Petrobras Lowers Fuel Prices to Stunt Import Competition

  • Company trying to protect market share against fuel imports
  • Move increases bets that central bank will cut rates next week

Brazil’s state-controlled oil company Petrobras cut the price of gasoline and diesel as part of a new policy designed to protect market share while avoiding costly subsidies that drained its profits in recent years.

Petroleo Brasileiro SA, as the Rio de Janeiro-based company is formally known, announced Friday that gasoline prices will fall by 3.2 percent while diesel will drop by 2.7 percent at refineries effective Saturday. At fuel stations, fuels may become 1.4 percent and 1.8 percent cheaper, respectively.

The world’s most indebted oil company hadn’t adjusted its prices for more than a year. The new policy takes into account international pricing parity plus a margin to make up for taxes and risks including foreign exchange volatility, Petrobras said in a statement. A committee comprised of Chief Executive Officer Pedro Parente, plus the chief of the company’s refining division and the chief financial officer will decide on fuel prices, which will be reviewed at least once a month, it said.

Petrobras has been selling gasoline and diesel at a premium for almost two years, helping recover an estimated $35 billion it lost subsidizing imports from 2011 through late 2014 during the commodities boom. The price cut won’t affect the company’s business plan, executives said.

“The impact on the company’s accounts isn’t only from prices, you also have to look at market share,” Parente told reporters in Rio.

Import Competition

Brazilians are consuming less fuel amid the deepest two-year recession on record, and competing fuel retailers including Ultrapar Participacoes SA’s Ipiranga unit and Raizen, a joint venture between Royal Dutch Shell Plc and Cosan SA Industria & Comercio, have increased imports to capture the higher margins. Diesel imports from competitors have surged this year and in September they were more than double January levels, according to Petrobras.

Petrobras’s preferred shares jumped as much as 3.4 percent in Sao Paulo, contributing most to the advance of the Ibovespa gauge. The policy of regularly reviewing prices is positive for the company even though the cuts announced today will have a short-term impact on earnings, UBS AG analysts Luiz Carvalho and Julia Ozenda said in a research report. The move could reduce fourth-quarter earnings before interest, taxes, depreciation and amortization by $300 million, the analysts said.

“With a clearer visibility on pricing policy, the attractiveness of refining business in Brazil increases, thus, helping the company to find new partners in the segment,” the analysts said.

Petrobras is looking for partners at its refineries to help share investment costs and bring technical experience, Parente said. The company plans to raise about $25 billion from asset sales by the end of 2018 in an effort to reduce leverage and help finance investments.

Swap rates dropped as the cut in fuel prices signaled the central bank may have more room to reduce the benchmark Selic rate, currently at a 10-year high of 14.25 percent, as early as next week.

“Petrobras’s decision will help inflation ease at a faster pace,” said Camila Abdelmalack, an economist with CM Capital Markets. “It confirms the expectation of a 50 basis points cut in the Selic.”

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