Commodity Online
Brazilian commodities demand could benefit greatly from the planned acceleration in infrastructure investment in the country. The bulk of the Brazil’s infrastructure systems dates back to the 1960s and ‘70s and is in need of major upgrades to sustain continued strong economic growth.
Lagging infrastructure has already begun to have a noticeable effect on the Brazilian economy and if left unaddressed could constrain the country’s future economic expansion. Transport and logistics, in particular, are a major area of weakness and source of cost in getting goods to markets. For farmers in the key soy producing region of Mato Grosso, in the center-west of Brazil, moving their produce to the South East ports of Santos and Paranaguá, account for roughly 30% of the total production cost; it also represents a multiple of what it costs rival farmers in the US to transport their products to ports.
The country’s railway system is inefficient and small, and the bulk of agriculture products are moved over long distances on the country’s beleaguered highway system. Only 14% of the 1.7mn kilometers of federal, state and municipal highway roads are paved. By comparison, roughly 50% of Chinese and Indian roads and 80% of Russia’s are paved.
While various projects have been proposed to expand the railway system and increase utilization of the country’s ample waterways, very little has been achieved so far. As the agricultural frontier continues to expand in new areas, poor logistics remain a key challenge and a potential constraint to the pace of expansion. Access to ports is another major bottleneck. Heavy traffic through the congested route leading to the major export terminal of Santos often causes jams and delays, as the vast majority of goods reach the port via road. Lack of storage warehouses at the port site also adds to costs and the journey’s time.
Indeed, the current transportation mix – heavily skewed towards road transportation – is largely inadequate for a country as vast as Brazil. The country’s railway system has not changed since the early 1970s, and it is half the size of that of China and Canada, countries characterized by similar surface areas.
Brazil has numerous ports and private terminals, most of which, however, require upgrades. While some improvements have been made in recent years – including privatization of a number of terminals – they have proved insufficient to cope with soaring traffic. Volumes at ports have increased by more than 50% over the course of the past decade, and projected strong export growth for a number of commodities – particularly the soy complex, oil and iron ore, which combined account for 65% of total trade volumes – would further strain the country’s port system, unless expansions are quickly implemented.
The major ports are located in the country’s East/South East, with Santos (Sao Paulo), Itaguai (Rio de Janeiro), and Paranaguá (Paraná) accounting for more than 60% of total trade in 2009. The bulk of agriculture trade currently takes place from three ports in the South/South East: Santos (SP), Paranaguá (PA) and Rio Grande (Rio Grande do Sul). A fourth export hub for agricultural products at Sao-Luis (in Maranhao State) in the North should open up next year as Vale carries out major work at the port and improves railroad access to the region. Sao Luis is already a major export outlet for iron ore, handling more than 30% of the country’s total Iron Ore exports and is on track to expand further in 2012.
Other major export hubs for Vale are the Tubarao Terminal in Vitoria (Espirito Santos State) and Itaguai (in the South of the State of Rio de Janeiro). Oil exports are handled through ports located along the Eastern Coast, spanning the states of Sao Paulo, Rio de Janeiro, Espirito Santo, and Bahia, where the bulk of Brazilian oil is produced.
The poor state of Brazil’s infrastructure is well documented. In its 2010-11 global competitiveness report the World Economic Forum ranks Brazil 62nd out of 139 countries for the quality of its infrastructure. The report identifies the most problematic areas in the quality of ports (123rd), roads (105th), air transport infrastructure (93rd), and rail road infrastructure (87th) and comments as follows: “This assessment reflects the appalling state of the transport infrastructure in the country, its underdeveloped railroads, the unexploited potential of its 48000 km of navigable waterways, its congested ports and airports.” In a similar vein, in a survey published in the same report, poor infrastructure is highlighted as the third most problematic factor for doing business in Brazil. By comparison, such factor ranks 7th for China and 10th for Russia.
The importance of infrastructure investment to fuel sustainable growth has been recognized by the Brazilian Government in recent years and upgrading infrastructure has formed a key pillar of the Lula administration’s ambitious Growth Acceleration Program (PAC) launched in 2007. PAC 1, which earmarked a total of R$504 bn in investment in the 2007-10 timeframe, has then been followed by PAC 2 in 2010, calling for R$959bn to be spent between 2011 and 2014. The financing is expected to come from a combination of public and private money.
Results so far have fallen short of expectations and a large portion of the financing that has actually taken place has been directed at housing rather than the improvement in physical infrastructure. Notwithstanding this, the PAC represents a step in the direction of improving the infrastructure and highlights the government’s increased sense of urgency in tackling the country’s infrastructure deficiencies. Overall, therefore, we see the potential for infrastructure investment to accelerate over the next few years.
The run-up to the 2014 World Cup and 2016 Olympic Games, alongside the development of the pre-salt oil industry, should also help attract incremental flows. We expect investments as percent of GDP to rise from the current 18% to 22% by the middle of the decade.
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