Oct 17 Brazilian pulp producer Aracruz Celulose ARCZ6.SA(ARA.N) reported a massive quarterly loss because of wrong currency bets, prompting it to slash investments and dividend payments to preserve cash.
The third-quarter net loss reached 1.64 billion reais ($764.9 million), compared with a year-earlier profit of 260.9 million reais. Aracruz said on Friday that it would cut investments in plant expansions, machinery and land purchases by 50 percent through 2009, a $1.07 billion reduction in the period.
Aracruz was one of several Brazilian companies to report huge foreign exchange losses in recent weeks as the country's currency plunged against the dollar.
The real BRBY surged 20 percent against the dollar in 2007 and it had strengthened another 14 percent in 2008 through early August, prompting many companies to bet the Brazilian currency would stay on a strong path.
Those bets turned sour as the turmoil in global markets deepened and concerns over a worldwide recession led to sharp capital outflows from emerging markets. The real has weakened 27 percent since reaching a nine-year high in early August, causing massive currency losses for Aracruz, meat processor Sadia SDIA4.SA and industrial conglomerate Votorantim Group.
Aracruz's foreign exchange and derivatives losses totaled 2.7 billion reais in the quarter.
The company said it had currency forward contracts with an average strike price of 1.76 reais per dollar and average maturity of 12 months.
Under the contracts, Aracruz agreed to pay double the difference between the strike price and Brazil's currency, when it traded weaker than the strike price. As the real plunged against the dollar, the company's losses mounted.