Focusing on Brazilian commodity production to gain a real-time sense of domestic economic performance
Brazilian economic activity on a path of rapid deceleration as Covid-19 spreads within the country
Brazilian President Jair Bolsonaro, unlike most other world leaders, has been less than willing to implement and enforce broad-based economic closures required to slow the spread of Covid-19. A lack of action at the top has not stopped state leaders from stepping in to fill the leadership gap. Twenty-four of Brazil’s 27 states had moved forward with increasingly strict quarantine measures as of April 1st at the demur of Bolsonaro.
Ultimately the lack of strong federal coordination has allowed for a chaotic and disparate set of requirements that is likely to add further pressures to an economic growth forecast already under strain from supply chain disruptions emanating from beyond the country. Early data is already painting a deeply negative picture. The Brazilian Real has depreciated by some 40% against the U.S. Dollar just since the start of 2020, forcing the central bank to draw heavily on foreign currency reserves to stem the bleeding. Indeed, the Brazilian Central Bank’s official reserve position declined 12.8% y/y in March to mark the largest such decrease since the time-series began in 2001. Unemployment, which began to tick higher late last year, is currently holding at 12% and could very well continue pushing higher despite seasonal effects that tend to weigh on the rate through Q3. Median expectations of annualized GDP growth are back into negative territory (-0.90%) for the first time since early-2017 and these expectations are likely to worsen in the months ahead.
Despite a lack of support from Bolsonaro, the Brazilian government has provided moderate amounts of fiscal stimulus in attempts to blunt the blow from Covid-19. In total, fiscal measures will come out to 6.5% of GDP, albeit half of this spending was already allocated to other programs. The Brazilian Central Bank has been similarly supportive with a focus on monetary easing. The official SELIC policy rate was cut to just 3.75%, the lowest level in more than two decades. The reserve requirement was also slashed by 14 basis points in a bid to further boost money circulation. Focus in the months ahead will need to center on signs of inflation which at present is holding within reasonable levels (3.2%).
Iron ore exports through April point to weakness in global steel production levels as downstream demand destruction weighs on manufacturing activity
Brazilian iron ore departures are far outperforming levels from a year earlier. Loadings finished April at 23.06 Mt, higher 5.71 Mt y/y. Unfortunately, the gain was not a true improvement in export growth, but rather a result of 2019 supply disruptions following the Vale dam disaster. More broadly, departure levels finished at some 5.93 Mt under the April 2018 total in a sign that demand for iron ore is struggling.
There are signs that the need for Brazilian iron ore will remain constrained in the weeks ahead. Chinese iron ore inventories, which realized significant draws through March, have since flattened out despite no significant change to aggregate iron ore imports. Chinese crude steel production has also begun to decline against year ago levels after some signs of recovery through March and early-April.
Under normal circumstances, Brazilian producers might look to other markets to fulfill the loss in marginal demand out of China. Of course, the Coronavirus is hindering economic activity everywhere. May will be a key month for determining whether Brazil will be forced to scale back departures more significantly to account for weakness along the global supply chain.
Brazilian oil producers look to export abroad as domestic gasoline/diesel demand struggles
While Brazilian refinery utilization levels are not actively published, it is a near certain likelihood that throughput struggled on the month. Like most other places on the planet, quarantines have heavily limited the need for domestic petroleum products. Despite movement restrictions, imports of middle distillates and light ends still finished up in April (+73 kbd y/y). Such an import gain is a notable confirmation that refinery run cuts likely outpaced reductions in domestic demand, a characteristic not true of most major refining centers globally.
Brazilian oil producers seemingly adjusted to this new lower throughput reality by attempting to export more crude. Departures on the month finished at a record high 1.8 mbd, marking a gain of 350 kbd m/m and 745 kbd y/y. A portion of the increase against year earlier levels was a result of an upward trend in loadings resulting from new production areas that have come online in the past six months. On a 14-day moving average basis, there is not yet evidence that producers are slowing departures into May.
Of course, the move to export more crude is not really a solution to the broader demand problem. While export loadings did indeed increase against month and year earlier levels, much of this crude is likely struggling to find buyers. Brazilian oil tagged as floating storage peaked at 8.5 mb in late-April, albeit about a third of this has since come off as barrels have found small pockets of onshore storage in China, Singapore, Spain, Malaysia and the United States.