22 October 2022
Supply chain, fuel, infrastructure: The economic pressures facing Brazil’s shipping industry
Brazil’s current fiscal situation is challenging. High commodity prices have boosted the economy, but debt is growing and inflation is rising.
China’s economic slowdown is just the tip of the iceberg in a series of events; the pandemic, through to the Suez Canal blocking, and the Ukraine-Russia conflict – all have taken a heavy toll on Brazil’s economy outlook.
The IMF forecasts the economy will grow by 1.7% this year because of stimulus spending in the election run-up, but only by 1.1% in 2023. Brazil craves investment, but to attract investment first requires the government to implement reforms.
Supply chain
Transpetro and a few smaller fleets aside, Brazil does not yet currently have a significant blue water fleet to smooth out freight costs. When the pandemic hit Brazil, containers for exporting goods became scarce because liners could not retrieve them from several ports. This affected the bulker freight trade when the demand for industrial materials improved, increasing costs to export commodities. Now increased freight on tankers is raising the cost of importing fuel.
Some exporters, such as coffee producers, have been exploring alternative options to export/import goods and are now exporting full loads of one-ton ‘big bags’ on breakbulk vessels. Exporters are also trying to stockpile industrial inputs to avoid production shortage in case of a new event. Many industries do not have private locations to stockpile inputs, and rely on terminal facilities for storage, thus changing the risk profile of many terminals. Most liquid bulk terminals have been operating at full capacity as well.
Supply chain issues tend to be interconnected. While Brazil exports many commodities, its industry depends on various inputs, such as refined fuel (gasoline, diesel), fertilisers and machinery.
Some shipowners intending to build new port tugs have been forced to buy competitors’ fleets. Shipyards could not guarantee delivery dates since many parts were manufactured abroad, with companies either backdating orders or also not guaranteeing delivery dates.
Another example of supply chain impact is terminal owners’ difficulties utilising Reporto (a scheme that gives almost a 50% reduction by waiving importation taxes). To take advantage of tax savings under Reporto, the goods must be delivered while the law is valid, but, as mentioned above, equipment manufacturers are not guaranteeing delivery dates. Without certainty, companies prefer to postpone investments.
of trade between Brazil and China is completed by sea freight
Trade with China
China’s zero-Covid policies, the property market slump and an intense summer drought impeded shipping.. The economy is now forecast to grow by less than 3% in 2022, far below the official target of 5.5%.
China is one of Brazil's biggest trade partners. COVID-19 significantly impacted supply chains running between China and Brazil. Around 96% of trade between the two countries is completed by sea freight, however, just as the global shipping industry was recovering from the pandemic, lockdowns earlier this year in China wreaked havoc at Shanghai, the world’s largest container port.
Freight rates on the export route from Brazil to Asia were already high, and in March the value reached USD 6,800 per 40-foot reefer container in the short-term market, compared with USD 3,000 to USD 4,000 before the pandemic. The price was up 58% year over year, a survey by the National Confederation of Industry (CNI) with data from consultancy Solve Shipping found.
In the Brazilian market, the route coming from Asia was the most impacted by the logistical crisis caused by the pandemic. Prices, around USD 1,500 per container before the crisis, rose steeply from the second half of 2020 onwards and reached record highs, above USD 10,000.
Brazil may also be impacted by a slowdown in mainland China's economic growth. Supply chains and ports that are a part of the trade routes with China may be hit by the lowering demand for Brazil's exports of raw materials. Brazilian soybean exports to China were sluggish in June 2022, according to official customs data, with shipments declining by roughly 600,000 tonnes annually. Industry experts believe it is still too early to predict when the Chinese logistics chain will stabilise.
The impact of increased fuel costs
Fuel costs skyrocketed this year, with diesel surpassing gasoline, creating an immediate price increase down the chain. The consequent jump in the cost of food and gasoline for personal use led to direct political intervention, pushing Petrobras to reduce fuel costs and resulting in a state reduction on fuel. Such efforts to cut fuel costs will impact the federal government budget since states are trying to obtain compensation for loss of revenue.
Fuel cost reduction helped slow inflationary pressures and avert possible truck drivers’ strikes –similar to the one that shut down traffic in 2018, where ports ran low on commodities to load for export. Road transportation handles the majority of freight, which results in high diesel usage. A trucker strike in response to rising fuel costs might impede or even stop shipments from reaching ports, causing delays, traffic jams, and financial losses.
Brazil currently relies on US fuel imports to meet current demand due to low utilisation rates and a lack of investment in its domestic refinery upgrades and expansions. These imports may carry a premium over crude oil and are likely to lead to a higher cost of production within the economy. Oil and natural gas prices remaining high could increase already high inflation and borrowing rates, which would hurt the economy. Fuel costs might rise dramatically if the supply network is delayed or fails.
Inflation
Economic sentiment and purchasing power have declined as a result of rising inflation, the Ukrainian conflict, and harsher financial conditions. Low consumer and business sentiment may dent demand and, together with trade disruption and economic sanctions, could push prices up further.
Inflation in Brazil is impacting shipowners in several ways. Interest rates to combat inflation at the time of writing were at 13.75%, which increases the cost of borrowing money. Marine diesel maintenance, supply costs and crew/staff costs have jumped. In terms of crew/staff, unions usually push for increases, and medical inflation (25% in 2021 and estimated at 20% for 2022) affects health plan annual readjustments. Some shipowners can push increases down the line to their customers through higher freight rates. However, others, such as harbour tug owners, are unable to share the burden as easily as the cost per manoeuvre is stable and there is competition.
Infrastructure
Brazil’s infrastructure spending has not been close to required levels for some time. It has invested around 2.2% of its GDP over the last 20 years in infrastructure development, whereas other emerging markets spend between 4% and 5%.
Inland waterway meets about 14% of Brazil’s transportation needs; however, vast stretches are underused compared to other countries such as Russia or China. There is a need to increase investment on cabotage trade as an option for road transportation. Investments begin with having vessels, which the BR do Mar is trying to address by allowing more foreign flagged tonnage to operate in Brazil.
Investment is needed for equipment and terminals (dredging, increasing piers, storage areas). There is also a need to invest in terminal infrastructure, especially on public terminals. Substantial long-term investment is necessary, and recently the federal government has pushed towards privatising more public terminals.
In the short-term, the country is focused on upcoming elections. The first round of Brazil’s election failed to provide either Luiz Inacio ‘Lula’ da Silva or Jair Bolsonaro with the majority necessary (50%) to prevent a run-off, scheduled for 30 October. Lula won 48% against Bolsonaro’s 43% - a much tighter result than pundits predicted. Lula's stance on the Amazon rainforest makes him the preferred choice for climate activists, while the agricultural sector favours Bolsonaro. Whether either will be able to tackle infrastructure investment and top voter concerns – rising food prices and inequality – remains to be seen.
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