In common with what is to happen in all the other countries where Lafarge and Holcim operate and will be obliged to dispose of capacity, the surplus in Brazil is to be sold to the Irish CRH company, reportedly the world’s leading asphalt maker.
As a result of this sell-off, the existing companies in Brazil will have to face something they had tried desperately to avoid in recent years by various blocking tactics, the arrival of a large new player, bringing the possibility of much greater competition and lower prices.
The Brazilian economy grew by only 0.1% in 2014, the smallest amount for more than a decade, while there was a 3% fall in output in the first quarter of this year. The low growth was caused by the combination of the sharp fall in the prices of most of the commodities which now generate two-thirds of Brazil’s export earnings and the end of a 15-year period when consumers’ incomes grew steadily each year.
This was caused mainly by steady rises in real wages and pensions and because, after growing by up to 20% a year for a decade, access to credit was curbed last year after many borrowers got into difficulties.
The situation has been made worse by a series of financial crises, the most serious involving the country’s giant oil company, Petrobras. State-owned Petrobras has been involved in a massive corruption scandal, involving pay-offs by suppliers to politicians and others. This has greatly undermined the authority of a government whose president was only re-elected at the end of last year, but who is now rejected by almost two-thirds of voters.
A total of 75% of the 70mt of cement now made and sold in Brazil each year is used by the civil construction industry. But with a sharp fall in the number of new properties sold last year, despite the fact that house prices have fallen by up to 20% in the past few months, demand for cement by this key industry has fallen sharply. Although demand by ‘self builders’ — people building and upgrading their own properties — continues fairly strongly, this is not sufficient to keep demand growing as it has done for the past ten years.
Because of the ongoing enquiry by Brazil’s monopoly commission Cade into alleged restrictive practices and overcharging by companies in the industry — with five leading companies liable for massive fines — the National Union of Cement Industries, SNIC, is not permitted to publish production and sales figures at the moment. Demand grew by an estimated 2.5% in 2013, but fell by as much as that last year, to reach an estimated 70mt. Sales are expected to fall again this year. The industry now has sufficient capacity to make about 85mt at its 300 or so mills. It had been anticipated until recently that all this capacity would be being used by the end of this year or early in 2016. This will not now happen.
An economic model which allowed more than 30 million Brazilians to be vertically mobile in the past 15 years, most able to consume considerably more than in times when very high inflation prejudiced the majority of the population, has now run its course. Aware of this, the government decided to switch priorities and encourage massive investments in Brazil’s creaking and seriously inadequate infrastructure.
Plans to build or improve tens of thousands of kilometres of roads and railways, and to upgrade ports and airports in an attempt to ease bottlenecks, many prejudicing exports, were prepared. It was envisaged that up to $US200 billion would be invested each year on new projects needed to reduce the present high cost of transport. There has always been a long delay between decisions being taken to invest and work actually starting on the ground in Brazil. As a result, many projects which it had been anticipated would move forward last year, are still on the drawing board. The government’s severe financial difficulties, including a fall in tax revenues and greatly increased difficulties in borrowing, has meant that work has had to be halted on numerous partly completed projects as well. This, coupled with the delay in starting new projects, is having very adverse consequences for the construction industry as a whole, and the demand for cement in particular.