Brazilian Steel Industry in Survival mode for the Foreseeable Future

The Brazilian steel industry has seem better days. If we look at the three stocks traded as ADRs in the NYSE, we can see the depth of their agony in the last ten years:

Gerdau (NYSE:GGB):

Gerdau - Brazilian Steel Industry Agony in the last 10 years
Gerdau – Brazilian Steel Industry Agony in the last 10 years

Companhia Siderúrgica Nacional – CSN (NYSE:SID):

SID - Brazilian Steel Industry Agony in the last 10 years
CSN – Brazilian Steel Industry Agony in the last 10 years

Usiminas (OTC:USNZY):

Usiminas - Brazilian Steel Industry Agony in the last 10 years
Usiminas – Brazilian Steel Industry Agony in the last 10 years

In the 27th Brazilian Steel Congress, held by the Brazil Steel Institute, industry executives said that the moment is still of high pressure and explained their survival strategies. As a common theme, they all mentioned exports will be the way to survive in the short term.

Benjamin Steinbruch, shareholder and president of Cia. Siderúrgica Nacional (CSN), said he believes the internal market is “the future” of the sector. It is necessary that the government create mechanisms to ensure that competitive conditions are the same as in other countries. He also complained about the high interest rate in the country today.

Questionable government policies in recent years have led to an impoverishment of the country. “It is the highest impoverishment through which a nation has been, without a war”, he said.

The new president of Usiminas, Sergio Leite, explained that the focus of the moment is survival – in the next three to five years this will be the order of the day. Meanwhile, calls for government priority to a program for the processing industry in the country. “Restructure and adapt businesses to market reality [is needed].” The “bottom” is already approaching, but recovery will take time, he said.

André Gerdau Johannpeter pointed out that the current crisis in the sector was announced. For some time, he said, we have been discussing the pressure that the Chinese excess capacity would have on the Brazilian market. According to the president of Gerdau, this oversupply from China will impact even on the next five to ten years.

“In the short term, what we can do is to seek export. There will be no domestic recovery”, Gerdau said. “Without exports, the picture is dramatic: layoffs and closed plants. In the medium and long term, we need structural competitiveness, changes in labor laws and taxes”, he added.

The event also brought experts on China and foreign trade, which said that the recognition of the Asian country as a market economy by the World Trade Organization (WTO) could distort the steel industry and other sectors in the world.

Usha Haley, professor at the University of West Virginia, said Chinese mills have access to cheap and easy capital, while receiving large subsidies from the local government. She believes that Chinas’s ultimate goal is just to increase production and, while maintaining employment and guaranteed volumes in the domestic market, be able to become a major exporter of the material.

Despite the gigantic fall in stock prices over the last 10 years, it’s hard to get positive on this industry. Sure, after so many years of oversupply and depressing costs, one could expect a turnaround and, in fact, all three ADRs are sharply higher in 2016. However, a more consistent recovery seems to be far for this industry.

CADE Approves Bradesco’s HSBC Brazil Acquisition with Restricticions

Brazilian anti-trust council (CADE) has approved the acquisition of HSBC Brazil by Bradesco with restrictions.

One immediate consequence of the of the restrictions imposed by CADE is that Bradesco is definitely out of the dispute to acquire Citi in brazil, since no new acquisition will be allowed to the bank for 30 months. On top of that, the bank has to lower the portability costs for HSBC customers that do not want to come under Bradesco.

With the acquisition, Bradesco gets closer to the largest private bank in Brazil (Itaú Unibanco). HSBC has around 2 to 3% of the banking system market share and now Bradesco should reach around 17%.

The EPS should have neutral impact for the first year, since the bank does not plan on issuing new stocks to finance the acquisition and the multiples of the acquisition are in line with Bradesco’s itself. The acquiring bank’s expectation is that the transaction starts to generate value a year after its closure.

What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.

Brazil mulls emergency loan to Rio de Janeiro ahead of Olympics

By Alonso Soto and Marcela Ayres

BRASILIA (Reuters) – Brazil is considering an emergency loan to the cash-strapped state of Rio de Janeiro as it prepares to host the Olympic Games in less than two months, according to two senior government officials familiar with the situation.

The loan would be guaranteed by the state’s participation in local companies and could be extended to the states of Minas Gerais and Rio Grande do Sul, which are struggling to pay employees and pensioners as a crippling recession reduces tax revenues.

“These states need cash injection. There is no other way,” said a member of the government’s economic team who asked for anonymity in order to speak freely. “These loans will be backed by states’ assets such as banks, utilities, gas and sanitation companies.”

Eligible states would transfer their stakes in government-led companies to the federal government, which could in turn sell them to private investors as it did during the last states’ debt restructuring in the late 1990s, the source said.

Rio’s main state-controlled company is its water and sewer provider Companhia Estadual de Aguas e Esgotos do Rio de Janeiro, commonly known as Cedae.

The city of Rio de Janeiro has enough money to complete the infrastructure for the Olympics, but a financial crisis at the state level threatens to disrupt public services during one of the world’s biggest sporting events, which starts on Aug. 5.

The oil-producing state, hit hard by the recession and drop in crude prices, faced its worst ever public health crisis this year when unpaid doctors and nurses walked off the job at hospitals and clinics were left without essential supplies such as syringes and disinfectants.

The Rio Olympics, the first held in South America, also has been marred by political turmoil that led to the suspension of the president and an outbreak of the mosquito-borne Zika virus that has been linked to brain malformation in babies in Brazil.

The amount of the emergency loans will depend on how much debt relief the government can give other states also in fiscal distress, another source involved in the talks said.

On Thursday, several Brazilian states seeking relief from debt that amounts to 11.2 percent of Brazil’s gross domestic product resumed talks with the government of interim President Michel Temer.

This creates a tricky situation for Temer, who in May replaced suspended President Dilma Rousseff while she stands trial for allegedly breaking fiscal rules. Providing relief to the states could exacerbate a fiscal crisis that has cost the country its hard-won investment grade rating late last year, driving up borrowing costs.

Temer’s government has rejected a proposal to pardon state debt payments for two years and lower interest rates retroactively, according to state representatives who met with finance ministry officials on Thursday. More meetings are scheduled for next week.

The finance ministry press office declined to comment. The finance secretary of Rio de Janeiro could be not be reached for comment.

Rio de Janeiro’s finances have deteriorated so much that the state missed debt payments to a French development bank and the Inter-American Development Bank last month. Moody’s Investor Services called the event a “credit negative for all of Brazil’s states.”

The state ramped up its payroll during years of high oil prices, expecting that royalties on massive crude discoveries off its coast would keep its coffers full.

Now the state is cutting social programs, eliminating secretariats and raising taxes to plug an expected budget deficit of 19.9 billion reais ($5.91 billion) this year.

Rio Grande do Sul-state Finance Secretary Giovani Feltes confirmed the negotiations for the loans, which he said will be used only for investment, but will give his state a much-needed breather.

“This loan will not go to current expenditures because the law doesn’t allow us to use loans to pay our employees,” Feltes said in a phone interview. “Obviously this (loan) would improve out fiscal situation.”

Brazil taps ex-Bunge boss Parente as Petrobras CEO, replaces Bendine

Brazil’s interim President Michel Temer named Pedro Parente chief executive officer of state-led oil company Petroleo Brasileiro SA on Thursday as his government tries to kick-start a shrinking economy and shore up the debt-laden oil producer.Parente, an engineer, former Bunge Ltd executive and one-time chief of staff to former President Fernando Henrique Cardoso, replaces Aldemir Bendine, according to the president’s office. Bendine had been running Petrobras, as the company is known, for the last 15 months.

Petrobras did not immediately reply to a request for comment on the appointment.

Parente, 63, will be charged with efforts to rescue Petrobras from financial crisis brought on by low world oil prices, crippling debt and a massive corruption scandal.

Parente is best known for his role as chairman of the Brazil unit of agribusiness and commodities-trading giant Bunge Ltd from 2010 to 2014. Bunge is Brazil’s largest grains exporter.

The appointment also marks Parente’s return to Petrobras after 14 years. He sat on Petrobras’ board under former Brazilian President Cardoso. Parente was a key player in opening Petrobras to competition and international investment after the Cardoso administration ended Petrobras’ monopoly over exploration and production in 1997.

From 1999-2002 he also served as Cardoso’s chief of staff and managed a severe energy crisis that required electricity rationing and the quick building of supplementary power stations. He also helped manage a reduction of the government’s stake in Petrobras.

The Petrobras he will take over, pending approval by the company’s board of directors, will be quite different than the one he left. Petrobras invested $4.91 billion in 2002, Parente’s last year on the board. A decade later Petrobras was investing nearly $50 billion a year and despite major cutbacks still plans to spend $19 billion this year.

Despite the nearly ten-fold increase in investment, Petrobras has struggled in recent years to increase domestic oil production as much as expected, missing annual targets for 12 straight years.

Meanwhile, its total debt soared faster than output to about 450 billion reais, or nearly $130 billion, at the end of the first quarter from 33 billion reais ($9.32 billion) in 2002. Petrobras is now the most indebted oil company in the world. Plans to sell $14 billion of assets have stalled, forcing more cuts.

Temer, who replaced suspended President Dilma Rousseff last week while she faces an impeachment trial, chose Parente on Monday, according to a report on the Web site of the O Globo daily newspaper.

Brazil’s president Dilma Rousseff is impeached

• The impeachment vote is still going on in the country’s lower house, but the ruling Workers Party has conceded defeat, reports Reuters. At the moment, of 412 votes cast, 307 have voted to impeach President Rousseff, and 101 have voted against. A total of 344 are needed to send the process over to the Senate.• For those wondering what’s taking so long, house members vote one-by-one, with each making a small speech alongside.

• Once in the Senate, a simple majority would be enough to put Rousseff on trial, a decision expected in May. Were the trial to be approved, Rousseff would be suspended from office, and former (but no more) ally Vice President Michel Temer would take over.

• Brazil’s stock market, of course, has put together a powerful rally this year on hopes for Rousseff’s removal. That is looking more like a reality at the moment.

Blackstone denies seeking to acquire Brazil mall operator

 Investment firm Blackstone Group LP (BX.N) on Sunday said it is not considering an acquisition of Brazilian shopping mall operator BR Malls Participacoes SA (BRML3.SA), denying a report published early in the day by newspaper O Globo.”We are not actively engaged in acquisition discussions for BR Malls,” Blackstone said in an emailed statement.

The Brazilian newspaper, without citing sources for its information, said early Sunday that Blackstone had hired JP Morgan Chase & Co. (JPM.N) to help it consider acquiring a controlling stake in BR Malls, which is based in Rio and is Brazil’s biggest mall operator.

The paper said the acquisition would amount to Brazil’s biggest-ever real estate transaction and would be valued at as much as 12 billion reais ($3.38 billion).

A spokeswoman for BR Malls, which is based in Rio and is Brazil’s biggest mall operator, declined to comment on the report.

A spokeswoman for JP Morgan Chase also declined to comment.

El-Erian says Brazil in ‘delicate situation’

Mohamed El-Erian’s bet on Brazil before President Luiz Inacio Lula da Silva’s election in 2002 was rewarded by a surge in the nation’s assets in the following years. More than a decade later, he says Latin America’s largest economy must seize the opportunity to undertake deep reforms.Brazil is facing the worst recession in a century amid a corruption scandal that’s ensnared some of its biggest companies and prevented Congress from focusing on measures to stimulate growth. After a selloff in 2015, the Ibovespa and the real are posting the best gains in the world this year, with bonds climbing more than twice the average for emerging markets and credit risk tumbling amid wagers that President Dilma Rousseff would be impeached and a new government would take over.

“Brazil now finds itself in a delicate situation, and one that threatens the well-being of both the current and future generations,” Mr. El-Erian, the chief economic adviser at Allianz SE, said in an e-mail to Bloomberg. “If the political class does not respond with a comprehensive set of policy measures, the country will be vulnerable to a prolonged recession, inflationary pressures, worse and spreading poverty, and gradually increasing internal and external financial pressures.”

While Brazil’s consumer and investor confidence levels have rebounded recently, they’re near historic lows as borrowing costs remain at the highest since 2006 to curb above-target inflation. Economists including Alberto Ramos of Goldman Sachs Group and former Brazil central bank director Alexandre Schwartsman have said the country needs to reform its social security and pension system as part of measures to shore up fiscal accounts.

Should the needed reforms happen, either at the hands of Ms. Rousseff’s government or the next administration, the real could rise beyond what analysts are now forecasting, Mr. El-Erian said. The currency will fall 11% to end the year at 4.15 per dollar, according to the median estimate of 51 strategists surveyed by Bloomberg. The real lost 0.2% or 3.6910 per dollar as of 11:18 a.m. EDT Thursday.

Mr. El-Erian, who previously worked as the co-chief investment officer of Pacific Investment Management Co., added to the firm’s Brazil holdings in 2002 as the country’s benchmark bonds plunged amid concern Ms. Rousseff would default after taking office. While the strategy put him at odds with investors including billionaire George Soros, it gave PIMCO’s Emerging Markets Bond Fund its best year since it was created in 1997 as Brazilian notes surged after the election.

In December, Mr. El-Erian said that the nation was going through a “house cleaning” that could hamper growth in the short term. Brazil’s economy is poised to shrink 3.5% in 2016, according to a central bank survey, adding to a 3.8% contraction last year.

“Brazil has an enormous potential, absolutely enormous”, Mr. El-Erian said. “What is missing is the political context that enables sustained policy implementation, coupled with broad-based understanding and support.”

Brazil stocks, currency extend rally on former president charges

Brazil’s stocks and currency rose on Thursday, extending a recent rally fueled by hopes ofpolitical change after prosecutors charged former President Luiz Inacio Lula da Silva in a money laundering investigation.

 State investigators suspect the family of the former president, who was detained for questioning by federal police on Friday, owned an undeclared beachfront apartment in the city of Guaruja. 

    Lula’s support for current President Dilma Rousseff was widely seen as a key factor behind her re-election. 

    Rousseff is facing impeachment proceedings in Congress and many traders believe the corruption probe could strengthen the odds of her ouster and thus help the crisis-ridden country recoup its credibility.

    “Political issues are the main market driver and will remain so for a while,” said Carlos Vieira, an economist with Lerosa brokerage in São Paulo.

 Shares of state-controlled oil company Petrobras, the center of a wide-reaching graft scandal, rose as much as 3 percent, but later turned negative on the back of lower crude prices.

    Nevertheless, the benchmark Bovespa stock index remained in the black, supported by leading banks ItauUnibanco and Bradesco, up 3.3 percent and 2.1 percent, respectively. 

    Investors said the banks, as well as state lender Banco do Brasil SA, were being lifted by optimism about the political scenario. 

    Traders saw little immediate market impact from Brazil’s plan to tap global markets for the first time since it lost its investment grade rating with a dollar-denominated bond.

     The Brazilian real revisited its six-month highs and strengthened for the seventh session in the last eight. Trading was volatile, however, as some investors bet the central bank could see the recent rally as a cue to reduce its support for the currency.

    Brazil’s central bank has about 110 billion reais ($29.92 billion) in outstanding currency swaps on its books, contracts which offer protection from sharp currency devaluations. The strategy has drawn criticism from some analysts due to its high fiscal costs.

    The bank has been fully rolling over the stock of currency swaps for several months. Some traders saw a decision to only sell some of the contracts offered in a daily auction on Friday as a signal it could allow some to mature in April.

Brazil Considers Raising Foreign Investment Limit On Airlines

Brazil plans to propose to Congress in the first half of the year an increase in the foreign ownership of local airlines, in a move to help the struggling sector.The government continues to discuss the percentage increase in foreign ownership, but believes an increase from the current 20 percent limit is key to bolster investment in local airlines, Interim Aviation Minister Guilherme Ramalho said.

“This is a very favourable moment to attract foreign investment… we should not restrict the access of capital of these companies,” said Ramalho. “The government has a joint position on this matter and that is key for its approval.”

The proposal reflects President Dilma Rousseff’s major shift in policy to open up one of the Western Hemisphere’s most-closed economies and bring in capital to halt a recession entering its second year.

Ramalho said it is “very possible” that the government will propose an initial increase in the foreign ownership stake to be followed by another depending on market reaction and foreign interest.

The Finance Ministry is working on a proposal to raise the ownership stake cap to 49 percent from 20 percent with the option of acquiring a controlling stake if approved by local aviation and competition authorities, Reuters reported.

Brazilian airlines such as TAM and Gol have cut flights and reduced staff numbers to cope with what is expected to be the country’s worst recession in a century. The sharp depreciation of the Brazilian real has worsened the crisis in the country’s aviation sector.

Ramalho said the government has not yet decided if it will adopt any of the current bills to remove capital restrictions or make the change via a presidential decree, which will ultimately have to be ratified by Congress.

DOZENS OF PROPOSALS

There are currently around 68 bills in the Lower House of Congress and two at the Senate to lift limits on foreign ownership.

One of them, which is under review by deputy Clarissa Garotinho, calls for the complete removal of restrictions.

“I believe that we need to move ahead with a bolder proposal because increasing the stake to 49 percent will not solve the problems of the aviation sector in Brazil,” Garotinho said.

Once a rising emerging market star with a expanding middle class that triggered a boom in air travel Brazil’s economy is now in tatters. The economy is expected to contract 8 percent between 2015 and 2016, driving down flight demand and threatening the survival of local airlines.

Ramalho also said that plans to open up the capital of Infraero, the state-run company that controls most of Brazil’s airports, would be delayed until 2017 given current negative market conditions.

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