Bloomberg News

Brazil Industrial Output Falls for First Time in Four Months

November 01, 2012

Brazil’s industrial production in September fell more than economists expected and for the first time in four months, as manufacturers struggle to regain their footing after a yearlong slowdown.

Industrial output fell 1 percent in September, the national statistics agency said today in Rio de Janeiro, after a revised gain of 1.7 percent in August. Economists had expected output to fall 0.5 percent from the previous month, according to the median forecast in a Bloomberg survey of 43 analysts. Output fell 3.8 percent from the year before, compared with a median forecast of a decline of 3.3 percent from 33 economists surveyed.

“This does not represent a good outlook for the sector,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said in a telephone interview from Sao Paulo. “It is an alert for the government that they need to maintain stimulus because industry is not capable of growing by itself. Business leaders are still not open to investing and increasing production capacity.”

The fall in output was broad-based, with 16 sectors out of 27 declining. “What surprised was that the decline was driven by machines and equipment, which fell 4.8 percent, and not by automobile sales as expected,” Rostagno said. “Auto sales only fell 0.7 percent.”

Recovery Signs

The world’s second-largest emerging economy has shown signs of recovery after President Dilma Rousseff’s administration boosted tariffs, cut taxes for consumer and industrial goods to prop up demand, and lowered payroll taxes for 40 industries. The central bank has also cut the benchmark rate to a record 7.25 percent and intervened in currency markets to maintain the real around 2 per dollar, helping to protect domestic industry from cheaper imports.

In 2012, economic growth in Japan and the U.S. will outpace that of Brazil, according to estimates compiled by Bloomberg. The central bank in September cut its forecast for gross domestic product expansion this year to 1.6 percent from 2.5 percent, adding that the economy will grow 3.3 percent in the second quarter of 2013.

Industrial production in August grew at a revised 1.7 percent, the highest level since February 2011. Retail sales rose for the third straight month in August and leaped 10.1 percent from a year prior.

The September industry decline was largely an adjustment from the strong results seen the previous month, David Beker, chief Brazil economist for Bank of America Merrill Lynch, said. Still, year-on-year industrial production remains negative and will remain so until early 2013, he said.

Capital Goods

“How sustainable the recovery process is will depend on the outlook for investment in capital goods,” Beker said by telephone from Sao Paulo on Oct. 31.

Capital goods output, a barometer of investment, fell 0.6 percent in September from August and 14.1 percent from the year before, the statistics agency said.

Usinas Siderurgicas de Minas Gerais SA, Brazil’s biggest maker of steel for the auto industry, a cornerstone of Brazil’s economy, posted a third consecutive quarterly loss after costs rose more than sales. The net loss in the third quarter was 143.3 million reais ($70.6 million), compared with a profit of 103 million reais a year earlier, the company said today in a regulatory filing.

Analysts covering Brazil forecast that industrial production will grow 4.1 percent in 2013 following a 2.1 percent contraction this year, according to the latest central bank survey of about 100 economists.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point, to 7.31 percent at 9:51 a.m. local time. The real was little changed at 2.0306 per U.S. dollar.

Inventories

Industrial inventory levels in September were “very close” to companies’ planned levels for the first time since April 2011, according to a survey by Brazil’s national industry confederation, known as CNI, of 1,790 companies.

The cost of maintaining high inventories has been a burden to industry, and lower levels open the door to increasing production, though only slowly, Marcelo Azevedo, a CNI economist and industrial policy analyst, said.

“After a long period of high inventories, industry will have difficultly betting big,” Azevedo said by telephone from Brasilia on Oct. 31. “Companies need clearer signs of demand to increase activity in a stronger way.”

Inventory levels that have returned to normal among automobile manufacturers “means they will have to increase production and investment,” Finance Minister Guido Mantega told reporters at the Sao Paulo auto show on Oct. 24.

Tax Cuts

Rousseff the same day announced a decision to extend tax cuts on car purchases, which had been scheduled to expire at the end of October. The tax cuts helped fuel a surge in car sales to a record 420,080 units in August. Car sales fell 31 percent in September.

Cledorvino Belini, the president of Brazilian carmakers’ association known as Anfavea, said at the auto show that he foresees 60 billion reais in investment for the auto industry.

Auto Factories

On Oct. 23, Portugal’s Tricos Districar became the latest car manufacturer to announce investment plans for a factory, to be built in Espirito Santo state with annual capacity of 50,000 to 60,000 units. The day before, Bayerische Motoren Werke AG, the largest maker of luxury vehicles, announced plans to build a 200 million euro ($259 million) factory in Santa Catarina state.

“Brazil is one of few countries that is attracting new investments in the automobile industry,” Mantega said at the auto show. “We want an automobile industry in Brazil that grows regardless of a crisis affecting other economies.”

The tax cuts on autos are set to expire at the end of the year, and on the day of the latest extension Mantega said that it would “probably” be the last.

“It is very difficult to forecast the auto market for 2013 as we don’t know how the incentive policy of the government will look,” Volkswagen AG’s Brazil chief, Thomas Schmall, said in Sao Paulo on Oct. 22. “The elimination of incentives will have a negative effect on car sales in Brazil. We are all curious to know how the market will develop.”

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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