Strong demand, and rising prices of most commodities, coupled with record crops of soya and maize, meant exports of Brazil’s dry commodities, together with crude oil, were responsible for an all time record $60 billion surplus in visible trade in 2017.
The favourable trade situation reduced the financial pressure on a government which has presided over three years of deep recession, with a rise in unemploy- ment, and major cut backs in spending in all areas. The situation for exports may not be quite as positive in 2018. Difficult weather conditions in the key centre west state of Mato Grosso, means that the grains crop may be ‘only’ 224–228mt (million tonnes), the second largest ever, compared with the record 238mt of soya and maize last year. But rising prices for market pulp and also oil may save the situation. A record 34mt of maize was exported in 2018, but a large surplus remained unsold, causing price to fall, so farmers planting that crop reduced plantings for the 2017/18 ‘main’ summer crop. The ‘winter’ maize crop, in recent years larger than the ‘main’ crop, with the maize planted immediately after soya is harvested, is expected to be the same as last year’s 67mt.
The Chinese economy may not grow as fast from now on as it has in the past 20 years, as inflationary pressures increase. But this will not affect demand for Brazilian grains, with the number of people living in cities in China, on course to increase by 150 million in the next ten years.
As diets improve, an extra 35mt of soya beans, is expected by Rabobank to be needed in China by 2035 — more than the 108mt imported last year. Almost 40mt of this will be Brazilian. Brazil has more unused land on which to plant extra grains than its rivals, the US and Argentina. The majority is used as animal feedstock. Adequate world grains stocks means prices have fallen, so farmers in Brazil will make less profit this year than they have in the past three years.
Lower prices will focus attention on the crucial problem of logistics. This is a great handicap for Brazilian farmers, who have to devote a third of their earnings to getting grains to ports. It costs $125 to get a tonne of the soya grown in Mato Grosso to the ports of Santos and Paranagua, and in the absence of adequate rail or waterways, 80% of Brasil’s grains still travel 1,500–2,000km by road. The amount of grains leaving from North East ports such as Santarem, Barcarena, Itaqui and Salvador, has already increased from 13% in 2013, to
24% last year. This is because 11 new loading facilities have been built at the riverside ports of Miritituba and Itaituba on the Tapajos river in recent years, allowing much more to be taken on large barge trains to deep water ports downstream. Optimists expects that, by the mid-2020s, 40mt will use these routes, which are at least $30 per tonne cheaper than that going by road to Santos & Paranagua. Other improvements will also help. Chinese investors, anxious to guarantee supplies, are to help finance thirty 60,000-tonne-capacity new silos to hold stocks at strategic places. Finance is also being sought by trading companies from Chinese investors, for a new railway to run from the soya growing regions to Miritutuba. All the soya now arrives at Miritutuba along the key BR 163 highway, along which 200,000 trucks travel each year, but which has not yet been fully paved. The army has been called in to do the job. Only 0.5% of Brazil’s GDP has been spent on logistics in the past few difficult years of recession.
Shrinking tax revenues have forced the government to slash spending on virtually everything. It is important that investments to logistics are made wisely, and priorities set carefully, which has not always been the case. For example, locks were built a decade ago at a hydro-electric plant on the Tocantins river, at a cost of $3 billion. These locks were designed to allow barge trains move 20mt of grains a year cheaply on this key route. The fact that a 43km stretch of water containing large rocks, lay below the locks was ignored. At present barge trains can only carry 6,000 tonnes at a time. The dredging is expected to take at least five years to complete, while $3 million has to be spent each year on maintaining the hardly used locks. Brazil is still littered with partly built railways, designed to carry grains, as well as sugar, iron ore and steel to ports.
A formula which would determine which operating company should be allowed to use the tracks, which in many cases are now rusting, has not yet been agreed. The main track may have been laid, but no sidings, or passing places have been built. The rail companies argue that the proportion of goods taken by rail in Brazil, which now totals about 540mt a year, has been increased. But critics point out that the huge increase in the amount of iron ore taken 600km from mines in Carajas to ports, is responsible for that.
The amount of other cargoes carried, notably grains, has fallen, as have the average speed at which trains travel, now only 12km an hour, compared with 20km/h before companies were privatized. Prospects for iron ore, of which Brazil — led by the Vale company — exports more than 400mt a year, are unclear, as the continued fluctuation in price, which swung from $30, to close to $70 per tonne during 2018, demonstrates.
Several factors help explain this. Although the rate of growth in China has slowed, the amount of steel produced there has hardly varied, which has contributed to a huge surplus depressing world steel prices. Concern with the serious problems of pollution in China, means that mills have come under pressure to switch from poor- quality locally mined ore, to more expensive imported varieties, of which that from Carajas is the best example. Many mines in China have closed down, partly because the current low price of ore means they are not economic.
The contrary is true of Brazilian ore, the cost of producing which is probably the lowest in the world. The low cost of top quality Carajas ore, compensates for the
fact it costs a great deal to transport ore to
its main market, China. Nobody is
panicking in the ore industry in Brazil,
however, while morale in the steel industry,
particularly hard hit in the past years of
recession, is also improving. Demand from
the key car-making industry, where a record
2.7 million units were made in 2016, half a
million of them exported, is increasing. The
hope is that demand for steel will increase
by up to 6% in 2018, when average
economic growth of about 3% is expected,
has allowed steel companies — notably
those making galvanized products, and hot
rolled steels — to increase prices.
To help pay off large debts, the Gerdau
company, which invested heavily in the
United States, neighbouring Latin America,
and Europe, has sold several mills in recent
months. Although prospects for the motor,
and consumer durable industries are bright,
the picture is still mixed.
The construction industry has still not
recovered from a period of over investing,
while the fact that the proportion of
components destined for the oil industry
which must be made in Brazil has been
reduced, in response to pressure from the
industry, is bad for the industry. Petrobras
has cut back on spending, and the building
of new refineries is at a standstill. There
was jubilation at the favourable result of a
recent round of bidding for new blocs in
the challenging ‘pre-salt’ area of deep
waters, which attracted many new
companies from abroad. But a start to
drilling, and pipe laying at these blocs will
not be made for at least three years,
If prospects are mixed for most of
Brazil’s commodities, they remain
extremely bright for the makers of market
pulp. Very strong demand for tissue, for
which the short fibre pulp which is the
speciality for most mills in Brazil, again
resulting from the move of millions to cities
in China each year, have caused demand for
Brazilian pulp to soar in 2017, when prices
were raised on ten occasions, more than
doubling in some cases. Depending on
destination, a tonne of short-fibred pulp
ended the year selling for more than $750.
It costs only $200 per tonne to make each
tonne at one of the most modern mills,
which each make up to 1.7mt a year. Two
new mills, the second line at Fibria’s Tres
Lagoas site, and the upgraded mill owned
by Chile’s CMPC company in Porto Alegre,
have started up, taking total output to near
20mt, but prices have not fallen. The
favourable prospects have led both Fibria,
whose mills now have capacity to make a
total of about 8mt of pulp — together with
Suzano, the second largest company — to
talk of building brand new mills.
Both of the Brazilian giants, as well as
Chile’s Arauco bid for the large ‘Eldorado’
mill, owned by the JBS meat company, which
has been obliged to dispose of numerous
assets round the world, following financial
difficult. But the Latin American companies
were not prepared to match the $7
billion offered by a
subsidiary of the
Asian Pulp and
which seems to be
in Asian countries.
eventually build a
second line at
reason for last
year’s price rises,
was a mismatch
and demand. This
was because mills
in the US, Europe
with capacity to
make 1.1mt, closed
in 2017. Despite
Brazil, a gap grew.
60 new machines
to make tissue, are
under construction in China. With little extra capacity
expected to come on stream in the next
couple of years, supply will probably remain
tight. Both Fibria and Suzano are taking no
chances, and are to close down some of
their oldest mills, including one line at Aracruz, pioneer in Brazil.