Bitter dose of real-ity: Brazil real woes drive shipping firms to maelstrom

Sete Brazil holds 50% of rig builders’ order books.

Singapore’s headline offshore & marine firms are wearily scrambling for answers economic and political trends escalate in the south-american nation of Brazil, perhaps with none bigger than the fast-depreciating Brazilian Real.

According to a report by CIMB, Vard Holdings has recently issued a profit warning for its 3Q15 and FY15 earnings, blaming its Brazilian operations.

“Vard’s Brazilian operations have been struggling, especially Vard Promar, which has been weighed down by delays for the LPG carriers and slow ramp-up. Order drought has also resulted Vard Niteroi to be in losses, affecting deliveries of AHTS,” CIMB said.

Analysts from CIMB say middle-level talent management could be the thorn in Vard’s side, as its location in Pernambuco in under-developed northeastern Brazil has a smaller pool of skilled labour.

“It is also located adjacent to Estaleiro Atlantico Sul, which cancelled the seven drillships contract with Sete Brasil,” they said.

Meanwhile, the real problem hitting Vard in the face is the depreciating Brazilian real, which has exacerbated gloomy Brazilian earnings in 3Q15.

“Vard incurred forex losses amounting to NOK313m in 1H15, mainly from US$ loans in Brazil while its functional currency is the Brazilian real,” CIMB said.

On the other hand, not only Vard Holdings is being plagued by the Brazilian real epidemic, as analysts fear it could also stall negotiations for Keppel and Sembcorp Marine.

“Although execution risks for Sete Brasil could be limited for both KEP and SMM, we believe the depreciation in Brazilian reals could further hinder negotiations for construction outstanding payment for the drillships and semi-submersibles being built. SMM’s yard in Espirito Santo (southeast Brazil) could also face pressure to ramp up, albeit to a lesser extent vs. Vard Promar given its closer proximity to the state of Rio,” CIMB said.

The real has depreciated more than -50% since the contracts were awarded to the yards in 2012, and it’s therefore more costly to build a rig today.