Industry Trend Analysis - Fuels Demand Will Stage Subtle Recovery - APR 2017

BMI View: Refined fuels demand will rise in 2017 on the back of a modest economic recovery. However, growth will be constrained by a large output gap and still-elevated unemployment.

Brazilian consumption of refined fuels will return to growth in 2017. Following a two-year recession, we believe improving business sentiment will boost investment into the country and revive economic activity over the coming year. However, demand growth will be limited by continued slack in the economy, particularly with respect to employment and output ( see ' Improving Business Sentiment Will Drive Modest Recovery ', January 5). We therefore forecast a 0.6% y-o-y increase for the year, compared to an estimated 4.5% y-o-y decline in 2016.

Tepid Rebound In 2017
Brazil - Real GDP and Fuels Consumption Growth, %
e/f = BMI estimate/forecast. Source: IGBE, ANP, BMI

Comprising upwards of 46.0% of total fuels demand, diesel fuel will drive the recovery in 2017. Over the next several quarters, an increase in fixed investment will increase output y-o-y, with much of the funds directed toward the upstream sector. A series of business-friendly reforms enacted over the past six months have targeted the oil and gas sector, encouraging private sector partners to expand their foothold in the market ( see 'Deepwater Potential Luring In Drillers', January 9).

Bolstered by decelerating inflation and falling interest rates, we believe an influx of investment will strengthen the industrial sector. Given its use in the industry, this will revive diesel consumption which we forecast will grow by 3.2% y-o-y in 2017, having declined by an estimated 5.2% y-o-y in 2016.

Nearing A Comeback
Brazil - Diesel Consumption and Industrial Production Growth, %
Source: IBGE, JODI

Substantial Headwinds Remain

However, we believe economic gains will be offset by continued slack that has built up over the past two years, thereby limiting overall fuels demand. Specifically, production gains throughout the country will be modest as a result of under-utilised capacity and ongoing concerns relating to project financing and returns ( see ' Improvements To New Concessions Programme Will Not Be Enough', December 9 2016).

This will prolong high levels of unemployment with debts dragging on household spending. At nearly 12.0% as of November 2016, elevated unemployment will delay a more robust economic recovery and weigh on overall demand.

Moreover, a new fuel pricing strategy announced in October 2016 by state-owned Petrobras will prove challenging for already-constrained Brazilian consumers. Having removed costly subsidies over the course of the past year, the new policy seeks international parity, with the company evaluating prices on a monthly basis.

Adjustments Weigh On Consumers
Brazil - Gasoline and Diesel Prices, USD/litre
Source: Global Petrol Prices

Nonetheless, we maintain that 2017 will witness a moderate uptrend in demand, as citizens adjust to modest economic gains, while contending with continued headwinds. Beyond this year, we believe fuels consumption will rise alongside economic activity, averaging 1.7% y-o-y through 2021.