SAO PAULO (Reuters) - Slow profit growth is prompting Brazilian commodities companies to slash capital spending plans, making growth in Latin America's largest economy even more dependent on consumer spending.
Pulp producers, miners and steelmakers that missed fourth-quarter earnings estimates are trimming investment as Europe's debt crisis and China's slowdown weigh on global demand for their products. Profit growth at eight of 14 companies surveyed by Thomson Reuters slowed about 7 percent from a year earlier.
In contrast, card payment processors, retailers and telecoms companies are picking up the slack, planning to invest more in hopes that government steps to lower borrowing costs and taxes will revive Brazil's economy later this year. Such promises came despite a weak quarterly performance for most.
"Large-scale investment in cyclical sectors is gaining a secondary role," said Dany Rappaport, who manages $150 million in assets at InvestPort in São Paulo. "Brazil is becoming a consumption-based economy more rapidly than many of us thought."
What first looked like a business cycle-oriented move may be further evidence of the deep changes that the $2.3 trillion Brazilian economy is undergoing. One aspect, in particular, looks worrisome: the shrinking role of industry as services take center-stage.
At the end of 2011, the share of services rose to 67 percent of Brazil's gross domestic product, from about 55 percent ten years ago. In contrast, the weight of industry fell to about 28 percent of GDP from roughly 35 percent in the same period.
Brazil, the world's fourth-largest democracy, is poised between being an industrialized economy and a commodity powerhouse that still depends upon raw materials.
As miners and factories scale back capital spending, the progress that Brazil has made in terms of increasing investment as a percentage of GDP could be at risk. Investment represents 20 percent of GDP, up from 15 percent in 2002 but below the level of many other emerging-market nations.
The government of President Dilma Rousseff is worried about the shrinking role of industry, a trend officials refer to as "deindustrialization." At the same time, though, the government is taking steps to encourage consumer spending, which might end up reinforcing the shift toward a services-based economy.
Investment by commodities producers kickstarted Brazil's economy during the slowdowns of 2003 and 2006. But when the economy slid briefly into recession in 2009, it was a heavy expansion in the services sector that revived growth.
BETTER BALANCE SHEETS
As market conditions for iron ore, pulp and oil remain uncertain, less-ambitious investment plans will at least help industrial goods and commodities producers improve their balance sheets in coming quarters and implement cost-cutting strategies that may ultimately prop up share prices.
"What numbers are likely telling us is that potential returns don't match risks in projects for commodities and industrial companies," said the head of equities at a São Paulo brokerage, who spoke on condition of anonymity. "It's a long-term, not a short-term, mismatch."
Bank of America Merrill Lynch economists predict that investment in Brazil will grow at a 3.7 percent pace this year, down from 5.1 percent. Capital spending grew around 1 percent in December on a year-on-year basis, the economists said.
Gerdau SA , the world's No. 2 producer of steel for builders, recently cut its five-year investment plan by 500 million reais ($294 million). Pulp producer Fibria Celulose SA , struggling with a costly debt load, said it will spend only what is necessary to keep running its plants.
Mining giant Vale SA , the country's biggest private-sector company, also trimmed its investment plan for 2012 by 11 percent to $21 billion, in the face of volatile metals prices. Chief Executive Murilo Ferreira has slowed new investments to focus on existing projects.
State oil company Petrobras will not "expand the scope" of its $225 billion, five-year spending plan, the largest in the oil industry globally, new chief executive Maria das Graças Foster said last week.
The companies all share common ground: they saw earnings before interest, tax, depreciation and amortization - a gauge of operational profitability known as EBITDA - growing at a slower pace. Some other profit indicators also deteriorated markedly.
"The more prudent many of these companies are with their investment budgets, the better they will cope with what looks to be a challenging period," said Roseli Machado, who oversees 5.2 billion reais in assets at Fator Adminstradora de Recursos.
The exception among overly cautious industrial companies is Embraer SA , the world's third-largest commercial planemaker, which upped planned investments by 44 percent to $650 million this year, partly to tap promising demand for defense and military aircraft.
SERVICES BOOM
Redecard SA , Brazil's No. 2 card payment processor, will more than double investment this year to 500 million reais to gain market share as card usage surges. Grupo Pão de Açúcar , the nation's largest diversified retailer, plans to increase capital spending by 40 percent this year.
Telefonica Brasil , which controls Brazil's largest mobile phone carrier, will keep its investment budget unchanged in 2012. Smaller rival TIM Participações will invest 3 billion reais this year, little changed from 2011.
"The perception is that domestic demand will certainly gain a lot of traction during the second half," Rappaport added.
Some economists say a greater contribution of investment to growth and more moderate consumption could help Brazil's economy avoid the repetition of the stop-and-go cycles that led to chronic hyperinflation less than two decades ago.
The bulk of the world's richest nations and some emerging markets like China first became industrialized economies before turning into global powerhouses. That is not the case of Brazil, despite enjoying a diversified base of manufacturing companies and abundant raw materials.
Brazil is sidestepping that transition mainly because a growing middle class - more than 30 million people climbed out of poverty in the last decade - is rapidly fueling demand for goods and services.
It is no surprise, then, that investors are likely to keep favoring retail and consumer goods stocks over industrial shares in coming years, Fator's Machado said.
"In a way, investors have been predicting that the balance was to shift towards Brazil as a consumption play," she said.
The Fator Prisma fund, a 90 million-reais fund that bets on consumer and infrastructure firms with an aggressive domestic focus, is up 32 percent since it was created 28 months ago. The Bovespa stock index <.BVSP> rose 1 percent over that period.
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Pulp producers, miners and steelmakers that missed fourth-quarter earnings estimates are trimming investment as Europe's debt crisis and China's slowdown weigh on global demand for their products. Profit growth at eight of 14 companies surveyed by Thomson Reuters slowed about 7 percent from a year earlier.
In contrast, card payment processors, retailers and telecoms companies are picking up the slack, planning to invest more in hopes that government steps to lower borrowing costs and taxes will revive Brazil's economy later this year. Such promises came despite a weak quarterly performance for most.
"Large-scale investment in cyclical sectors is gaining a secondary role," said Dany Rappaport, who manages $150 million in assets at InvestPort in São Paulo. "Brazil is becoming a consumption-based economy more rapidly than many of us thought."
What first looked like a business cycle-oriented move may be further evidence of the deep changes that the $2.3 trillion Brazilian economy is undergoing. One aspect, in particular, looks worrisome: the shrinking role of industry as services take center-stage.
At the end of 2011, the share of services rose to 67 percent of Brazil's gross domestic product, from about 55 percent ten years ago. In contrast, the weight of industry fell to about 28 percent of GDP from roughly 35 percent in the same period.
Brazil, the world's fourth-largest democracy, is poised between being an industrialized economy and a commodity powerhouse that still depends upon raw materials.
As miners and factories scale back capital spending, the progress that Brazil has made in terms of increasing investment as a percentage of GDP could be at risk. Investment represents 20 percent of GDP, up from 15 percent in 2002 but below the level of many other emerging-market nations.
The government of President Dilma Rousseff is worried about the shrinking role of industry, a trend officials refer to as "deindustrialization." At the same time, though, the government is taking steps to encourage consumer spending, which might end up reinforcing the shift toward a services-based economy.
Investment by commodities producers kickstarted Brazil's economy during the slowdowns of 2003 and 2006. But when the economy slid briefly into recession in 2009, it was a heavy expansion in the services sector that revived growth.
BETTER BALANCE SHEETS
As market conditions for iron ore, pulp and oil remain uncertain, less-ambitious investment plans will at least help industrial goods and commodities producers improve their balance sheets in coming quarters and implement cost-cutting strategies that may ultimately prop up share prices.
"What numbers are likely telling us is that potential returns don't match risks in projects for commodities and industrial companies," said the head of equities at a São Paulo brokerage, who spoke on condition of anonymity. "It's a long-term, not a short-term, mismatch."
Bank of America Merrill Lynch economists predict that investment in Brazil will grow at a 3.7 percent pace this year, down from 5.1 percent. Capital spending grew around 1 percent in December on a year-on-year basis, the economists said.
Gerdau SA , the world's No. 2 producer of steel for builders, recently cut its five-year investment plan by 500 million reais ($294 million). Pulp producer Fibria Celulose SA , struggling with a costly debt load, said it will spend only what is necessary to keep running its plants.
Mining giant Vale SA , the country's biggest private-sector company, also trimmed its investment plan for 2012 by 11 percent to $21 billion, in the face of volatile metals prices. Chief Executive Murilo Ferreira has slowed new investments to focus on existing projects.
State oil company Petrobras will not "expand the scope" of its $225 billion, five-year spending plan, the largest in the oil industry globally, new chief executive Maria das Graças Foster said last week.
The companies all share common ground: they saw earnings before interest, tax, depreciation and amortization - a gauge of operational profitability known as EBITDA - growing at a slower pace. Some other profit indicators also deteriorated markedly.
"The more prudent many of these companies are with their investment budgets, the better they will cope with what looks to be a challenging period," said Roseli Machado, who oversees 5.2 billion reais in assets at Fator Adminstradora de Recursos.
The exception among overly cautious industrial companies is Embraer SA , the world's third-largest commercial planemaker, which upped planned investments by 44 percent to $650 million this year, partly to tap promising demand for defense and military aircraft.
SERVICES BOOM
Redecard SA , Brazil's No. 2 card payment processor, will more than double investment this year to 500 million reais to gain market share as card usage surges. Grupo Pão de Açúcar , the nation's largest diversified retailer, plans to increase capital spending by 40 percent this year.
Telefonica Brasil , which controls Brazil's largest mobile phone carrier, will keep its investment budget unchanged in 2012. Smaller rival TIM Participações will invest 3 billion reais this year, little changed from 2011.
"The perception is that domestic demand will certainly gain a lot of traction during the second half," Rappaport added.
Some economists say a greater contribution of investment to growth and more moderate consumption could help Brazil's economy avoid the repetition of the stop-and-go cycles that led to chronic hyperinflation less than two decades ago.
The bulk of the world's richest nations and some emerging markets like China first became industrialized economies before turning into global powerhouses. That is not the case of Brazil, despite enjoying a diversified base of manufacturing companies and abundant raw materials.
Brazil is sidestepping that transition mainly because a growing middle class - more than 30 million people climbed out of poverty in the last decade - is rapidly fueling demand for goods and services.
It is no surprise, then, that investors are likely to keep favoring retail and consumer goods stocks over industrial shares in coming years, Fator's Machado said.
"In a way, investors have been predicting that the balance was to shift towards Brazil as a consumption play," she said.
The Fator Prisma fund, a 90 million-reais fund that bets on consumer and infrastructure firms with an aggressive domestic focus, is up 32 percent since it was created 28 months ago. The Bovespa stock index <.BVSP> rose 1 percent over that period.
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