Archives for October 2011

Has Brazil’s Economy Decoupled Itself? Apparently Mantega Thinks So

EconomicsAccording Brazil’s finance minister, Guido Mantega, Brazil’s economy is well shielded against any and all problems that might arise because of the U.S. debt-ceiling controversy or the European fiscal crisis.

As in the U.S., President Barack Obama is attempting to settle a broad compromise with Congress to raise the U.S. national debt ceiling for deep budget cuts, and probably tax increases, over the next 10 years, many fears that Brazilian exports and growth will be severely hampered by these moves in the US.

“I suppose they will find a way out,” Mantega said of the U.S. political negotiations. “I don’t think there will be a U.S. default or anything like it.” Mantega said that, “in any scenario, Brazil is well protected from any fallout.

Also, regarding the European fiscal crisis, which involves a number of countries with massive debt loads, Mantega said that he believes the situation is more complicated. But he expects that soon the ECB will be able to find solutions to the problems.

While speaking  to the reporters last week, Mantega noted that Brazilian foreign reserves are now well above $300 billion, while the country’s net public-sector debt is equal to only about 40% of country’s gross domestic product.

When asked about the continued rising value of Brazilian Real against the U.S. dollar which is hurting Brazilian exporters, Mantega said, the pace of acceleration has slowed down.  He asserted that there has been little change recently in the value of the currency. He also downplayed worries about continued intense foreign investment inflows, saying “inflows are normal and were manageable (not inflationary).

According to Brazilian Central Bank figures released Wednesday July 20th the net U.S. Dollar inflow into Brazil for the first 15 days of July was $10.5 billion. This is huge jump compared to last year where for the first 15 days of July 2010, Brazil registered a net outflow of $3.19 billion.

Brazil Inches Forward with its Potassium Project

BrazilBrazilian mining giant Vale and state-owned oil giant Petrobras late Wednesday closed in on an agreement that would clear up the way for investments of over $1 billion in potassium mining business.

Brazil at present imports over 90% of the potassium needed to fertilize its soybean, corn, sugarcane and various other crops. However, the government is leading an effort to reduce foreign dependence ahead of an expected surge in farm production over the coming decade.

As per the rising requirements for potassium,, President Dilma Rousseff supervised the meeting between Vale CEO Murilo Ferreira and Petrobras CEO Sergio Gabrielli to whip out a deal over concessions that were impeding investments in two new mines to extract carnalite which is a potassium source.

The mine and fertilizer project could generate a total investments of up to $2.5 billion and see output increase to 2.2 million metric tons by the 2015 which is equivalent to almost double Brazil’s existing potassium production, according to the industry experts.

Even though, Vale has been developing the Itaquiri-Vassouras deposit in the northeastern state of Sergipe for about 20 years, but the company only exploited a third of its potential. The miner has held back from investing more in recent past because the concession to operate the mine, held with Petrobras, ends soon — in 2014, 2017 or 2025, depending on which lawyer you speak to.

Rousseff, whose government has substantial influence at Vale as state-run pension funds are key shareholders, pressured for an extension of the concession. Apparently Petrobras relented, agreeing to a 25-year extension on the condition that Vale fully exploits the potential of the deposit.

Vale hopes the carnalite mine will more than counter balance the depletion of reserves at its potash-rich sylvinite ore mine, also in Sergipe, over the next five years.

Meanwhile, Potassio do Brasil, a Brazilian firm, announced last year that it had found potash reserves that could top 1 billion tons in the Amazon basin. Nevertheless, it remains uncertain whether it is cost-effectively viable to exploit these reserves.

Currently, local potassium production totals 1.2 million metric tons, or just fewer than 9% of total Brazilian demand.

Will Brazil Create More Jobs in Second Half of 2011?

Thanks to exports orders, Brazil’s unemployment rate fell to its lowest since January in spite of efforts by policy makers to cool growth and inflation in Latin America’s biggest economy. According to national statics agency, the jobless rate fell to 6.2% in June, from 6.4% in May and 7% a year earlier. Now, many experts believe that unemployment level will see further drop in second half of the year.

For Gabriel Goulart, this numbers are strong, with the job market growing even at full employment.  Gabriel Goulart is an analyst at Mercatto Gestao de Recursos who helps in managing 1.6 billion USD at the Rio de Janeiro-based asset management company. He believes that current number just shows that the economic deceleration is very soft.”

Meanwhile, country’s Labor Minister Carlos Lupi anticipates that Brazil will create more jobs in the second half of the year than it did in the first half of the year. He is optimistic that with current trends, a record 3 million formal jobs will be generated in the year of 2011.

Recent data reveals that the economy continues to gather momentum at a pace that puts pressure on inflation. Retail sales did fairly well in May following an unexpected decline the previous month. Industrial capacity utilization was also at 82.4% in May, the same level it was in December before the central bank began rates hikes.

According to the statics provided by the labor ministry, Brazil’s economy created 215,393 government-registered jobs in June.

Good news on exports front

Meanwhile, The Brazilian Exporters Association, or AEB, has scaled upward its forecast for Brazil’s trade surplus in 2011, owing to commodities prices increases, the association asserted this on 20th July 24, 2011, Wednesday in a statement.

The association is anticipating Brazil’s trade surplus to rise at $26.26 billion this year, up from the $26.1 billion expected before. By comparison, Brazil showed a trade surplus of $20.26 billion in 2010. The newly forecast number would correspond to a 29.6% increase from last year.

The association believes that commodities such as iron ore, soy, coffee among others products, represents 70% of all Brazilian products exported and prices for commodities, remaining at high levels, will facilitate the nation to post an increase in trade surplus.

Both imports and exports will swell in 2011, according to the AEB. The AEB estimates Brazilian exports in 2011 of $244.5 billion and imports of $218.3 billion. Comparatively, in 2010, exports stood at $201.9 billion and imports totaled $181.65 billion.

So far this year, all the way through July 17, Brazil’s trade surplus stood at $15.7 billion, jumping up from $9.2 billion in the same period of 2010.

Inadequate Ports Hampering Cruise Industry’s Growth Potential

The Brazilian cruise industry grew by 20% annually over the past ten years and reaching a level of 800,000 tourists annually, however, now the pace of cruise expansion in Brazil is expected to encounter a sharp slowdown in the 2011-2012 seasons.

The forecasted expansion in the supply of beds is only 1.6%. The major reason is the infrastructure deficiencies of Brazilian ports, which have no more room for accommodating large vessels. Thus, considering this scenario, it will mark the first time a cruise season will have fewer vessels than the last: 17 instead of 20.

Now, upset with current infrastructure, Brazilian industry executives say that the trend, if port infrastructure remains unaltered, is for the industry to reorganize and reshape its infrastructure because it may have grown far more than ports capacity.

According to president of the Association of Maritime Cruises (Abremar), Ricardo Amaral, owing to lack of sufficient investments in ports the sector’s growth is feared to slow down.

On the other hand, Brazil’s Ports Secretariat is of the view that it is fairly conscious of maritime demand growth.  as of now, according to port’s secretariat, The authority is building six terminals for the World Cup 2014 which demand an investment of 740 million Real. The authority also maintains that all projects are going to be leased out in due time and they will all be finished by 2013.

 

The repercussions:

Italy’s MSC Cruises is contemplating a 34% fall in the number of beds this coming season as well as in overall sales, although the percentage was not released. Adrian Ursilli head of MSC marketing said the company will be operating one vessel less, a drop of 70.000 beds this season which will be transferred to operations in the Arab Emirates owing to insufficient infrastructure in Brazilian ports.

Last year this company transported 300.000 South American tourists of which 250.000 Brazilian. But this coming season the number will plunge to 200.000, estimated Ursilli. However he also pointed out that MSC, Abremar, Brazil Ministry of Tourism have been collaborating together with other government offices to find a solution to the port bottlenecks.

Meanwhile, Royal Caribbean is also bringing a cruise vessel less this season to the South Atlantic. It will be operating with only two vessels but estimates a growth of 30% in the number of tourists since it has extended the season by 20 days, which means the number of calls will increase from 44 last seasons, to 51 in 2011/2012.

Rio do Janeiro can at present receive up to seven vessels simultaneously and it is planned to expand docking capacity by 73%, at a cost of another 200 million dollars approximately.

US Based CFR Demands More Strengthening Economic and Political Relations With Brazil

EconomicsAccording to an independent task force run by the USA based, Council of foreign relations (CFR), it is in the interest of the United States “to recognize Brazil as a complex international actor whose weight on the defining global issues of the day is only likely to increase.”

As an advantage to Brazil, the CFR report recommended that Washington lobby to get Brazil a permanent seat on the UN Security Council, a situation the previous Brazilian ex- president, Lula da Silva, often went on world tours trying to promote.

When the Cold War was going on, Washington kept a close eye on Brazil, looking it as the most influential power in the region. It politically — if not strategically — backed a military coup to oust left-leaning elected President Joao Goulart in the 1960s. Goulart’s downfall resulted in to two decades of military rule in Brazil, a trend that was witnessed throughout Latin America.

The supposed Washington Consensus kept Brazil on the radar until that economic policy wore thin in the late 90s and was crushed under President Lula da Silva in 2001 that initiated a more autonomous course in Brazilian and Latin American politics. Since then, Washington has turned its back on Latin America, and turned its spotlight on the Middle East and Asia.

CFR reckons that Washington would be wise to look south again, not for fresh rivalries, but for new, and even stronger partnerships.

The report emphasized the significance of regular communication between US President Barack Obama and Brazilian President Dilma Rousseff.

According to the report released on July 12, cooperation between the United States and Brazil holds too much promise for miscommunication or foreseeable disagreements to stand in the way of potential gains. The report also states that a mature, working relationship would mean that the United States and Brazil can help each other by pressing forward mutual interests even without wholesale policy agreements between the two countries.

The Task Force also recommended:

1. U.S. Congress abolishes the ethanol tariff on Brazilian sugarcane ethanol in any bill concerning reform to the ethanol and bio-fuel tax credit regime.

2. US relinquish visa requirements for Brazilians by instantly reviewing Brazil’s criteria for participation in the Visa Waiver Program.

3. US State Department create an Office for Brazilian Affairs and the National Security Council (NSC) integrate its efforts under a NSC director for Brazil in order to better organize the current decentralized US policy.

The Gigantic Oil Reserves

petroleumWonder what could be the oil reserves in Brazil? Well, Brazil’s oil reserves, including latest discoveries in deep waters of the Atlantic Ocean, are of a similar size to those found in the North Sea, according to an exploration official at Petroleo Brasileiro SA.

Currently, The U.K. and Norway held about 62 billion barrels of reserves in the North Sea before the deposits were developed, Francisco Nepomuceno Filho, Petrobras’s London head of exploration and production, said in an interview in London recently.

Nepomuceno emphasized that Brazil as a whole could have a potential of the same size of the North Sea, including Norway and the U.K., and these two countries grew a lot and had huge development.”

According to the country’s oil regulator, Brazilian reserves that sit miles beneath the floor of the Atlantic Ocean trapped under layers of rock and salt hold an estimated 50 billion barrels of oil. Lula, the major discovery in the Americas in over three decades, had the country’s most dynamic and productive well in May, yielding 36,322 barrels a day of oil and natural gas.

Petrobras, is also preparing to test a latest discovery well in the offshore Sergipe Basin in northeastern Brazil, an area that may be a “new oil province,” Nepomuceno pointed out. Petrobras will attain its target of 2.1 million barrels a day of average oil production in Brazil for this year, he emphasized.

Investment Plan of the company

The North Sea hit the highest point production of 6 million barrels a day in 1999, Nepomuceno said. Petrobras contemplates to triple production to 6 million barrels a day by 2020, including output from deep-water reserves where Petrobras bought production rights from the government previous year.

Petrobras is modifying its $224 billion, five-year investment plan and the company’s board may endorse it on July 22, Nepomuceno said, without providing details of the plan.

Mounting output rates in the pre-salt area are reducing costs because the company can supply each production platform with lesser number of wells, Nepomuceno said. Each pre-salt well costs almost $100 million dollars to drill in Brazil. Improved productivity will support compensate for the larger exploration area Petrobras requires to tackle under its new plan, he said.

Meanwhile, Petrobras is planning to borrow about $47 billion by 2014 to finance investments and refinance existing debt, Chief Financial Officer Almir Barbassa said last month.

M&A Witnessing a Bullish Season

bulBy the end of the first half of 2011, Brazil saw 142 M&A deals worth US$41bn signifying a 15% increase in volume and 24% increase in value over the preceding year. Recently released Brazilian M&A Outlook survey published by “merger- market” and “Merrill DataSite”, says that this trend is expected to continue.

In the second quarter of 2011, Merrill DataSite delegated the mergermarket to interview investors and executives with recent deal making experience in Brazil concerning their expectations for the country’s M&A market for the upcoming 12 months. Survey respondents provided insight into the drivers, current issues and emerging trends within Brazil.

With a wealth of natural resources and a growing middle class, Brazil’s place in the global economy is growing quickly. As a result, respondents are confident generally M&A deal flow will carry on its recent surge. Over half of respondents point to foreign investment as the major driver of activity, with 64% identifying China to be the most avid foreign buyer of Brazilian assets. Brazilian buyers will also increase their outbound acquisitions, with respondents spotting other Latin American countries and North America as their key targets.

The infrastructure sector is projected to experience momentous growth in M&A activity over the next 12 months, according to nearly half of respondents, followed by the thriving energy sector. These, along with the construction and consumer sectors, are believed to generate the highest premiums for deals.

Additional survey results:

High returns: The majority of respondents intend to earn greater than 15% on Brazilian exits, which they suppose to exceed typical returns in both developed and other emerging markets.

Financing: IPOs and issuing new equity will be the most frequent methods for financing M&A activity according to almost half of respondents

Economic Outlook: Over the next 12 months, respondents anticipate interest rates and inflation to increase and the real to appreciate further.

The Equity Market Correction is Good: IPO Experts

stocksBrazil’s equity market probably seems to have contradicted the fundamental growth story so many investors are banking on, with the benchmark Bovespa index falling 1.3% in 2010 and down 15% year-to-date.  However, in spite of that weakness, veteran legal professional in Brazil, Robert Ellison, is enthusiastic on Brazilian equities, calling the correction “healthy” and advising international investors not to turn away given recent weakness and the “Brazil risk.”

Ellison puts Brazilian equity markets as having gone through two diverse phases in their evolution.  Currently, we are witnessing them transition into a third, more exciting era with markets that are both more balanced and more closely connected to the basic economy, with IPOs flourishing and foreign investors deeply involved, believes Ellison.

For him, The first phase spanned from 1990 to the early 2000s, where Brazilian equity markets were mainly driven by large commodity plays and state champions. He explains that  Oil and gas, steel, and other plays on Brazil’s rich natural resource endowment dominated markets via placements in New York given “the fact that the local market didn’t have strength or liquidity.”

Nonetheless, as Brazil’s international significance grew with the new millennium, Brazilian markets matured.  Ellison puts the second phase as running from late 2005 to late 2008.  “IPOs exploded,” terms Ellison, “with 70 IPOs in 2007, the red hot year.”  According to Ellison, during 2006 and 2007, Brazilian companies generated more capital than in the preceding 20 years, who’s worked on some big deals that included Petrobras’ $70 billion offering, Banco Santander’s IPO, and the Itau/Unibanco merger.

But the situation has altered now, according to Ellison.  Although global weakness seemed unfamiliar to strong emerging markets like Brazil and China, equity markets have underperformed.  Ellison terms this as “healthy.”

He says that the markets are now behaving more like real markets, they are being more rational.  He attributes Bovespa’s slowness to real factors hitting the economy, with Brazilian companies having extensive exposure to the unstable international environment (especially to Europe), and fears that the government might not be able to effectively manage current levels of growth.

As the year started, people were expecting for something like 40 to 50 IPOs in 2011, now, after a large correction, estimates have been pegged down, noted Ellison, emphasizing that that is how sane markets should behave.  He expects 20-25 IPO’s this year.

Brazil Gears for Measures for Protecting its Domestic Industry

futuresLast month, Brazil’s president Dilma Rousseff emphasized on launching of a new plan aimed to boost up and shield Brazilian industry against international competition and at the same called for a technological development jump forward.

This strategy, according to Brazil’s leader is focused towards the increase of local production and battles foreign protectionism. Importance will be put on fruitful development based on technological innovation and strengthening Brazil’s position in global trade.

She retreated that the administration will without fail fight protectionist practices that are unlawful, fraudulent in world trade, affecting directly Brazilian products and export. She was saying this on Porto Alegre, a ceremony at which new authorities of Rio Grande do Sul industries federation (Fiergs) took office.

The president revealed that the new plan is to be launched August 2nd and focuses on commercial tensions with Europe and the United States. She also emphasized that The Brazilian government is determined to act boldly and with no time to lose.

But she also thinks that competition forces a country to strengthen its industry, and showed confident on a model where there is  a joint venture between the State and the private sector to boost country’s competitive conditions and edge. Meanwhile, The president promised that  government’s  plan will be to increase local components in manufactures, and termed it as  very “decisive factor”.

Rousseff also vowed to initiate tax reforms and credit expansion for the industrial sector poorly hit by Real 100% overvalue to the dollar in the preceding ten years.

Brazil’s president explained that the plan essentially addresses the “world economic unbalance” which causes inflow capital pressure on emerging markets, resulting into inflation and the exchange rate.

While congratulating the incoming Fiergs president Heito Müller, Rouseff said that the governments of Rio Grande do Sul and their very dynamic industry will play a leading role in this new chapter of Brazil’s development and they will have in the federal government a dedicated partner. The Brazilian president also called on industry leaders to develop “an army of young qualified Brazilians” to concentrate in an age of technological development and innovation.

Concluding the speech, the president asserted that Brazil will only grow if it counts with a sophisticated industry competent of creating quality jobs for millions.  She said that “Our destiny is to become one of the great economies of the XXIst century but with an educated populace that makes us proud of living in a just and progressive country with social inclusion”.

 

 

Tough Times for Brazilian Beef But Good Time for Coffee Producers

BeefThe Brazilian beef exports fell by 9% based on year on year basis. The fall in Brazilian shipments is largely blamed at dearer cattle prices despite relatively steady production, as there was stronger domestic beef consumption, which is estimated to be around 76% of total production, and a 7% year-on-year appreciation in the Brazilian real to US60¢.

Even though Brazilian beef production during the nine months to March fell only 2% to 5 million tons (owing to ongoing tight cattle supplies since 2007), average heavy steer prices increased by 27% to BR$3.32/kg LWT.

Nevertheless, the export industry faced a testing year with lower margins, as average heavy steer prices jumped 37% to US198.5¢/kg LWT, whereas average export prices rose by a lower 27% to US$4,642/ton.

Although Russia continues to be Brazil’s main single destination (responsible for 33% of total shipments), exports to this market dropped 5% to 289,787 tons SWT. On the other hand, the Middle East region was Brazil’s major market, taking 42% of the total and jumping 6% year-on-year to 363,947 tons SWT. The rise in exports to the Middle East was largely due to an 8% increase in shipments to Iran (172,054 tons SWT) and a 49% increase in exports to Egypt (to 100,738 tons SWT).

Meanwhile, South America was Brazil’s third largest market, up 21% to 67,808 tons SWT, mainly driven by a 4% increase in shipments to Venezuela (to 45,918 tons SWT) and an 89% jump in exports to Chile to 21,470 tons SWT.

Shipments to the EU market were restricted to only 5% of total exports, falling 9% year-on-year to 42,935 tons SWT due to the continuing approved cattle property restrictions to that market since 2008.

Meanwhile, the Brazilian Green Coffee Exporters Council, or Cecafe, said on Thursday that Brazil’s total coffee exports in June jumped by 24% from a year earlier to 2.65 million 60-kilogram (132-pound) bags.

The total exported basket includes green, roasted and instant coffee. Brazil is the world’s leading grower and exporter of the commodity.

The value of Brazilian coffee exports reached a peak of $697.4 million last month, more than double June 2010 revenue, thanks mainly  to lofty prices on the global market.

Moving on to the break-up of revenues, while mild-tasting Arabica beans accounted for 1.97 million bags, or 74% of Brazil’s coffee exports in June;  exports of Robusta beans were 405,773 bags, or 15% of overall exports, and instant coffee exports stood at 281,006 bags. Europe imported 55% of Brazil’s coffee exports in the first six months of 2011, Cecafe revealed. North America bought 23%, and, followed by Asia’s 17%.