Brazil Sector report

February 2021

Sectors @ a glance

Industry performance outlook

Agriculture

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Automotive/ Transport

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Chemicals/Pharma

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Construction/ Const. Materials

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Consumer Durables

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Electronics/ICT

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Financial Services

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Food

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Machines/ Engineering

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Metals

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Paper

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Services

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Steel

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Textiles

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Agriculture

The arrows in this overview represent the direction of change in the Atradius outlook for the industry since the previous update. No arrow will appear if there has been no change in our overall outlook.

Remains Fair Some businesses in the fertilizers distribution segment have been affected by higher import costs of commodities (mainly agrochemicals) due to the real volatility against the USD, which negatively influenced margins. However, a record harvest and the still unsolved issues between China and the US favor Brazilian agricultural exporters, who also benefitted from the low exchange rate. Agriculture exports remained robust in H2 of 2020, and sector value added is expected to increase by more than 4% in 2021.

Automotive/Transport

Remains Bleak Both automotive manufacturing and sales suffered from deteriorating demand in H1 of 2020. This has led to severe liquidity strains and cash shortfalls among many businesses. However, the sector has started to rebound since Q3 of 2020, helped by a better than expected economic recovery. Automotive value added is expected to increase 30% in 2021 after a 40% contraction in 2020.

Chemicals/ Pharmaceuticals

Remains Good Both chemicals and pharmaceuticals businesses have improved their results and margins over the past couple of years, and payment experience has been good over the past two years. Demand for medicines and specialised drugs will grow. The market mainly consists of resilient distributors and retailers. In the chemicals subsector, most raw materials have to be imported, and production costs are exposed to exchange rate volatility, especially in the agrochemicals (pesticides) subsector. Low prices for fertilisers have contributed to improved business profitability in H2 of 2020. Chemicals value added is expected to rebound 7.5% in 2021 after a 9% contraction in 2020.

Construction/Construction Materials

Remains Poor Operating margins are very tight, with increased credit risk mainly to smaller players. In H1 of 2020, the economic downturn aggravated the situation of many businesses, with further deteriorating margins. However, sector performance has improved in H2 of 2020, due to demand for renovation. Meanwhile, a need for new and larger houses emerged due to the pandemic. Consumers have diverted money that would otherwise be spent on travel or entertainment to home restructuring, and low interest and inflation rates continue to support market recovery. Construction value added is expected to rebound 6% in 2021 after a 12% contraction in 2020.

Consumer Durables

Remains Poor In H1 of 2020, private consumption of non-food consumer goods sharply decreased due to the coronavirus impact, and the financial strength of many retailers has seriously deteriorated. Thanks to e-commerce retail, the sector has seen a strong surge in demand as of May 2020. Government assistance (e.g. cash handouts) to poorer households has supported the industry. Meanwhile, an increasing number of purchases by middle class consumers working from home has benefitted certain businesses, particularly in the small appliances and white goods segments. Retail value added is expected to rebound 8% in 2021 after a 9% contraction in 2020.

While a considerable number of retailers has asked for payment extensions, a substantial increase in credit insurance claims has not yet materialized. However, the credit risk for smaller retailers that own no online business and/or have been impacted by the lockdown without material support from banks remains elevated. In this segment, payment defaults have increased, while the number of both judicial recoveries and bankruptcies has decreased year-on-year for medium-sized and larger retailers.

Electronics/ICT

Remains Poor After an initial slowdown in March and April 2020, ICT sales have benefited from strong demand for laptops and connectivity items, as many companies have switched to remote working. However, the credit risk for smaller ICT businesses that have been impacted by the lockdown without material support from banks remains elevated. In this segment, payment defaults have increased. ICT value added is expected to rebound by more than 5% in 2021 after a 1% contraction in 2020.

Financial Services

Remains Good The sector remains robust, able to provide strong support to the economy. This support has been enabled by emergency measures taken by the Central Bank, which helped banks to extend payment terms on loans without raising capital costs. Non-performing loans have not yet substantially increased.

Food

Remains Good Despite ongoing sales, the sector was impacted by the consequences of the lockdown (e.g. transport and supply chain issues) in H1 of 2020. Value added growth is expected to contract 2.5% in 2020, but to rebound strongly by almost 6% in 2021.

Machines/Engineering

Remains Poor Engineering value added is expected to decrease by more than 17% in 2020, followed by a 15% rebound in 2021. Demand from key buyer industries has decreased, and capital investment contracted sharply in H1 of 2020. However, domestic machinery builders have benefited from the fact that machine imports have become more expensive due to real depreciation.

Metals

Remains Poor Metals value added is expected to decrease by more than 15% in 2020, as demand from key buyer industries has decreased. However, a substantial increase in credit insurance claims has not yet materialized, and sector performance is expected to improve in the coming months.

Paper

Remains Poor Paper producers have been impacted by decreased demand due to lockdown measures, the economic recession and the ongoing digitalization. However, demand for paper products used for health care and hygiene has increased.

Services

Remains Poor As a result of rising unemployment and the comprehensive lockdown measures in face of the coronavirus outbreak, many segments suffered heavily, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. The overall liquidity drain in the services sector has triggered a significant increase in payment delays and insolvencies. Hotel and catering value added is expected to decrease by more than 20% in 2020, followed by a 14% increase in 2021. A comprehensive rebound remains subject to progress in vaccination, and is expected to start in H2 of 2021 at the earliest.

Steel

Up from Bleak to Poor Steel value added is expected to decrease by more than 18% in 2020, as demand from key buyer industries decreased. However, sector performance started to rebound in H1 of 2020 due to increased demand from sectors like construction. Value added is expected to rebound by about 14% in 2021.

Textiles

Remains Bleak Producers, wholesalers and retailers already suffered before the coronavirus outbreak from fierce competition, thin margins, changes in customer behaviour and increased competition from new online retailers. Their performance further deteriorated due to low sales that resulted from lockdowns and rising unemployment. Textile value added is expected to shrink by more than 26% in 2020 after annual contractions in 2018 and 2019. Payment delays and business failures increased last year – a trend that is expected to continue in 2021.

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