Industrial Grown Down
Perhaps the hardest hit sector in the Brazilian economy is industrial growth. Industrial production dropped by 2.7 percent in December, with a full year retraction in many major states: Sao Paulo, for example, finished the year with a 6.1 percent contraction, according to the Instituto Brasileiro de Geografia e Estatística IBGE), the Brazilian institute of geography and statistics. Among the greatest negative impacts recorded were in the production of motor vehicles, trailers and trucks, an industry centered in Sao Paulo.
LatinFocus Consensus Forecast participants see “industrial production increasing 0.7 percent in 2015…In 2016, industrial output is expected to expand 2.3 percent,” the analysts recently reported.
Scandals in the oil and gas sector led rating agency Fitch in November 2014, to place all rated Brazilian construction companies on Rating Watch Negative. “A possible reduction in (state oil company) Petrobras’ investment plans and an environment of lower oil prices may put an additional burden on some construction companies (and) oil service-related companies,” Fitch warned.
Higher Taxes Hit Coatings
In an attempt to control the economy, the government has tightened credit and raised taxes, a counter-movement to falling prices in commodities, which strongly affect the economy. The tax increase on imports, which moved up from 9.25 percent to 11.75 percent as of February, has a burdensome impact on the paint and coatings industry, which estimates that imported materials account for 60 percent of the cost of formulation in Brazil. “The more sophisticated the product, the higher the imported component,” noted Dilson Ferreira the executive director of the Associação Brasileira dos Fabricantes de Tintas (Abrafati), the national coatings manufacturers’ association, in Sao Paulo.
“The higher taxes this year will pressure already thin margins at a time when we are facing weak demand,” commented Ferreira recently. During the Abrafati Forum, 95 percent of the attendees projected a 2015 GDP growth rate between zero and two percent. “The first half of 2015 will be a tough time,” reckoned Abrafati management board chairman Antonio Carlos Lacerda.
Final coatings industry numbers have not been released by Abrafati yet, but the expectation is that volumes were down two percent in 2014, and that they will climb by one percent this year.
Efforts to keep the currency weak may help boost Brazilian exports, nonetheless, and China is growing in its importance for Brazilian products, slowly expanding beyond raw materials and food. London-based HSBC indicates that Brazil’s currency, the Real, has weakened against the dollar for five months in a row, also increasing the cost of imported goods.
The good news included a note in February, that the HSBC Purchasing Managers’ Index for the Brazilian manufacturing sector was reported to have risen to a seasonally adjusted 50.7 in January from 50.2 in December, keeping the index positive by a fraction. “The output index rose to its highest since December 2013, mostly driven by consumer and intermediate goods,” the bank indicated.