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Mixed Carnival for Brazil's Largest Companies

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Petrobras and Vale report sharp drops in profit though Brazil looks to be heading for single-digit interest rates as inflation calms.

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It's been a mixed carnival for some of Brazil's biggest companies. While revelers danced for five days solid and vendors earned enough cash to keep them going for the next couple of months, Brazil's business elite may have taken some time out to look at the year ahead -- or perhaps not.

State oil company Petrobras (PBR), the cornerstone of the country's economy, suffered a fourth-quarter decline in profit of a whopping 52%, falling to $2.94 billion from $6.24 billion compared to the same period of 2010, thanks to rising operating costs which far offset the increase in revenue. The figure was just over half of that expected by 10 analysts surveyed by Reuters. Shares fell 7.16% on the news, the biggest drop in six months.

The fall came just a day after the approval of the company's new Chief Executive, Maria das Graças Silva Foster. The 58-year-old has worked at Petrobras for more than three decades as well as served as Brazil's Secretary of Oil, Natural Gas and Renewable Fuels in the last 10 years.

This political experience will serve her well alongside the government of President Dilma Rousseff, keen to keep a close hold -- perhaps too close -- on Brazil's biggest companies, such as Vale (VALE), which saw Murilo Ferreira, a Rousseff-ally, replace Roger Agnelli as Chief Executive in April.

Foster's predecessor at Petrobras, José Sergio Gabrielli, committed the company to 6.4 million barrels per day by 2020, around three times its current output of 2.72 barrels per day in December. Foster has a $225 billion five-year investment program to manage in order to increase output.

The investment plan is focused on a subsalt region off the coast of Rio de Janeiro which could hold as much as 100 billion barrels of oil.



One reason to quickly increase output -- and a factor in Petrobras' disappointing results -- was huge domestic gasoline consumption last year, up 19% in 2011 to 35.5 billion liters. This meant Petrobras had to import a record 70,000 barrels per day in December alone as domestic refineries were unable to keep up with demand.

Petrobras is invaluable to Brazil's economy, as pointed out by Forbes' Kenneth Rapoza. "Without Petrobras and its massive deep ocean oil discoveries off the coast…, international inflows into Brazil would look tame," wrote Rapoza, adding that the huge foreign investment flowing into Brazil -- $15.4 billion in December, $48.5 billion over the year -- is primarily due to Petrobras alone.

Mining giant Vale may have struggled in its fourth quarter results -- with a 21% drop in net profits -- but 2011 itself was a record one for the company. "Record operating revenues of $60.4 billion…; record operating income from existing operations…; record operational margin from existing operatios…; record net earnings of $22.89 billion…" and so the company's press release went on.

It's not going to be an easy year for the company, however. Its biggest bugbear is the declining price of iron ore, its biggest export. Price fluctuations, growing costs and depletion of mineral reserves will have to be overcome if 2012 is to be a success, according Dow Jones.

While Petrobras and Vale may have had a rough ride in the fourth quarter, other Brazilian firms would have had more reason to celebrate over carnival. Natura, the continent's largest cosmetics company, saw net profit up 33% in the period compared to the previous year.

Inflation
Brazil may finally be closing in on inflation. The benchmark index was at 5.98% in the year to mid-February, its lowest level since December 2010. The news has reinforced speculation that the Central Bank will pull interest rates down from 10.5% to single digits this year. It will make its next decision on March 7.

Authorities will be walking a tightrope as they pull the interest rate down, concerned that the economy may begin to overheat again. Most economists are expecting the interest rate to be at 9.5% by the end of 2012.

Economists expect this year's inflation figure to be 5.24%, according to a Central Bank survey.

Rousseff Coming into Her Own
The Economist has said that Rousseff has "progressively emerged from [former President Luiz Inácio Lula da] Silva's shadow to recast the Brazilian state in her own likeness," after a slow start in which she was, the article claims, careful not too make changes to rapid that may appear to rebuff her extremely popular predecessor.

Lula himself would have been buoyed this week as a guest post in the Financial Times suggested that he would be a good bet to take over from Robert Zoellick as president of the World Bank.

Though, like Mexican Central Bank Governor Agustin Carstens' bid last year for the leadership of the International Monetary it may be a little while before Europe and the United States lose their domination the international monetary organizations.

Twitter: @jammastergirish
No positions in stocks mentioned.

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