MONTHLY REVIEW OF ECONO MIC, LEGAL, AND POLITICAL DEVELOP ... · PDF fileVeirano adVogados’ MONTHLY REVIEW OF ECONO MIC, LEGAL, AND POLITICAL DEVELOP MENTS ... Aécio Neves of the

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Veirano adVogados’ Monthly review of econoMic, legal, and political developMents

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n Jockeying for political power

n Infrastructure issuesn Mining notesn Banking and financen Economy in brief

n Oil & gas in briefn Petrobras newsn Biofuels in briefn Electricity sector

n Politics in briefn Defense issuesn Legal issuesn Social issues

n Diplomatic briefsn International trade

Viewpoint economy & Business energy & enVironment politics, law, society international affairs

As Brazil licks its wounds from a disastrous defeat at the hands of Germany, the end of the World Cup on 13 July will signal the beginning in earnest of the presidential campaign. The rout has not improved the mood of the electorate, and some commentators already think it will hurt President Dilma Rousseff’s chances.

Up until 30 June, political parties jockeyed for free air time, which is allocated in proportion to their weight in Con-gress. Out of every 25 minutes, Rousseff of the Workers’ Party (PT) has 11 minutes 21 seconds, Aécio Neves of the Brazilian Social Democracy Party (PSDB) has 4 minutes 33 seconds, and Eduardo Campos of the Brazilian Socialist Party (PSB) has just 1 minute 54 seconds.

The candidates have now also chosen their respective vice-presidents: Rousseff retains Michel Temer in order to hold the Brazilian Democratic Movement Party (PMDB) in line; Neves has chosen Senator Aloysio Nunes Ferreira to ensure São Paulo’s support for his Minas Gerais–centered campaign; and Campos has enlisted Marina Silva to woo voters from the Sustainability Network (Rede Sustentabilidade).

Campos and Silva constitute an unlikely couple, as there are at least as many tensions between them as between PSB and its competition.

An IBOPE poll on 10 June indicates that for the first …

Jockeying for power: after the world cup, the horse race begins

Aécio Neves

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time the number of voters who regard the government as “bad” or “very bad” surpasses those who regard it as “good” or “very good.” Support for Rousseff has fallen from 40 percent in May to 38 percent – and her rejection index is growing.

The governing coalition consists of PT, PMDB, the Repub-lican Party of the Social Order (PROS), the Progressive Party (PP), the Democratic Labor Party (PDT), the Com-munist Party of Brazil (PCdoB), the Social Democratic Party (PSD), the Brazilian Republican Party (PRB), and Humanist Party of Solidarity (PHS).

On the eve of their conventions, parties allied with the government are applying pressure in order to increase their political capital. After the defection of the Brazilian Labor Party (PTB) – which has announced its support for Neves – PRB, PP, and PSD lobbied for improved condi-tions in exchange for their support.

PSD, led by Gilberto Kassab, convened its convention on 25 June in Brasília and invited Rousseff to participate. The party has offered its support to PMDB candidates in eight states and will support only one of 13 PT candidates for state governments.

At its national convention on 10 June, PMDB confirmed its support for the Rousseff–Temer ticket, but the margin

of approval was narrower than in the previous campaign: down from 84.8 percent in 2010 to only 59.1 percent now. The party is obviously split and has made it clear that it has little appetite for campaigning for the president.

the rousseff campaignPT held its national convention in Brasília on 20 June and ratified Rousseff’s presidential candidacy with the slogan

“More changes, more future.” The campaign strategy is to label Neves as the “candidate of the elite” and to invest in the southeast, where the president has low ratings, notably in São Paulo.

At the convention, which Rousseff did not attend, former president Lula da Silva and his colleagues also recycled an old slogan from 2012, to the effect that the party will undertake “a campaign so that hope overcomes hatred.” (At a speech in Porto Alegre on 6 June, he had nonethe-less openly criticized aspects of Rousseff’s economic policy, such as credit security that has stifled investment, and demanded greater Brazilian investment in Africa.)

The former president will have an influential role in the campaign and the party will have at least six more candidates for governor than in 2010.

PT is looking for more space in the Rousseff campaign in order to force it to veer to the left. The party therefore …

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wants to put such issues as media regulation and political reform on the table. The whole idea is to radicalize the party discourse and place it in direct opposition to PSDB.

Rousseff will have platforms in every one of Brazil’s 27 states. Her campaign will be based on comparing her tenure with the previous 20 years under Lula da Silva and Fernando Henrique Cardoso, against a backdrop of strong state intervention in the economy. But this does not reflect the strong desire for change manifested by two-thirds of the electorate.

the neves campaignPSDB held its national convention in São Paulo on 14 June and formalized its nomination of Neves for presiden-tial candidate. In his acceptance speech, he declared that

“a tsunami will sweep over PT, and the country is experi-encing the winds of change.”

Neves has managed to secure the support of several small parties: the Party of National Mobilization (PNM), the Labor Party of Brazil (PTB), the Christian Labor Party

(PTC), and the National Labor Party (PTN). On 5 June, he received the formal support of the Rio de Janeiro section of PMDB, a significant factor. His support has grown from 20 to 22 percent, according to the 10 June IBOPE poll.

The economic guru of the Neves campaign is Armínio Fraga, a former president of the Central Bank and a partner in investment bank Gávea Investimentos. His policies rely heavily on the Real Plan, which was enacted 20 years ago to combat inflation.

In a recent interview in Valor Econômico, Fraga advocates a gradualist approach rather than “shock treatment” to reduce inflation or put fiscal policy on the path of better fiscal surpluses. He referred to the economy as “weak, frightened, and very defensive,” with little investment and little boldness. Uncertainty has a macroeconomic dimension, he noted, tied to low growth, high inflation, and a deficit in the current account.

Fraga asserted that the state has lost its capacity to invest. In each sector the existing rules and the way they are applied will have to be re-examined, and coordination between government departments will have to be reinforced.

On 17 June in Pernambuco, northeastern Brazil, Neves announced a program of aid to the region, which he called

“a shock of infrastructure,” based on the “management shock” he successfully implemented while governor of Minas Gerais.

On 30 June with his choice of Ferreira for running mate, Neves put to rest rumors that the choice could fall on former governor José Serra. Serra, who has now decided he will run for the Senate, nevertheless continues to needle Neves by criticizing Fraga.

the campos campaignPSB held its regional convention in São Paulo on 20 June, ratifying its tactical alliance with PSDB and thus, support for the re-election of incumbent governor Geraldo Alckmin. In exchange, PSDB guaranteed the position of vice-governor on the ticket for PSB, although it did not specify a candidate.

PSB has thus secured a privileged position in the largest electoral college in the country. (In the third-largest, the state of Rio de Janeiro, PSB allied itself with PT.) Campos admits that PSB lacks strength in the large states, and it is for this reason that it has made local alliances with PSDB and PT.

Campos’s decision to abandon the “third way” in São Paulo and support the PSDB candidacy opened a rift with Marina Silva, who said that she wouldn’t appear at campaign events with Alckmin.

Campos has been taking steady jabs at the government. He said on 16 June that “the federal government is led by foxes who have stolen what they could.” Speaking on 29 June in Brasília, he said that voters don’t want alliances, and promised to pass a comprehensive tax reform during his first year in office, if elected.

His support, according to the IBOPE poll, has risen from 11 to 13 percent over the past month, and Silva is responsible for an overall 5 point rise in voter support.

That said, voters want growth and change, and national political alliances have little bearing on what happens at ground level. Brazil is an enormous, complex, polycentric country, and what happens in the regions and states will determine the outcome of this crucial election.

Neves has managed to secure the support of several small parties

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infrastructure issuesflying the third wayControversy surrounds a planned third airport in São Paulo, at Caieiras. The Odebrecht Group has criticized the project, which is being undertaken by competitor public works contractors Camargo Corrêa and Andrade Gutier-rez. Odebrecht questions the need for a new airport.

financing highwaysThe National Bank for Economic and Social Development (BNDES), the Bank of Brasil, and Caixa Econômica Federal will finance up to 70 percent of new highway concessions. Marcelo Odebrecht, president of Odebrecht Group, has commented that private banks face difficulties in invest-ing in long-term infrastructure projects.

In similar news, the state of São Paulo on 18 June received proposals for public–private partnerships to build the Nova Tamoios highway, linking São José dos Campos to the port of São Sebastião. The road will run for 125 km and is expected to cost R$2.9 billion.

Concessions of roads and railways by the federal government are expected to inject R$300 billion in the Treasury between 2015 and 2017.

studying railwaysThe government on 10 June authorized studies to be conducted with respect to the construction of six new railways, totaling 4,676 km. Ferrogrão is among the projects under consideration, attracting the interest of commodities traders Bunge, Cargill, Dreyfus, Maggi, and EDLP. These companies have not only requested the

studies but have also committed themselves to investing in the construction of the railways, which will cost an estimated R$10–15 billion.

The principal project will enable the production of Mato Grosso to be transported to the north of Brazil, through the railway port of Miritituba, Pará.

a piece of a private portThe Port of Rotterdam will have a 30 percent ownership share of a new private port named Porto Central de Presi-dent Kennedy in the state of Espírito Santo, an investment of R$5 billion. The forecast is that construction work will be started in mid-January 2015.

The port will be controlled by the government of the Netherlands and the municipality of Rotterdam. A 70 percent share will be in the hands of TPK Logística, a local enterprise created for the exclusive purpose of advancing the project. From the R$5 billion invested, 70 percent will came from financing, largely from BNDES.

piping gas from guarapimirim The government expects to tender by 2015Q1 a gas pipeline from Guarapimirim to Itaboraí, in the state of Rio de Janeiro. The project, budgeted at R$112.3 million, will be subject to public hearings conducted by the National Petroleum, Natural Gas, and Biofuels Agency (ANP).

mining notesa duct in due courseThe global president of the Anglo American mining company, Mark Cutifani, witnessed the completion of a 525 km duct that will convey mineral ores through 32 municipalities to the coast at Rio de Janeiro. The finishing touch on the duct took place at a small town, …

The Port of Rotterdam will have a 30 percent ownership share of a new private port named Porto Central de President Kennedy

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Conceição do Mato Dentro, 130 km from Belo Horizonte.

The point of origin is one of the largest mining projects of the world, the Minas–Rio, which should come on stream in December, four years late. By 2016, full production capacity will have reached 26.5 million tons per year.

Anglo American expects to convey the commodities to China and the Middle East, at the cost of US$35 per ton.

no taste for iron oreA sharp decline in the price of iron ore, along with a pessimistic report published by Morgan Stanley, helped to reduce the market’s appetite for shares of mining enterprises on a worldwide basis.

Morgan Stanley cut the price forecast in 2015 and 2016 by 21 percent, to US$90 and US$87 per ton, respectively. For the current year, the forecast was reduced by 13 percent to US$105 per ton.

One of the enterprises most affected is Vale, which has one of the lowest production costs in the world, of US$28 per ton.

Vale struggles abroadVale has so far invested US$4.5 billion in the Moatize mining project in Mozambique, comprising one of the richest iron ore areas in the world, a 912 km railway, and a deep-water port. The intention has been to develop the project by the end of 2015 with a total investment of US$8.3 billion.

Now, Vale has begun to reassess the competitive position of Mozambique in the coal industry, prompted by a sharp downfall in the price of that commodity. The company has opened a discussion with the government

of Mozambique and suppliers about the competitiveness of the production chain for coal. During 2014Q1 Vale suffered losses of US$44 million in the country.

The company now recognizes that the goals it set for the exploitation of coal in Tete province were too ambitious, and is crusading to reduce costs while maintaining a production target of 100 million tons per year within five years. Vale is seeking a reduction of taxes and it is possible, but by no means certain, that the government will yield.

Vale is also coming under pressure with respect to the Simandou mine in Guinea, where Rio Tinto is suing it over iron ore rights. Rio Tinto has already spent over US$3 billion on its own project at Simandou.

mining code malaisePresident Rousseff last year announced new rules intended to modernize mining. One year later, on 16 June, a group of 40 municipalities in the state of Minas Gerais is preparing a blockade in railways unless the bill updating the Mining Code is revised.

setback for Belo sunA federal court in Altamira, Pará, has suspended envi-ronmental licenses granted to Canadian Belo Sun Mining Corporation for the Volta Grande Mineração project. The largest gold mining project in Brazil would be established on the Xingu River, very close to the site where the Belo Monte hydroelectric plant is being built.

The court decreed that resumption of the project is contingent on an environmental impact study by Belo Sun, assessing the effect of the mine on indigenous com-munities under the terms of reference prepared by the National Indian Foundation (FUNAI).

Belo Sun CEO Mark Eaton said the impact study is already underway and that the new ruling does not extend the company’s timeline for production. He noted that the company needs another five months to finish the study, and will “probably appeal” the federal court suspension and apply for an installation license by year end.

Despite his optimism, some analysts pushed the timeline for gold production from Belo Sun from 2016 back as far as 2020 in response to the news.

Big money, more jobsThe mining sector will invest US$47 billion in the state of Pará, resulting in the creation of 199,000 jobs. The largest project of Vale, at Canaã dos Carajás, has been described as “a rich town with a poor people.”

Banking and financestimulating the capital marketAt its last meeting, the Monetary Policy Committee of the Central Bank (Copom) kept the Selic interest rate stable at 11 percent per annum, suggesting lower inflation and more economic uncertainty. The Central Bank suggests that the interest rate will not be raised but admits, for the first time, that GDP growth will be lower in 2014 than in 2013.

The weak economic performance in 2014Q1 is due in part to credit restrictions. Accordingly, the government has begun to revive proposals to stimulate the capital market that have been discussed for at least a year. …

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Minister of Finance Guido Mantega on 16 June announced a series of measures for the sector, notably a tax exemption on capital gains for investors acquiring shares in small and medium-sized enterprises (those with annual revenues up to R$500 million). The measures also normalize fixed-income ETF funds with the correspond-ing fiscal exemptions and extend a tax exemption on infrastructure bonds.

The National Bank for Economic and Social Development (BNDES) announced on 16 June two new funds designed to stimulate access to the capital market for small enterprises. The first fund, with resources of R$1 billion, will guarantee 20 percent of stock offers with resources from BNDESPar. The second is a R$250 million fund, in which BNDESPar will participate with 30 percent.

expanding creditAt a meeting of the Council on Economic and Social Development (CDES) on 5 June, President Dilma Rousseff expounded on the need for investments geared

to long-term private credit. Minister of Finance Guido Mantega, in turn, defended the expansion of credit.

CDES is an advisory body to the president consisting of representatives of the business community and trade unions. Some of the country’s most distinguished entrepreneurs participated in the meeting.

reinforcing BndesThe National Treasury has adjusted what BNDES owes to the federal Union for 2006–08 by R$11.5 billion. The measure is an attempt to avoid the Bank’s lending capacity being reduced under the rules of Basel 3 and is part of the government’s strategy to reinforce the capital of public banks.

In mid-June President Rousseff sanctioned a law that authorizes up to R$30 billion in issuances by BNDES, increasing the limit of loans subsidized by transfers from the Treasury to R$402 billion.

In other BNDES news, the bank has selected fund man-ager Kaeté to manage its Fund for Investments and Par-ticipations in Sustainable Enterprises in Amazonia. The fund holds 32 percent of the capital of Peixes da Amazonia, whose installation is nearly finished in Rio Branco, Acre.

not balancing the booksOne year after President Dilma Rousseff announced a fiscal responsibility pact to reduce public expenditures, the opposite has happened. From June 2013 to the present, expenditures, fiscal remunerations, and debt insurance reached R$58.2 billion. Some R$27.9 billion of that was spent in 2014.

The government’s accounts show a record deficit in May of R$10.5 billion, the worst result ever for the month.

A 17.37 percent drop in tax collection is responsible, reflecting the weak economy.

Brazil also has a record deficit in external accounts: US$6.635 billion in May and US$40.07 billion so far this year. The Central Bank projects a deficit of US$80 billion for the entire year.

Additionally, R$12.3 billion has been spent over a number of years to subsidize the interest rate on BNDES financing.

financing worker benefitsIn order to finance its unemployment insurance and sal-ary bonus costs, the government will have to contribute R$19.9 billion to the Fund for Support of Workers (FAT) in 2015. This is higher than the R$16.2 billion set aside for the purpose in the Law on Budgetary Guidelines (LDO).

foreign exchange newsThe government on 4 June exempted foreign exchange transactions deriving from foreign loans extending over six months from the IOF tax. The 6 percent tax on trans-actions from 181 to 360 days was eliminated. The move, coordinated with the Central Bank, will permit more borrowing abroad.

The Central Bank has indicated that it will extend the auction of foreign exchange swaps at least through to 31 December. The operation corresponds to the sale of dol-lars and reduces pressure for an increase in value of the US currency. The extension was well received by the market.

pension fund capitalRio Previdência, the pension fund of employees of the state of Rio de Janeiro, is preparing to raise capital abroad to the tune of US$2.2 billion, guaranteed by the securitization of petroleum royalties due to the state. …

Minister of Finance Guido Mantega

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The state received R$4.7 billion in royalties from January to November 2013, while pensions accruing to the fund added up to R$3 billion.

The operation is to be divided into two series; one for 10 years that will be denominated in dollars, worth US$1 billion; and another, due in 2022, worth R$2.7 billion and denominated in the Brazilian currency.

odebrecht bondsOdebrecht Finance plans to raise US$500 million by issuing senior bonds due in 2025. They will be used in an exchange for notes due to 2020, 2023, and 2033. On 11 June, Odebrecht Oil & Gas took advantage of favorable market conditions in the fixed-income market and raised US$400 million with an issue of perpetual bonds yielding 7 percent per year.

stock exchange newsThe São Paulo Stock Exchange index on 18 June reached 55,202 points, its best result since October 2013, and an increase of 1.66 percent over the previous day. The rally was due largely to the Fed’s decision to keep interest rates steady and reduce monthly purchases of bonds.

Despite turbulence in the Brazilian market, bank shares have increased 22 percent in value in 2014 on the exchange.

foreign banks in BrazilAfter selling its controlling interest in Sudameris Bank in Brazil over 10 years ago to ABN-Amro Bank, Italian banking group Intesa Sanpaolo returns to Brazil. It has the goal of developing a credit portfolio of €2 billion within three years in the commercial and investment banking areas. Intesa is waiting for Central Bank permission but plans on initial capital of €100 million to start operations in São Paulo.

And French bank Natixis, which last year had revenues of €7.2 billion, has started operations in Brazil. It is focused on agribusiness and on large companies willing to expand outside Brazil.

shoring up Banco panBanco Pan, which is controlled by BTG Pactual and Caixa Econômica Federal, will receive a capital injection of as much as of US$1.3 billion from shareholders in an effort to resume profitability. If needed within the next five years, it will receive another capital injection of the same amount.

data central for santanderSantander Brazil bank has spent R$1.1 billion to construct a new data center in Campinas, São Paulo. The move will increase the bank’s processing capacity by 50 percent and will provide a command center for Santander Group units in Latin America.

Buying financial assetsFrench insurance company AXA is considering the purchase of the insurance assets of Itaú Unibanco, which are available for sale. Conversely, Brazilian financial

enterprises Itaú Unibanco, BTG Pactual, Bradesco, and BM&F are seeking to expand overseas.

Brics banking moves forwardThe BRICS Bank and the Contingent Reserve Arrange-ment (ACR), the institutions that Brazil, Russia, India, China, and South Africa plan to form jointly, were approved in July by the 6th BRICS summit meeting in Fortaleza, Ceará.

The Bank will have initial capital of US$50 billion, comprising R$10 billion from each of the five countries, and guarantee of US$8 billion to be used only in case of need. It will operate under rules so stringent, however, that it will be difficult to make it a concrete alternative to the International Monetary Fund in case of necessity.

The ACR will have shares of US$10 billion each from …

The São Paulo Stock Exchange index on 18 June reached 55,202 points, its best result since October 2013

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Brazil, Russia, and India, plus US$5 billion from South Africa and US$41 billion from China.

The details of how BRICS banking will function are to be agreed at a meeting on the sidelines of the G20 meeting in Melbourne, Australia, this fall.

meat moneyGiant Brazilian meat-processing company Marfrig Global Foods announced on 10 June that it had raised US$850 million to improve its debt profile. The funds will be used to repurchase papers due in 2017 at an interest rate of 9.87 percent, and other bonds due in 2021 at 11.25 per-cent. Now the negotiated bonds will be due in five years with interest of 6.87 percent per year.

economy in briefgdp flatlining?Risk agency Moody’s warned on 25 June that Brazil’s rating, which is currently stable, will remain so only if negative economic tendencies are reversed. This will probably depend on the success or failure of the next government to raise economic growth to a level closer to its potential.

Moody’s changed its forecast for Brazilian GDP growth this year from 1.8 percent to 1.3 percent and 1.5 percent in 2016.

Similarly, the World Bank has lowered its projection to 1.5 percent, down from 2.4 percent in January. The Brazilian economy, says the Bank, is expected to have one of the lowest rates of expansion among emerging countries, ahead of only Argentina, Venezuela, Serbia, and Ukraine.

The Central Bank on 12 June reported that the perfor-mance of the economy during 2014Q2 has left the GDP almost stagnant, although the country is not yet in reces-sion. The bank’s Focus poll, which canvassed 100 finan-cial institutions, lowered the annual GDP projection from 1.5 to 1.44 percent.

In an 11 June report, the International Monetary Fund stated that an increase in Brazil’s GDP depends on adoption of structural reforms.

rousseff supports industryOnly one-third of Brazilian industrial enterprises plan to invest over the next 12 months. On 17 June, President Dilma Rousseff met with entrepreneurs representing various sectors of the economy to announce new mea-sures of support. Her intention was to counteract the opposition’s success in attracting business support.

She announced the following measures:

n The Reintegra program, which reimburses a portion of the taxes paid by exporters, will be extended.

n The Program to Sustain Investments (PSI), created in 2009, has been extended to the end of 2015.

n Regulatory Norm no. 12, which raises from 40 to 340 the regulations affecting suppliers and buyers of new and used machinery, will now be postponed or abandoned.

inflation trendsThe National Monetary Council (CNM) met on 2 June and maintained the inflation target for 2014 at 4.5 percent, +/–2 percent, the same since 2005. During the 12 months through to May, the cumulative IPCA index was 6.37 percent, and the Central Bank expects that inflation will exceed the 6.5 percent ceiling before the October election but drop again to 6 percent before the end of the year.

world cup bump?The tourism sector gained 7 percent as a result of the World Cup, through to March, and further gains can of course be expected in this respect. Some 3.7 million visi-tors were expected at the various World Cup sites, with related spending adding up to 0.6% of nominal GDP. …

The tourism sector gained 7 percent as a result of the World Cup, through to March, and further gains can of course be expected in this respect

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On the other hand, the cost of the event is estimated to be R$1.35 billion, contributing half a percentage point to inflation.

optimistic or pessimistic?Brazilian executives are among the most pessimistic glob-ally, according to the Global Panorama of Business survey released on 10 June. Brazilian CFOs surveyed rated at 49.5 points. That said, 46 percent of Brazilian enter-prises plan to increase their investments in the next year, according to a survey by consultancy Grant Thornton.

company activitymozambique movesBrazilian companies are developing business in Africa, despite intensive and growing competition from China. Andrade Gutierrez will build a dam at Moamba, to supply water to Maputo, the capital of Mozambique, at a cost of US$460 million. Of that figure, US$350 million is being financed by the National Bank for Economic and Social Development (BNDES).

Odebrecht has a project for an industrial zone at Nacala, also in Mozambique. The proposal will cost US$100 million, of which US$40 million may be financed by BNDES.

fertile grounds for investmentMoroccan company OCP has acquired 9.5–10.5 percent of Brazilian company Fertilizantes Heringer for R$145.4 million. Heringer is one of the country’s largest companies in the fertilizer sector.

American company Transgas plans to invest US$2.7 billion to build a fertilizer plant in southern Santa Catarina. The company wants to target the Brazilian fertilizer mar-ket, since from 70 to 80 percent of fertilizers used by the agricultural sector are imported.

The company is also considering the possibility of exploit-ing the state’s coal resources, estimated at 3 billion tons. That project is to be carried out by Transgas in partner-ship with enterprises such as Linde, ACS, Thyssen-Krupp Technology Solutions, and Pike.

cargill targets BrazilCargill, one of the largest American commodity traders, will invest US$1.2 billion over the next five years, including US$320 million in 2013. Cargill has targeted Brazil as one of the five largest recipients of its investments worldwide.

agribusiness acquisitionAmerican investment bank Amerra Capital Management, which focuses on agribusiness, has acquired a 25 percent share in Brazilian grains trading company Fiagril, based in Lucas do Rio Verde, Mato Grosso. The transaction is estimated to have involved US$100 million. Amerra has about 10 percent of its portfolio in Brazil.

switching types of celluloseJari Cellulose, a Brazilian enterprise based in Amazonia, will expand production at its plant in Vale do Jaci, located between the states of Pará and Amapá, in July or August of this year.

Instead of producing 400,000 tons of eucalyptus-based cellulose, the plant will now produce soluble cellulose, a substance used mainly by the textile industry. The investment was R$600 million, of which BNDES contributed R$350 million.

constructing construction machineryChinese company XCMG, a manufacturer of heavy equip-ment, opened its first factory abroad on 6 June in Brazil. It will export construction machinery to Latin America and Africa. The plant was built at Pouso Alegre, Minas Gerais.

refrigerators heat up employment Swedish company Electrolux will invest R$250 million to build a new refrigerator manufacturing plant in the municipality of Lapa, on the outskirts of Curitiba, Paraná. The plant will create 800 direct jobs and over 2,000 indirect ones, and has received fiscal incentives from the state of Paraná.

cars, trucks, tiresTwo months after opening a new factory at Resende, southern Rio de Janeiro, Japanese automotive manufac-turer Nissan has set itself the goal of garnering 5 percent of the Brazilian market by 2016. The factory cost R$2.6 billion to build.

Michelin, the French tire manufacturer, announced on 9 June that it had purchased Brazilian truck fleet manage-ment company Sascar for R$1.35 billion. As part of the deal, it also absorbed R$247 million in debt.

telephony towersAmerican Tower enterprise has acquired BR Towers from GP Investments for R$2.18 billion. This acquisition makes American Tower a leader in the telephony towers sector in Brazil – both building and leasing. With 11,000 antennae, Brazil represents the third-largest market globally after the United States and India.

pilgrim’s bid faltersPilgrim’s Pride, a US subsidiary of Brazilian meat packer JBS, in early June offered US$55/share to acquire Hillshire Brands, a producer of meats and desserts, in an attempt to parry a rival offer from Tyson Foods.

Confronted with a competing US$8.5 billion offer from Tyson, JBS has how given up its attempt to acquire Hillshire brands.

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energy & enVironment

oil & gas in briefa strategic oil reserveThe Federal Court of Accounts (TCU) has demanded that the government create a strategic oil reserve, similar to that of the United States, designed to guarantee supply. The order is backed by the Petroleum Law.

Accordingly, the Ministry of Mines and Energy (MME) formed a working group in early June consisting of the MME, Petrobras, the National Petroleum, Natural Gas, and Biofuels Agency (ANP), and the State Participation Fund (FPE). The group is charged with formulating an annual plan for the proposal, to be included in the Law of Budgetary Guidelines for 2015. The plan will be evaluated by the National Council on Energy Policy (CNPE).

switching fuelsNorwegian Statoil, the second-largest producer of oil among foreign companies operating in Brazil, has made a proposal to the Brazilian Institute for the Environment and Renewable National Resources (IBAMA). The company wishes to use crude oil as fuel to generate electric power at the Peregrino platform in the Campos basin, instead of diesel oil and natural gas.

redistributing gasCemig and Spanish company Gas Natural Fenosa agreed on 16 June to join forces with respect gas distribution

in Brazil. They will form the joint venture Gas Natural do Brasil S.A. (GNB), which will include four gas distributorships, constituting a “platform for consolidation of assets and investments in natural gas projects.”

Cemig will contribute the 60 percent it holds in Gasmig distributorship, while Gas Natural will contribute its distributorships CEG and Ceg-Rio, as well as Gas Natural Fenosa São Paulo Sul.

Batista renegotiating debtsThe corporate empire built by Brazilian entrepreneur Eike Batista began dissolving two years ago, and Batista man-aged to secure approval for the judicial recovery of his oil company, OGX. Currently he is negotiating intensively with Mubadala, the sovereign investment fund of Abu Dhabi, to which he owes about US$2 billion.

Brazilian oil supplyThe International Energy Agency (IEA) reported on 16 June that over the next five years the Brazilian oil supply will grow more quickly than that of any other non-OPEC producers outside of North America, with production exceeding 3 million b/d by 2019 – some years later than forecast last year. The IEA notes that pre-salt exploration is expanding at a “healthy rhythm.”

Yet foreign companies are less willing than before to invest in the country. The agency reports that Petrobras has become the most indebted oil company in the world, with a debt of over US$100 billion, due mainly to con-trolled prices for gasoline. Further, Petrobras faces “severe cash restrictions due to enormous losses in its down-stream activities.”

While Petrobras has had to curtail investments over the next few years, companies such as Statoil and Chevron

are planning to increase investments to US$14 billion per year until 2018.

shifting shuttle tankers Japanese shipping group Mitsui OPSK lines has acquired half of Viking Shuttle, which is controlled by Norwegian group Viking Shipping. Viking Shuttle has five shuttle tankers in service to Petrobras, with contracts ranging from 5 to 15 years.

Although the value of the transaction was not publicized, it is known that the five ships have a total value of R$472 million.

12th round results still suspendedThe Regional Federal Court for the 4th Region, based in Porto Alegre, has upheld an earlier decision by the Federal Court in Paraná that suspended the results of the 12th ANP auction round, held last November. The Agency claimed that the suspension has caused losses of R$195 million.

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Biofuels in briefcutting back on sugar Four years after announcing huge investments in the sugar and alcohol sector, Odebrecht Agroindustrial will slow its expansion. The enterprise had a liquid loss of R$1.2 billion and a banking debt of over R$10.5 billion in 2012–13.

It had planted 100,000 ha of sugarcane, costing R$1.2–1.3 billion per year. Now, the annual planting will be reduced to 60,000–70,000 ha, and the budget has been reduced from R$900 million for the 2014–15 harvest to R$600–700 million for the 2015–16 crop.

a sweet tooth for innovationA government program to promote innovation and raise productivity in the sugar and alcohol sector has been created, funded to the tune of R$1.48 billion with the potential to increase to R$2 billion.

The Plan for Joint Support for Agricultural Technological Innovation in the Sugar-Based Energy Sector (PAISS Agricola) will be managed through the biofuels depart-ment of the National Bank for Economic and Social Devel-opment (BNDES). Requests for financing so far total R$4.5 billion for 61 business plans.

a surfeit of ethanol?Copersucar, the world’s largest trading company for sugar and ethanol, closed its books for 2013–14 with profits of R$68 million – 16.17 percent higher than for the …

petrobras newsparaguayan deal postponedPetrobras has postponed the execution of an interna-tional services contract with Odebrecht for marketing fuels in Paraguay, where Petrobras has 20 percent of the market.

The company operates 170 service stations in the country, but most are at least 30 years old and must be totally refurbished. In July 2011, Odebrecht signed a contract with the Paraguayan Ministry of the Environment to conduct the needed work within two years, but this was not done.

pre-salt production boomPetrobras took out a full-page advertisement in the Brazilian press to announce that pre-salt production reached a new record of 2,059,000 b/d in 2013. The company is expected to grow 7.5 percent in 2014.

According to the magazine Evaluate Energy, Petrobras is the only one among the majors to increase production in the last six years.

so who wins?In a momentous decision on 24 June, the government eliminated a tender for four pre-salt fields in order to cede them directly to Petrobras. Apparently, the direct contracting was decided without a full evaluation.

The blocks are all in the pre-salt level of the Santos basin: Búzios, Entomo de Iara, Florim, and Nordeste de Tupi. Petrobras was granted exclusive rights to produce up to 5 billion barrels from the fields in return for the issue of US$42 billion in shares to the Brazilian state.

The company will have to make advance payments totaling R$15 billion from 2014 to 2018 even though the fields are not expected to produce until 2021. Its stock lost R$13 billion on the day of the announcement.

The production-sharing agreement (PSA) is for 35 years, and Petrobras is entitled to 51.5–53.5 percent of the profit oil, depending on the field, less than the 58.35 percent it receives along with its consortium partners for the Libra field, which was auctioned last year.

O Estado de São Paulo published an exclusive interview with Petrobras CEO Maria Graça Foster on 29 June. She said that the direct contracting without tender was justified by the great accumulation of data. Notably, the federal Union gains twice: first in the money paid to it for the deal, and second in the production of oil.

the cost of shrinkingA wave of layoffs has already cost Petrobras some R$120 million. Now, alleging that the company has delayed making payments currently due, several enterprises on contract (terceirizadas) have abandoned their works in progress.

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previous harvest. The company’s ethanol processing increased 8.8 percent in the year, to 4.9 billion liters.

The International Energy Agency (IEA) foresees mid-term difficulties for the Brazilian ethanol industry, as low sugar prices have led to a greater production of ethanol.In related news, the National Council on Energy Policy (CNPE) decided on 23 June to raise the content of ethanol in the gasoline mixture, from 25 percent to 27.5 percent.

Biomass alchemyStora Enso has advanced its diversification strategy by acquiring Virdia, a company specializing in the develop-ment of technologies for extracting and converting bio-mass from high-purity sugars. Its operations may reach US$62 million.

electricity sectorpartnering with panamaOdebrecht Energy Luxemburg was awarded the conces-sion of Panama state-owned utility company Egesa on 8 June for US$1.05 billion.

The government of Panama had been seeking a “strate-gic partner” for construction of the Chan II hydroelectric plant, in which Odebrecht has a 77 percent stake and a 50-year concession. The plant is expected to come on stream in 2019.

more power to BrazilThe National Operator of the Electric Power System (ONS) has increased its estimate of hydroelectric power reservoirs in general, and raised the estimated energy potential of reservoirs in the southeast and the center-west regions by 2.7 percent.

generating components locallyVestes, a Danish manufacturer of wind turbines, will invest €32 million in a new plant near Fortaleza, Ceará, in order to nationalize the production of 70 percent of wind-power generator components, in conformity with the rules on local content required by the National Bank for Economic and Social Development (BNDES).

auctioning energy The Brazilian Electricity Regulatory Agency (ANEEL) held an auction on 6 June of electricity from wind-power plants and the Santo Antônio hydroelectric plant, on the Madeira River, for delivery in three years.

Some 967.6 MW came from the wind-power plants, of which 551 MW was from new plants. The Santo Antônio plant has a generating capacity of 417.6 MW but sold just 126.9 MW.

The latest National Energy Balance notes that, while wind-power energy accounts for only 1.1 percent of the electric power generated in Brazil, at the auction it cost less than all other sources of energy (see Table 1), and 30 percent less than the R$184.65/kWh it fetched at the first auction, held in 2009.

The next auction of electric power planned by the government is scheduled for 12 September and will focus on gas-fuelled thermoelectric plants generating power within five years. There are already a record number of bidders for the 36 plants, which would generate a total 20,000 MW.

a helping hand?While the Ministry of Finance and of Mines and Energy continue to refuse further financial aid to electricity distributorships, ANEEL director-general Romeu Rufino has advocated for such aid, arguing on 17 June that an injection of R$8 billion is necessary before the end of the year. He stressed that the final decision will be made by the minister of finance.

rooftops ruleEletrosul, a subsidiary of Eletrobras, on 27 June inau-gurated the first solar plant in Brazil to be installed on a public building. The new solar plant on the roof of its head-quarters is capable of serving 540 homes, with a system formed by 4,200 photovoltaic modules. It is financed with R$49.5 million from German development bank KfW.

Table 1: electricity prices by energy source

energy source price per kwh (r$)

Diesel oil 203.59

Fuel oil 192.52

Sugarcane-processing plants 174.83

Small hydroelectric plants 161.56

Wind generators 129.97

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politics, law, society

politics in briefBooed at the pitchPresident Rousseff was widely booed and insulted by the crowd attending the UK– Uruguay match of the World Cup at the Itaquerão Stadium in São Paulo on 12 June. The same phenomenon occurs now wherever she appears in public, but this time it was really excessive.

Former president Lula da Silva immediately labeled it an attempt by the elite to foment class struggle, and indeed that is the slogan that the Workers’ Party (PT) wishes to impress on the political campaign, wherein “adversaries” become “enemies,” to be fought to the bloody end. These are tactics of desperation. A PT minister attending the match, Gilberto Carvalho, ascribed the incident to the media, another favorite PT target.

The fact is that the booing of the president reflects the widespread discontent of the population with the govern-ment’s policy and in particular with the rising prices. To ascribe it to the class struggle is a dangerous distortion of the facts.

a governor for são paulo?São Paulo gubernatorial candidate Alexandre Padilha of the Workers’ Party (PT) has given up the fight in view of his very limited support. The party has instead endorsed Paulo Skaf, candidate for PMDB, as its own. Skaf was for many years the president of the Federation of Industries of the state of São Paulo (FIESP).

On 4 June he chose José Roberto Batóchio to be his deputy. Batóchio is a well-known lawyer, who defended

Antonio Palocci, finance minister in Lula da Silva’s first term, when he was charged with corruption and ministe-rial abuse of power.

Skaf will run against the incumbent Geraldo Alckmin of the Brazilian Social Democracy Party (PSDB).

sarney steps downSenator José Sarney of the Brazilian Democratic Move-ment Party (PMDB), who hails from Maranhão but represents the state of Amapá, announced on 23 June that he will retire from politics. Sarney was president of the Republic from 1985 to 1990 and a senator for 24 years. …

defense issues the wings beneath the industryEmbraer will produce the military transport aircraft KC-390 and, in addition, will continue to produce commercial jet aircraft and F-X2 fighter aircraft for the Brazilian Air Force. These three programs will together cost about US$11 billion.

This will require companies in the aeronautical sector to double their competitiveness in order to supply

Embraer and to evolve technologically and diversify their production.

In 2012, exports from the sector totaled US$6 billion, a little over 85 percent of it from Embraer.

choppers for the navyThe first of 50 EC-725 helicopters manufactured by Helibrás and acquired by the Brazilian Armed Forces was delivered to the Navy on 24 June at the plant in Itajubá, Minas Gerais.

A EC-725 helicopter

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He had lately served as president of Congress. His with-drawal from politics signals the end of an era.

rallying for nevesAécio Neves has rallied his allies, the Democrats (DEM), to support Luis Fernando Pezão, the PMDB candidate in Rio de Janeiro. The former Rio mayor, César Maia (DEM), has given up his candidacy and will run for the Senate in a coalition led by Neves.

Keeping everyone happyIn order keep the Brazilian Republican Party (PRB) within the governing coalition, President Dilma Rousseff has replaced Minister of Transport Cesar Borges, who will nev-ertheless head a special secretariat for ports, also at Cabi-net rank. He will be replaced by Paulo Sergio Passos, who had previously been rejected. With PRB support, Rousseff has garnered half the available free television air time.

legal issuescorporate contributionsJustice Gilmar Mendes of the Supreme Federal Court (STF) is also vice-president of the Superior Electoral Court (TSE). He said on 9 June that the absence of cor-porate donors from electoral campaigns “runs the risk of infiltration by organized crime in partisan structures.”

A majority of the STF had voted to veto corporate contribu-tions to political parties, but the trial had been interrupted by a request for review (pedido de vista) from Justice Mendes, which may result in the judgment being reversed.

alliances or misalliances?The TSE stated on 29 June that the current law permits an “electoral orgy of parties.” A constitutional amendment

presented in 2006 permits parties to make regional alliances that differ from those they commit themselves to at the federal level.

a woman at the helmFor the first time in 206 years, a woman has been named Chief Justice of the Superior Military Court (STM). On 16 June, Justice Maria Elizabeth Guimarães Teixeira Rocha, 54, was sworn. More generally, 64 percent of Brazilian judges are men.

connecting to societyThe president of the Appellate Court of Justice (Tribunal de Justiça) of the state of São Paulo, José Roberto Nalini, has created an Inter-Institutional Advisory Council (Conselho Consultivo Inter-Institucional) to serve as a communication link between the court and civil society. The initiative is important and may soon be emulated by courts in other states.

The São Paulo court, the most important of its kind in the country, will be an example of “participatory democracy,” says Chief Justice Nalini. He also remarked that the coun-try suffers from an epidemic of judicial activity, with 100 million lawsuits, 800,000 lawyers, 17,000 judges, 15,000 public prosecutors, 6,000 public defenders, and so forth.

amending the constitutionThe Brazilian Congress on 27 May approved a constitutional amendment that orders the expropriation of properties where there is a proven practice of slave labor. The amendment had been pending for 15 years.

social issuesHaitian workersMany Haitian refugees in São Paulo are professionally qual-ified and speak a variety of languages. Brazilian enterprises are now seeking to offer them jobs in various parts of the country, compensated at the same rates as Brazilian work-ers. The government is also expanding its visa program through the Haitian embassy and a Center for Integration and Citizenship of Immigrants is being built in São Paulo.

it’s not what you doThere is a sharp difference of opinion between President Dilma Rousseff and Vice-President Michel Temer regard-ing the best way to implement proposed people’s coun-cils for popular participation. Rousseff has issued a decree but Temer believes the matter should be governed by a law, submitted to Congress, instituting the National Policy on Social Participation (PNPS).

ambitious plans for educationThe National Education Plan (PNE) for the next 10 years – approved by Congress as Law 8.035 – has clear objectives and ambitious goals. The plan enumerates 20 targets, such as increasing computer use, and its cost has risen from 7 percent of GDP to 10 percent.

The PNE entered into force on 24 June but there is uncer-tainty and dissent about who will finance the increasing expenditures in the educational sector.

Relatedly, President Rousseff on 18 June launched the second phase of the National Program for Access to Technical Education and Employment (Pronatec 2). The initiative will create 12 million openings between 2015 and 2018, spread over 220 high-school vocational courses and 646 labor qualifications. …

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The government intends to invest R$5.5 billion this year in technical and professional courses, an increase of 40 percent over 2013. States and municipalities will have one year to create their respective plans. Today, only 10 states out of 27 and 42 percent of municipalities have their own educational plans.

employment and laborFormal employment in May had its worst performance in 22 years – only 58,836 job vacancies were filled. The pace of employment generation has slowed, with 543,200 vacancies filled so far this year – a 28 percent reduction relative to the same period in 2013.

Civil construction has stopped leading employment. The sector has 3.5 million registered workers but has declined in job creation since March.

Ironically, the Boston Consulting Group (BCG) surveyed the labor market and concluded that Brazil will be one of the countries most affected by a lack of labor, with a deficit of 8.5 million workers in 2020 and up to 40.9 million by 2030.

The study analyzed the dynamism of labor supply and demand in 25 countries, including 65 percent of the global population and over 80 percent of the world’s GDP. It concluded that imbalances in the supply of labor may generate losses of US$10 trillion over the decade.

the growth of private wealthPrivate wealth in Brazil has grown 5.6 percent in 2014, to US$1.3 trillion, according to the Boston Consulting Group (BCG). This represents a sharp reduction in the rate of growth in relation to the 14.1 percent registered in the previous year.

international affairs

diplomatic briefstalking with merkelPresident Dilma Rousseff received German Chancellor Angela Merkel on 15 June in Brasília. Their conversations covered global governance, a peace agenda, international security and the security of electronic communications, and in particular the free trade agreement between Mercosur and the European Union, in which the two governments will pursue joint efforts.

The two leaders agreed to increase bilateral flows of trade. Trade between Brazil and Germany reached €21.7 billion in 2013. Germany is Brazil’s principal trading partner in Europe and fourth worldwide.

and with BidenPresident Rousseff received US Vice-President Joe Biden in Brasília on 17 June. He made significant gestures in an attempt to normalize bilateral relations following the National Security Agency (NSA) electronic spying scan-dal – but stopped short of the public apology requested by Rousseff.

The two dignitaries also dealt with other topics, such as the situation in Venezuela, where both stressed their com-mon interest in having Venezuela acquire greater political stability. Trade relations were not discussed.

clinton on BrazilHillary Clinton released on 10 June in New York her memoir Hard Choices, in which she devotes 23 pages to Latin America. In them she calls Brazil “deeply mistaken” over its nuclear agreement with Iran and Turkey in 2010,

which was at the time rejected by President Barack Obama.

Clinton also expressed admiration for Rousseff as a “formidable leader … with a strong intellect and true determination.”

oas meets and mullsThe General Assembly of the 34-member Organization of American States (OAS), convened in Asunción, Para-guay, on 5–6 June – without the presence of US Secretary of State John Kerry or Brazilian Foreign Minister Luiz Alberto Figueiredo.

Among the principal topics discussed was a proposal by Ecuador, supported by other Bolivarian countries, for institutional change in the Inter-American Commission of Human Rights (CIADH). The proposal, which would have weakened the CIADH, did not receive Brazilian support and ultimately failed.

President Dilma Rousseff received German Chancellor Angela MerkelPh

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mediating for colombia?The new president of Colombia, Juan Manuel Santos, met with President Rousseff in Brasília on 19 June. An economist and former defense minister, Santos this month won 51 percent of the runoff vote against Oscar Ivan Zuluaga, who had pledged to take a tougher stance against Colombian guerrilla groups.

His victory gives him a mandate to continue peace talks with the rebels, and in an interview with Valor Econômico, Santos floated the idea that Brazil might act as mediator in peace negotiations with the Liberation National Army (ELN), if it is willing to take on the responsibility.

The ELN, which espouses a composite Communist ideology of Marxism and liberation theology, is the second largest guerrilla group in Colombia after FARC, the so-called Revolutionary Armed Forces of Colombia. Norway is acting as mediator in peace talks with the latter group.

international trade in briefa port for all reasonsBrazil’s first export processing zone (ZPE) was launched on 16 June at the port of Pecém, Ceará, which has the capacity to dock Post-Panamax ships. The port provides the shortest distance from Brazil to the principal con-sumer centers in North America and Europe.

argentinean autopactPresident Rousseff has approved a new, one-year automotive agreement between Brazil and Argentina, and it came on stream on 1 July. For each US$1 million in automobiles bought from Argentina, Brazil may export up to US$1.5 million to that country free of tariffs.

The World Trade Organization (WTO) on 28 June condemned Argentina for restricting imports. Brazil, although suffering from such restrictions, did not.

Relatedly, Brazilian ambassador to the United Nations Antonio Patriota stated on 25 June that Brazil “supports completely” Argentina in its fight against American creditors who demand the payment of US$1.3 billion.

drumming up business in africaBrazil is losing market in Africa, mainly to China. Six of its nine principal African markets purchased less in 2013 than in 2011. Since February, missions of business and government officials began negotiations in Angola to strengthen local industrialization. In July a new delegation will visit Angola, and ministers from that country have recently visited Brazil.

Brazilian advisors dealt with such topics as market studies, choice of technologies, strategies with respect to personnel and suppliers, and design of factories.

trade volume and valueAlthough the volume of Brazilian exports grew 2 percent from January to May, thanks mostly to soybeans, the prices of commodities have declined – most particularly that of iron ore, a key export. With the deceleration of Chinese demand, the value of Brazilian exports has dropped 5.1 percent over the year, and the accumulated trade deficit so far in 2014 is US$2.49 billion.

Nevertheless, the country managed a surplus of US$2.36 billion in June, up from US$0.71 billion in the previous month, the fourth consecutive monthly surplus. Exports increased 3.56 percent on average from May to June and imports fell 5.15 percent.

Colombian President Juan Manuel Santos

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