Brazil’s Government Aims to Cut the ‘Brazil Cost’

The high cost of doing business in Brazil is a longstanding complaint among, well, pretty much anyone who does business in Brazil. Now the government is trying to chip away at one piece of the so-called Brazil cost: electricity rates that rank among the highest in the world.

In April, Alcoa Inc., one of the world’s largest producers of aluminum, said it was considering closing factories in Brazil because of its high electricity costs. It’s not hard to see why. According to a report by the Getulio Vargas Foundation, “It’s not just the fact that at US$180 per megawatt hour Brazil’s electricity rate is the world’s third most expensive (after Italy and Slovakia). It’s that the government pulls out a disproportionate amount in taxes and fees.”

To her credit, President Dilma Rousseff has made cutting these electricity costs one of her top priorities. According to an article in the business daily Valor Economico on June 25, Rousseff plans to press Brazilian states to reduce the ICMS, a local tax for goods and services and a major component in the cost of electricity. Federal and state taxes account for about 45 percent of the average electricity bill, while electric power makes up about 35 percent of the total cost of production in Brazil.

The need to make Brazilian industry more competitive has grown more pressing amid a broader economic slowdown. Brazil’s economy expanded just 0.8 percent in the first quarter, and analysts have cut their 2012 growth estimate to 1.9 percent, the lowest in three years.

Rousseff’s government, which in the past routinely blamed foreign monetary policy and theEuropean debt crisis for Brazil’s lackluster growth, has also finally started to implement policies to lower interest rates, provide tax breaks on certain consumer goods and check the appreciation of the currency, which had hurt Brazil’s exports.

So far this year, the real has declined almost 9 percent against the dollar. Lowering the “Brazil cost,” which includes the added expenses of excessive red tape and widespread bribery, will be Rousseff’s next challenge. Maybe she is starting to understand that growth shouldn’t be taken for granted and that the slowing economy can’t be blamed on the exchange rate or the European debt crisis, but on the high cost of doing business in the sixth largest economy in the world.

Source: Bloomberg

Principal Financial seeks LatAm expansion

Principal Financial Group is looking to expand in Latin America through further acquisitions as it consolidates its purchase of Brazilian fund manager Claritas Administração de Recursos.

The US-based asset and pension fund manager and life insurer, which acquired 60 per cent of Claritas earlier this year, said Latin America was one of the prime targets of its international expansion.

“We have a significant capital base to invest,” Roberto Walker, Principal’s Latin America president, told the Financial Times. “We are looking for opportunities now to deploy that capital for organic growth, share repurchases and for acquisitions in emerging markets and obviously Latin America is going to be a key part of that strategy.”

Principal’s interest comes as multinationals are increasing direct investment in Brazil in spite of a slowdown in economic growth in Latin America’s largest market.

International and local financial institutions are competing to build pan-regional franchises, with Brazilian banks BTG Pactual and Itaú expanding in Chile, Argentina and other South American markets while eyeing opportunities further north in Mexico.

Although Principal did not disclose how much it paid for Claritas, the São Paulo-based fund manager has more than R$3bn ($1.5bn) under management in long-short and long-only funds as well as other strategies.

“This partnership will help us to present ourselves … to local and offshore institutional clients,” said Carlos Ambrósio, chief executive officer of Claritas.

With $335bn in assets under management, Principal’s Mr Walker said he believed the asset management industry was set to grow in Brazil because of a trend towards lower interest rates.

Brazil has among the world’s highest real interest rates as a legacy of its earlier history of runaway inflation but spreads are declining.

The central bank recently reduced its benchmark Selic interest rate to a record low, forcing investors to rethink their tendency to place their savings in high-interest bearing deposits with banks rather than with fund managers.

“We always thought that the high levels of interest rates for the Brazil were not sustainable and we would see a significant decrease,” said Mr Walker.

“Declines in the interest rate will push the development of other more value added products.”

He said he expected to see more opportunities for acquisitions in the region as global economic turmoil forced international financial groups to sell asset management operations that were not regarded as central to their operations.

Principal, which has said it has $800m to $900m to deploy this year, already has a large pension fund joint venture in Brazil with Banco do Brasil.

The company last year acquired the Mexican pension fund business of HSBC and has mortgage and asset management businesses in Chile.

Source: Financial Times

Smithfield Turns to Brazil for Corn

CHICAGO—Smithfield Foods Inc., SFD -0.44% the world’s largest pork producer, said Tuesday it will import corn from Brazil, a move that reflects how surging costs for U.S. feed grains are rippling through the livestock and meat industry.

The worst drought in decades has battered the U.S. Corn Belt, leading to tight supplies and sharply higher prices.

Analysts say it is unusual for a U.S. livestock producer to import supplies from SouthAmerica, though it could be cheaper to buy and ship corn from there to the eastern U.S. than to get it by rail from the Midwest, in light of the high domestic corn prices. The U.S. is by far the world’s biggest producer and exporter of corn.

A Smithfield spokeswoman confirmed the company’s decision to use Brazilian corn in its hog-raising operations, after the Financial Times reported earlier this week that meat companies including Smithfield had arranged to ship Brazilian corn to the East Coast. She declined to say how much of the feed the Smithfield, Va., company has purchased, or when the first shipments will arrive. Smithfield has hog-production operations on the U.S. East Coast and elsewhere.

The cost of animal feed is a critical factor for big livestock producers, such as Smithfield, which buy millions of bushels of feed each year as they stock the meat supply chain with new pens of animals ready for slaughter.

Tyson Foods Inc., TSN +0.14% the world’s largest chicken producer, declined to comment on whether it has purchased Brazilian corn, citing a quiet period ahead of an August earnings report.

Spot-market prices for physical corn in the U.S. surged early this year as supplies ran low, and farmers demanded a higher payoff for their corn that was still in storage from last year’s harvest.

Paulo Molinari, a consultant at Brazil’sSafras & Mercado, said corn at Brazilian ports is currently going for around $290 per metric ton, compared with $345 in the U.S. Gulf of Mexico. Shipping corn to the U.S. from Brazil adds anywhere from $30 to $40 per ton to that cost.

“There’s never been this big of a difference in price,” Mr. Molinari said. “Brazilian corn is almost always at the same level as in the Gulf of Mexico, if not higher.”

Even with this year’s record crop, projected by the Brazilian government at nearly 70million metric tons, Brazil’s corn output is only a fraction of U.S. production, which routinely exceeds 300 million tons. Corn prices in Brazil tend to track prices abroad but have had trouble keeping up in recent weeks, given the large surplus expected from this year’s crop.

Mr. Molinari said that while the price difference appears to be encouraging some exports of corn from Brazil to the U.S., the shipments have yet to turn up in official trade data or in reports from shipping agencies.

“So far, nobody knows who’s importing, the final destination or the volumes,” he said.

Source: The Wall Street Journal

Venture Capital Firm Makes Long-Term Bet on Brazil

At a time when the Brazilian economy is cooling, at least one Silicon Valley firm is doubling down.

Redpoint e.Ventures announced Monday that it had raised $130 million to invest in early-stage Internet start-ups in Brazil, South America’s largest economy.

The firm, less than a year old, is a joint effort between Redpoint Ventures of Menlo Park, Calif., and BV Capital of San Francisco, which has just renamed itself e.Ventures. Each firm had invested in Brazilian Internet companies separately, including the online travel site Viajanet and Grupo Xango, a tech holding company co-founded by a former Microsoft executive.

Jeff Brody, Redpoint’s founding partner, acknowledged Brazil’s challenges, including slower growth and sagging industrial production. On Friday, Brazil’s government lowered its 2012 gross domestic product forecast to 3 percent growth, from 4.5 percent.

“None of that is good news for us,” Mr. Brody said. “Europe and China slowing down will definitely impact Brazil.”

But he said that the firm was more focused on the long term, the next decade, and that recent economic concerns “were not mentioned at all” by investors in the new fund.

In fact, the firms raised more than their original $100 million target, said Mathias Schilling, a founder of e.ventures. Internet use is still growing, and so is the mobile Web, and Brazilians still face a large void in early-stage venture capital, presenting a major opportunity.

A few pioneering local firms have already tapped into the market, including Monashees Capital of São Paulo. In addition, Kaszek Ventures of Argentina holds just under $100 million, with two-thirds of its investments in Brazil.

Still, the Redpoint joint venture is the first such fund in Brazil originating from Silicon Valley, said Allen Taylor, director of global networks for Endeavor, an American nonprofit group that promotes entrepreneurship in emerging markets.

Redpoint “has really taken a leadership position from the beginning” in helping encourage Brazil’s start-up culture and seeking it out as a market, Mr. Taylor said.

The founding partners of Redpoint e.Ventures, based here in São Paulo, Anderson Thees and Yann de Vries, say they will typically make initial investments from a few hundred thousand dollars to $5 million.

For many, the benefits go beyond the cash.

Camila Souza introduced the fashion shopping site Sophie & Juliete with her partner, Ronald Beigl, last week. It is backed by Redpoint e.Ventures and IG Expansion.

Thanks to the presence of the new fund, and what she hopes will be other funds to follow, she said “entrepreneurship will become a lot more professional now” and less dependent on wealthy families.

“It will influence people who before did not really believe it was possible,” she said.

Source: Deal Book

US fund to back Brazil tech start-ups

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Two US venture capital firms have raised what is thought to be the largest fund yet to back early-stage internet start-ups in Brazil, as well as the first from Silicon Valley, adding to the growing international clamour to tap into an anticipated surge in the country’s online consumer economy.

Redpoint Ventures and e.ventures, previously known as BV Capital, said they had received commitments of $130m for a joint fund that will invest mainly in new consumer internet companies.

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In another sign of Silicon Valley’s rising interest, Sequoia Capital, one of the top US venture capital firms, is about to open an office and is hiring staff in the country, according to a person familiar with its plans. Sequoia declined to comment.

The hunt for the next booming market for tech start-ups has drawn a steady stream of visitors from Silicon Valley to Brazil, turning it into the hottest new venture capital market outside the US.

Venture capitalists around the world rate Brazil above China as a place to invest, putting it second only to the US, according to a survey of investment confidence published last week by Deloitte and the US National Venture Capital Association.

Signs that US venture capitalists are now starting to put down roots by raising funds to invest exclusively in Brazil and opening local offices mark a further evolution of the market. A large and growing middle class, fast-growing online use and an undeveloped consumer internet and ecommerce landscape have contributed to the rush.

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“The engagement [of Brazilians] on social media websites is very high, but the number of Portuguese-language websites is relatively low,” said Jeff Brody, a partner at Redpoint, which has invested in Brazil for the past two years. “There’s a latent unmet need.”

Leading US venture capitalists to have been drawn to Brazil in recent months include Kevin Efrusy of Accel Partners, who was responsible for his firm’s landmark investments in Facebook and Groupon and has recently led four investments in Brazilian internet companies. Other Silicon Valley financiers to join the rush include Insight Venture Partners and Benchmark Capital.

Despite the surging international interest, Brazil’s rudimentary tech start-up scene has left few openings for hungry investors, according to a number of US financiers. That has prompted warnings that early investors may already be over-paying for a piece of the most promising new companies.

The country’s tech industry is still in the early stages of developing an entrepreneurial culture and needs more success stories to encourage the sort of risk-taking familiar in Silicon Valley, said Mathias Schilling, a partner at e.ventures.

Redpoint and e.ventures announced earlier this year that they would set up a joint venture in Brazil, with two partners based locally.

Source: Financial Times

Biggest Iron Miner Vale Lifts Output As Brazil Rain Eases

Vale SA (VALE5)’s second-quarter iron-ore production rose 0.4 percent, beating analysts’ estimates, as the world’s biggest producer of the steel-making ingredient lost less time to rain at its largest mine.

Output climbed to 80.5 million metric tons from 80.3 million tons a year ago, the Rio de Janeiro-based company said in a regulatory filing yesterday. That beat the 80.2-million ton average estimate of six analysts surveyed by Bloomberg. BHP Billiton Ltd. (BHP)’s quarterly iron-ore output climbed 15 percent.

Brazilian iron-ore exports rose 2.1 percent in the quarter as expanding Asian demand partially offset a slump in European orders. Steel demand in China, the biggest consumer of iron ore, is performing in a “very good” way this year, Vale Chief Executive Officer Murilo Ferreira said last month. Production at Carajas, the world’s largest iron-ore mine, grew 5.2 percent in the second quarter as weather conditions improved, Vale said.

“We were positively impressed by the recovery in production at Carajas, which delivers Vale’s highest quality ore at the lowest cost,” Barclays Plc analysts led by Leonardo Correa in Sao Paulo said in a note to customers yesterday.

Vale, the world’s second-largest mining company, slid 0.1 percent to 38.57 reais at the close in Sao Paulo, the lowest since Jun 28.

Nickel Delays

Vale’s production of pellets, a processed form of iron ore used by the steel industry, gained 8.5 percent to a record 14.3 million tons in the quarter. Nickel output rose 8.4 percent to 61,000 tons, missing a 69,000-ton forecast by Citigroup Inc. after delays at its Canadian operations and shutdowns at Onca Puma and the VNC project in New Caledonia. Copper output climbed 11 percent in the past year to 70,000 tons, Vale said.

“The longer-than-expected temporary suspension for safety assessment of mining operations in Sudbury negatively impacted finished nickel production,” the company said, referring to its Canadian mine.

Vale’s Onca Puma nickel plant in northern Brazil stopped producing by the end of the quarter after problems with two furnaces and is likely to be out of operation for the next few months, the company said. VNC, which stopped production in May due to an incident at an acid plant, is expected to resume operations in the fourth-quarter.

Exceeding Forecasts

Melbourne-based BHP, the world’s third-largest iron-ore producer after Vale and Rio Tinto Group, said yesterday that output for the steel-making raw material was 40.9 million tons in the three months ended June 30, beating the 37.3 million ton median estimate of five analysts surveyed by Bloomberg. Rio’s quarterly iron-ore production was little changed at 48.6 million tons from last year, meeting analyst expectations, the company said July 17.

Vale has gained 2 percent this year compared with a 9.6 percent decline for BHP in Sydney and Rio’s 4.6 percent drop in London.

The Brazilian company is scheduled to release its second- quarter earnings report on July 25.

Source: Bloomberg