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Brazil Auto Production Declines in June, But Sales Offer Hope

--Brazil auto production declines again, but hopes pinned to sales recovery --Government tax breaks, new bank lending help drive sales --Anfavea sees flat sales or slight increase for the year By Paulo Winterstein SAO PAULO--Brazilian auto production continued to decline in June, and while a surge in sales sparked by government tax breaks has erased some of the pessimism for this year, the recovery will likely be slow. Vehicle production--including trucks and buses--was down 9.4% in the first six months of the year, at 1.55 million units, compared with the same period in 2011. Sales were down 1.2% from 2011, at 1.72 million, but the big change was the 23% increase in sales from May. "There is still room for the market to grow," Cledorvino Belini, president of the Brazilian Motor Vehicle Manufacturers Association, told reporters in Sao Paulo. "The minute that you start having lower interest rates and an expansion in credit, without a doubt that provides growth opportunities." Troubles in the auto industry reflect the broader issues affecting Brazil's manufacturing sector, which has struggled to cope with competition overseas. Brazil's government has unveiled a series of measures to help industry, including specific encouragement for auto lending, and has also sought to weaken Brazil's currency. The effects of those changes were clearly felt in June, as stockpiles shrank to 29 days' worth of sales in June, down sharply from a high of 43 days of sales in May, Mr. Belini said. Factory stockpiles, meanwhile, shrank to just seven days of sales. Once again, Fiat SpA (FIATY, F.MI) led Brazil car sales in June, with 63,530 vehicles sold, closely followed by Volkswagen AG (VLKAY, VOW.XE), with General Motors Co. (GM) further behind and Ford Motor Co. (F) in fourth. The outlook for auto loans started to improve in June, contributing to the increase in sales. The central bank's crucial Selic interest rate fell to a record low 8.5% in May, bringing down lending rates. Nonpayment levels declined, and new loan approvals rose in June, Mr. Belini said. Loan-approval levels had fallen to one quarter of applications but were back up close to 50% in June, he said. "Things have improved a lot but we're still not at the levels we saw a while back, of about 70%," he said. Earlier this week, auto-dealer association Fenabrave said vehicle sales will likely fall 1.5% this year, after an earlier estimate of 3.4% growth. Mr. Belini said tax cuts and lower interest rates could help sales recover in the second half, and sales will likely be flat or may increase slightly from last year--still a far cry from the 4.5% growth the manufacturers' group, known as Anfavea, predicted at the beginning of the year. The association will study sales trends for a bit longer, perhaps until the tax cuts expire at the end of August, before revising its estimates, he said. Although some car makers, including GM, Volkswagen and Volvo AB (VOLVY, VOLV-B.SK), have laid off workers, largely due to the decline in truck production, Anfavea said car makers added 1,900 jobs in June, up 1.3% from May. "The layoffs are coming in the truck sectors where there's no production, but they're reallocating production to the car sectors," Mr. Belini said. Employment levels in the auto industry will end the year at 2011 levels or higher, he said. Auto exports, meanwhile, showed a slight improvement in June after slipping in May. Exports are up 4.5% so far this year, at $7.93 billion, as Brazil exported more big-ticket items and more car parts to supply vehicles sold overseas in the past, Anfavea said. Write to Paulo Winterstein at paulo.winterstein@dowjones.com.

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