Brazil Hiking Fuel Prices, But Only After October Presidential Elections

Gas prices to go up Dilma Rousseff, the president of Brazil, admitted her government might increase domestic fuel prices at refineries by up to 6% after the October presidential election. The increase of 5.5% and 6% is a preliminary calculation and is geared to help prop the finances of the government managed oil and gas giant Petrobras.

President Rousseff, who is running for re-election on October 5, has kept fuel prices below international levels to curb above-target inflation. That policy has hurt the finances of Petrobras, which is forced to buy fuel at international prices and sell it more cheaply in the local market.

Economy ministry sources also anticipated that the government will not be able to meet its key fiscal savings target in 2014.

Last week Finance Minister Guido Mantega admitted that the government could raise fuel prices after the election and review its primary surplus target for the year.

The primary surplus, which represents the public sector’s excess revenue over expenditures before the payment of interest on debt, fell well below expectations in the first half of the year.

Many analysts believe the government could revise downward its goal of a primary surplus of 99 billion Reais (US$ 43.52 billion), which is equal to 1.9% of GDP. In the first six months of 2014, the primary surplus was equal to 1.17% of GDP.

Fuel prices and public spending are key in the government’s battle to curb inflation, which has risen less than expected recently but remains at the 6.5% ceiling of the official target.

High inflation and sluggish growth have dragged down the popularity of Rousseff and raised the probability of a second-round run-off election later in October.

Her main rivals, Aécio Neves and former governor Eduardo Campos have complained that fuel price controls have undermined Petrobras, which is considered the world’s most indebted and least profitable major oil company.

Although Brazil is virtually self sufficient in oil, and even exports, the lack of refining capacity dating back to plans of former president Luiz Inácio Lula da Silva with Venezuela’s Hugo Chavez to build a giant refinery in the northeast of the country, have conditioned Petrobras finances.

Earnings Down

Second quarter profits for Brazil’s Petrobras dropped 20% compared to the same period one year earlier, the state-run oil giant said. Petrobras recorded profits of 4.96 billion reais (about US$ 2.22 billion) in the quarter, compared to 6.2 billion Reais (nearly US$ 3 billion) for the same period in 2013.

CEO Graça Foster said that the slump in profits was due to an 800 million reais drop in revenue as well as an increase in federal taxes.

The company also imports gasoline – its local refineries cannot meet the domestic demand – and sells it at a subsidized price as set by the Brazilian government.

Income from sales, however, stood at 36.9 billion dollars, up 12% compared to the same period last year.

Only counting crude and liquefied natural gas production, Petrobras had an average production of 1,972 barrels per day in the second quarter, up from 1,931 barrels per day a year earlier.

Petrobras’ imports of oil and derivatives surged 33% in the second quarter from a year earlier to 941,000 barrels a day. The refining division’s quarterly loss ballooned to 3.88 billion Reais, up 54% from the second quarter of 2013.

The fuel subsidy, combined with a massive investment budget, has turned Petrobras into the world’s most indebted oil major. Net debt as of June 30 stood at 109.58 billion, up 16% from the end of 2013.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, fell 10% on the year to 16.26 billion reais.

Brazil aims to be among the world’s top five global oil producers by 2020, when it expects to be producing four million barrels of oil a day. Petrobras reiterated its target of increasing oil production by 7.5%, plus or minus one percentage point, in 2014.

Petrobras Chief Executive Maria das Graças Foster said in a note that the company’s own output of gasoline and diesel will rise in the second half of the year as production at existing refineries improves and the Abreu e Lima refinery, the cost of which has risen past 18 billion, comes online.

“These factors will allow us to reduce by about 30% our imports of oil and derivatives compared with the first half,” Ms. Foster

Agribusiness

Brazil’s agribusiness trade balance closed out July at a surplus of US$ 8.1 billion, resulting from earnings of US$ 9.61 billion in exports and costs of US$ 1.51 billion in imports. The figures were reported by Brazil’s Ministry of Agriculture, Livestock and Supply.

Soy (beans, meal, and oil) topped the list of exports, accounting for 41% of sales amount – it sold US$ 3.94 billion in July, 0.3% less than in the same month of 2013. Shipments amounted to 7.44 million tons, up 0.8% compared to July 2013.

The second leading export was meat, with sales of US$ 1.66 billion, 14% up from July 2013. Poultry led the group with sales of US$ 772 million, followed by beef exports which amounted to US$ 690 million. Pork exports totaled US$ 139 million.

The sugar-ethanol group was the third largest exporting sector in July with US$ 1.05 billion in sales and shipments of 2.56 million tons. Other major exports include forest products and coffee. Pulp and paper lead forest products with earnings of $652 million. In the coffee sector, exports totaled $583 million, 65.2% up from July 2013.

ABr/MP

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