RIO DE JANEIRO, BRAZIL – Among 13 of the most important sectors of Brazilian industry, 10 have either recovered or surpassed pre-pandemic activity levels in this first half of the year.
These sectors are expected to continue growing, mainly driven by the advance of vaccination which may increase consumption. But there are a number of hurdles to be overcome for this to be achieved.
The main concern is that a new strain of the virus will force governments to again implement isolation measures, which could have a direct impact on the expected economic rebound. But there are also the challenges related to the pressure of raw material and electricity costs, higher interest rates, unemployment, and a shortage of components for production in a number of sectors.
Itaú Unibanco economist Pedro Renault says that the trend for the second half of the year is for “normalization,” albeit not full, in several segments. He says that part of industrial activity is growing more as a result of restocking, rather than demand growth. According to him, the consumption of durable goods, for instance, tends to decrease in segments such as electronics.
Renault also points out the increase in interest rates, which affects companies’ investment capacity and consumers’ ability to finance themselves. “This tends to remove a stimulus from the economy that is present now.” The SELIC rate is currently at 4.25% per year. Economists heard by the Central Bank in its Focus report are projecting it will end the year at 6.75%.
Fabio Bentes, economist for the National Confederation of Trade of Goods, Services and Tourism (CNC), also sees a positive “but not golden” scenario for the second half of the year. He says there are several obstacles, such as the high energy prices, which should be passed on to goods. “Energy drains a significant portion of consumers’ income and there is less left over for consumption.”
High demand
A survey conducted by Itaú Unibanco indicates that among the sectors with a performance above the pre-pandemic period are the steel industry – with a good part of demand coming from construction – and the packaging sector, which in turn drives the paper industry.
In steelmaking, crude steel production grew 4% in the first half of the year compared to the same period in 2019, with a total of 18 million tons. Last year, with many furnaces shut down in the early months of the crisis, 14.6 million tons were produced.
The sector’s initial projection for this full year was for a 6.7% increase in production compared to 2020, but in May the index was revised to 11% and, this month to 14%, which would amount to 35.8 million tons, said Marco Polo de Mello Lopes, executive president of the Brazil Steel Institute. If confirmed, the volume will be almost 10% higher than before Covid-19.
“Steel consumption and economic development go hand in hand, and it’s no wonder that the GDP is being revised, because a recovery is in fact occurring,” Lopes said. Brazil steel works with the prospect of a 5% increase in the economy this year.
As for the paper industry, production grew by 15% in the first half of this year compared to the same period in 2019, totaling 1.99 million tons, according to data from the Brazilian Paper Packaging Association (EMPAPEL). An important part of the demand came from the growth of e-commerce purchases and food delivery.
Components
Unlike steel manufacturers, the automotive sector is on the list of those furthest from returning to pre-pandemic levels. Vehicle production is 21.8% below 2019 figures, with 1.15 million units recorded in the first half of the year.
Itaú Unibanco’s Renault says that demand for vehicles is strong, but there is a bottleneck in the supply of semiconductors that has led several automakers to halt production. Consequently, there is a shortage of vehicles at dealerships. The Fiat Strada pickup truck, the best selling model in Brazil today, has a three-month waiting list.
“Despite lower production, the industry is managing to increase prices, preserving margins a little better, and is prioritizing the production of more profitable vehicles,” Renault says. According to him, although the production volume is well below 2019, the sector’s financial soundness is not as concerning.
The president of the National Association of Motor Vehicle Manufacturers (ANFAVEA) Luiz Carlos Moraes says that between 100,000 to 120,000 vehicles ceased to be produced in the first half of the year because of the shortage of electronic parts, which contributes to delaying the sector’s rebound. “We are working with a period of 3 years, more or less, to return to 2019 levels.”
The Brazilian Association of Car Rental Companies (ABLA) says that the sector intended to buy 800,000 new vehicles during the year. Due to production challenges, the entity believes that no more than 50% of this potential will be achieved, with purchases between 380,000 and 400,000 cars and light commercial vehicles.
Another sector faced with this type of shortage, although on a smaller scale, is the electrical and electronics sector. According to the Brazilian Electrical and Electronic Industry Association (ABINEE), in June 46% of companies reported difficulties in sourcing electronic components from Asia, a rate that reached 58% in April. Nevertheless, from January through May the sector improved its production index by 1.8% compared to the same period in 2019.
Retail
Beyond the industrial area, retail is a sector that has suffered heavy losses since the start of the pandemic. Fabio Bentes, economist at the National Trade Confederation (CNC), calculates the accumulated loss from February 2020 through May this year at R$873.4 (US$169) billion. He points out that there is discrepancy between segments, with supermarkets, food products and beverages growing in the pandemic, and segments such as office and computer equipment and materials, fabrics, clothing and footwear posting significant losses.
On the other hand, online sales stood out. Pedro Renault believes that e-commerce “gained a share that it will not give back even after the pandemic.” This type of sale also boosted logistics, which previously operated with large distribution centers in warehouses outside urban centers. “Now, companies look for land within cities and operate with the so-called ‘last mile’, which consists of delivery with small trucks to the customer’s door.”
The CNC projects that retail sales will grow 4.5% this year, the highest rate in 9 years. But Bentes points out that the increase is assessed on a low base.
Deloitte consulting company assesses that Brazil’s economic scenario will be more positive by October, with a marked upturn in several activities and a higher number of people vaccinated. Some sectors, such as tourism and events, are expected to slowly recover, as there is repressed demand.
“But the level of indebtedness of several companies has grown,” says Deloitte’s chief economist Giovanni Cordeiro. According to him, a report by the Bank for International Settlements (BIS) estimates that companies in emerging markets heavily affected by the crisis will take about 2 years to pay off their debts.
For companies in Brazil, the BIS estimates that the most indebted will have to dedicate 45% of their net income to pay off their debts. Cordeiro believes that there will be an adjustment trend, because many companies will not be able to recover, not least because the unemployment rate in the country remains high, undermining the population’s purchasing power.