March 12 (Bloomberg) -- A surprise diesel-price increase that fueled Petroleo Brasileiro SA’s biggest rally in four years is being countered by record fuel demand from farmers, signaling further import losses for the state-run oil company.
Petrobras, as the Rio de Janeiro-based company is known, surged 15 percent in the days after the government unexpectedly approved a 5 percent diesel price increase on March 6, the biggest two-day gain since October 2008. The preferred shares lost investors 27 percent in the past year in U.S. dollar terms, the second-worst performer among major oil companies.
The diesel increase will pare the discount to prices abroad to about 10 percent, meaning Petrobras will continue losing money as it imports more-expensive supplies to make up for a domestic shortfall, said Lucas Brendler, who helps manage 5 billion reais ($2.6 Billion) at Geracao Futuro. Farmers, truckers and shippers will be buying more diesel in coming quarters to get record sugar and soybean crops from the fields to U.S. and European consumers, he said.
“The second and third quarter is when you have more crops to be exported, the whole economy expands,” Brendler said by phone from Porto Alegre, Brazil. “This 5 percent increase helps, but doesn’t solve the main problem of cash generation.”
Petrobras lost 5.8 billion reais last year as it imported diesel and gasoline at international rates and resold it for the lower government-set price caps, Banco Itau SA said in a report this month. Gasoline was sold at an average 20 percent discount and diesel at a 16 percent discount.
The company has a policy to align domestic fuel prices with the international market in the medium and long term, according to a March 5 statement. Petrobras declined to comment on the impact agriculture will have on diesel demand and profits, the company said in an e-mailed response to questions.
Petrobras trades at 7.6 times estimated 2013 earnings, the second lowest among the Americas’ 50 biggest oil companies. The stock is the worst performer among the world’s biggest oil companies with a market value above $50 billion after Russia’s Gazprom OAO.
Diesel consumption grew seven times faster than Brazil’s economy last year and is expected to surge another 7 percent this year, Florival Carvalho, a director at the National Petroleum Agency, said March 5. Petrobras’s 12 refineries are producing near capacity and the company will have to import additional supplies until it builds new plants and pipelines.
Surging crop output will drive diesel demand as growers ship products hundreds of miles from farms to seaports, using mostly diesel-fired trucks rather than railways. Millers will produce a record 37.5 million tons of sugar this year, 3.7 percent more than last year, according to U.S. Department of Agriculture data compiled by Bloomberg. The soybean crop is forecast to be the world’s largest at 83.5 billion tons, 26 percent more than a year ago, the data show.
The country is already the world’s largest exporter of coffee and orange juice and is forecast to surpass the U.S. and Argentina as the world’s largest corn exporter this year, according to U.S. Department of Agriculture data.
“Despite its widely advertised self-sufficiency, Petrobras has been importing oil products for a long time,” Banco Itau SA analysts Paula Kovarsky and Diego Mendes said in a March 3 report to clients. “Diesel imports have increased steadily over the last years, following the GDP expansion, boosted particularly by higher demand from agribusiness and transportation.”
Government caps on gasoline and diesel helped drive Petrobras profits last year to their lowest point since 2004. The company has a five-year plan to invest $236.5 billion to develop off-shore oil reserves, which helped make it the world’s most indebted publicly traded oil company.
‘Change in Direction’
Brent oil prices, a global benchmark, have dropped 12 percent in the past year to $110.22 per barrel, after surging from $45.59 at the end of 2008. U.S Gulf Coast conventional gasoline spot prices have risen 11 percent this year after dropping 0.5 percent in 2012.
The willingness of the government, which controls Petrobras with a majority of voting shares, to increase diesel and gasoline prices over the past year marks a shift from previous concern that price hikes will fuel inflation, Dany Rappaport, who helps manage about 250 million reais at Investport in Sao Paulo, said by phone.
“The main element isn’t the magnitude, but the direction, the change in direction is what is surprising,” Rappaport said.
Analysts raised their 12-month price target on Petrobras shares by 1.1 percent after the diesel increase to 25.29 reais. The stock fell 01 percent to 18.75 reais at 2:52 a.m. in Sao Paulo.
With Petrobras unable to produce more diesel at its refineries, it will have to continue importing the fuel to meet demand, said Adriano Pires, the head of the Brazilian Center for Infrastructure, a consulting firm in Rio de Janeiro. He expects imported diesel to account for 25 percent of Petrobras’s total sales this year, up from 19 percent in 2012.
“The main thing is the outlook for robust growth in diesel consumption,” Pires said by telephone. “This year will be difficult for Petrobras because even with the diesel price increase, the gap continues.”