Brazil industrial output falls as oil products lose momentum - Valor International

The easing of tensions in the Middle East weighed on refined petroleum output in June, sapping momentum from one of the few sectors that had been helping sustain Brazil’s industrial activity amid a prolonged environment of high interest rates and elevated corporate debt. According to the Brazilian statistics agency IBGE, industrial production fell 1.8% in June from the previous month, seasonally adjusted. In May, output declined 0.9%, following an estimate of a 0.2% drop. June’s result showed broad-based weakness, with declines in 16 of the 25 industrial sectors surveyed by the IBGE, as well as across all four major economic categories.

The 1.8% monthly decline was the steepest since December 2025 (-1.9%) and the largest for any June since 2014 (-2.9%). It also came in below the most pessimistic estimate in the Valor Data survey, where forecasts ranged from a 1.4% decline to a 0.8% increase, with a median projection of a 0.6% drop.

Compared with June 2025, industrial output rose 1.7%, also below the lowest estimate in the survey, which ranged from gains of 2.1% to 5.8%. All four major industrial categories posted declines from May. Capital goods fell 1.1%; intermediate goods also dropped 1.1%; durable consumer goods contracted 3.2%; and semi-durable and non-durable consumer goods declined 4.1%.

Among the 16 industrial sectors posting declines in June, coke, refined petroleum products, and biofuels led the downturn with a 5.9% drop. “The petroleum sector had the largest negative impact. It was not the sole driver of the overall decline, but it accounts for roughly 14% to 15% of the industrial structure, and this marks its second consecutive monthly decline,” said André Macedo, the IBGE manager responsible for the industrial production survey.

Taking into account June’s result and the downward revision for May, second-quarter industrial growth was revised to 0.3% from 1.2%, according to ABC Brasil. The statistical carryover for the third quarter—the growth rate implied if output remains unchanged over the next three months—currently stands at -1.5%.

“That calculation reinforces a clear downside bias for the industrial sector in the coming quarter. It has also affected the statistical carryover for full-year 2026, which has fallen to 0.6%,” the bank said in a note to clients.

For XP Investimentos, the breadth of the decline suggests that the industry’s strong start to the year was little more than “a midsummer night’s dream.”

“The breakdown is even less encouraging than the headline figure suggests. The extractive industry expanded 1.9% in the second quarter after rising 2.3% in the first and accounted for virtually all of the quarter’s overall growth, while manufacturing edged down 0.1% after expanding 1.2% in the previous quarter,” economists Rodolfo Margato and Alexandre Maluf wrote in a report.

Following the release, the brokerage revised its high-frequency GDP estimate for the second quarter to 0.40% quarter-over-quarter from 0.47%. Its full-year GDP growth forecast remains at 2.0%.

André Galhardo, chief economist at Análise Econômica, highlighted that the decline was three times larger than the consensus forecast and attributed the result not only to high interest rates but also to elevated inventories and the unwinding of the Middle East conflict’s impact on the oil and gas sector. “Oil reached $120 a barrel at the height of the conflict and remained around $100 for some time. In June, it quickly fell to $70 a barrel, something that neither many economists nor I expected, especially given the destruction of productive capacity caused by the conflict,” he said.

He also believes that high iron ore inventories in Brazil weighed on mining activity. Manufacturing, he added, faced a similar dynamic. “The recovery seen at the turn of the year reflected inventory rebuilding. Now, even with a modest decline in the Selic policy interest rate, the sector is entering a delicate phase in which inventories remain high, borrowing costs and delinquency are still elevated, and overall economic activity is losing momentum.”

Following the June data, Galhardo lowered his forecast for industrial production growth this year to 1.2% from 2%. “That is still above the 0.6% recorded in 2025, but it is fairly modest considering the average over the two years and the expectation that the economy as a whole will grow 2% in 2026,” he said.

IBGE’s Macedo said it was not yet possible to identify a direct impact from the Middle East conflict on the decline in refined petroleum output in June, although he sees a clearer connection in the chemical products sector, which had the second-largest negative impact on industrial production during the month. “Chemical products include fertilizers, which have been affected by the war. Output fell 4.3% in June, erasing the previous month’s 3.6% gain and posting a decline larger than the industry average.”

Asked whether the latest figures pointed to a turning point, Macedo said the industrial sector’s dynamics had changed. “Industrial output fell 2.7% over May and June. That does not fully offset the 4.4% increase recorded in the first four months of the year, but it does point to a different trend from what had been observed previously. The result for the six months through June indicates that the upward trajectory has been interrupted.”

This article was translated from Valor Econômico using an artificial intelligence tool under the supervision of the Valor International editorial team to ensure accuracy, clarity, and adherence to our editorial standards. Read our Editorial Principles.