices reached almost $120 a barrel and the exchange rate was at R$2 to the dollar. Today, the barrel is at $100 and the exchange rate is at R$5 to the dollar,” the executive said.

The Abiquim-FIPE price index saw a 0.56% decrease in January, compared to December, and jumped 51.2% compared to the same month in 2021, reflecting the appreciation of oil and its impact on the cost of naphtha.

The prevailing view in the industry is that there are still many uncertainties about the sanctions that will be imposed on Russia and how this will affect natural gas, which is used as raw material and energy in the sector. Prices in the local market were already under pressure from the increased demand for power generation. “We are very worried about this pressure that is coming from outside,” she said.

In a first moment, since there is idleness in certain segments of the local chemical industry, the difficulty in accessing products abroad may encourage domestic purchases and raise the occupation rate.

In January, with some improvement in production rates and domestic sales of chemicals for industrial use, the use of installed capacity in Brazilian industry reached 82%, the best rate since October 2018 and the highest for the first month of the year in last four years. Still, the index is low for continuous production and capital intensive activity.

“This instability could help the local industry to produce more, but with no effect on products such as fertilizers and methanol [which have ceased to be produced locally in recent years],” she said.

The sector monitors with concern the supply of fertilizers and intermediates in the international market, since Brazil is heavily dependent on imports. Although the country has different suppliers, Russia is the main trading partner in this group.

Abiquim’s head says that the risk faced by Brazil at the moment – of shortage of input for agribusiness, a strategic sector – should open new discussions about the use of gas in Brazil. Last year, the country reinjected more gas than it imported. “It is a noble resource that could have other applications,” she said.

In the view of the industry, which recently lost an important tax break in the petrochemical chain, the Special Regime for the Chemical Industry (Reiq), Brazil lacks a state policy that prevents further decline of manufacturing, already seen in the chemicals industry – the country stopped producing fertilizers and methanol, for example, because the local product was not competitive.

Source: Valor International

https://valorinternational.globo.com

/by

War likely to have little impact on Brazilian economy, experts say

Economists and banks, however, warn that it depends on the duration of the conflict

Brazilian economy: encouraging news from the IMF - Europartner

The Brazilian economy is little exposed to the Russia-Ukraine war and is likely to suffer little impact, at least for now. This scenario, however, will only be confirmed if the conflict does not spread to other European countries, economists and banks told Valor.

For the head of economic research in Latin America at Goldman Sachs, Alberto Ramos, the fastest impact will be seen in inflation via commodities, and not in growth. “The first quarter will still be very much influenced by the omicron dynamics, which affected activity in January and there was a small rebound in February,” he said.

“Potentially, the implication [of the Russia-Ukraine conflict] will be to backfire a bit on the inflationary process and make the Central Bank more conservative because of the impact on commodity prices,” he added.

“Brazil’s trade levels with Russia and Ukraine are quite limited. The supply of fertilizer for the agribusiness can be impacted by this channel and put more pressure on food prices and energy prices with oil above $100. It means more pressure on Petrobras. But the impact, I say it again, is more immediate on inflation than on growth. We are already in March, there is not much more to go for the first quarter,” says Mr. Ramos.

A report by Dutch bank Rabobank goes in the same vein. The economists at the financial firm note that with the exception of the fertilizer market, Brazil is little exposed to Russian supply or demand and believe that the military attack should only indirectly weigh on Brazilian activity.

The report entitled “A Russian cloud over Brazil,” says that everything depends on the duration of the conflict. The side effects of the war, says the bank, may come from energy prices and uncontrolled imported inflation, and the likelihood of higher interest rates.

With high inflation, Rabobank projects a Selic rate of up to 12.25% in the second quarter of this year, with a slowdown to 11.75% by the end of the year. But it warns that a prolonged conflict may delay the easing cycle.

In the evaluation of the chief economist of RPS Capital, Gabriel Leal de Barros, the prospect of increased public spending in Brazil, because of the elections, may end up offsetting the negative effect coming from the war in Russia. He recalls that states and municipalities have about R$180 billion in cash today, equivalent to 2% of GDP. “Some states are already spending more, giving salary raises for civil servants, and this move acts as a counterweight to the negative effect of the war on activity,” he said.

Source: Valor International

https://valorinternational.globo.com

/by