Get to know in detail the most robust sectors in this powerful nation and their relationship to Venezuela, apart from this giant’s dilemma as an emerging economy.
Author: StefaniaVitale
Caracas, June 7, 2006.- Brazil’s primary leverage are its natural resources, in developing two fundamental non-oil related economic activities with an important presence in international markets: agriculture and the industrial sector. In this context, this country’s companies have bet on internationalization to enhance their production and markets.
Brazil has the largest, most diversified and most highly integrated manufacturing industry in the Latin American region, characterized by producing from traditional goods (mechanical and electric tools, electric equipment and automobiles) to more sophisticated technology products such as airplanes and telecommunications equipment.
The South American giant also plays a leading role in worldwide mining and the steel industry, since it is a producer and exporter of iron, bauxite, manganese and gold and has important reserves of all the above. Since its opening in 1995, the sector has rapidly expanded and its rhythm has kept a continuous pace, especially now with China’s growing demand for basic goods. Some of its most important companies include foreign concerns such as the Grupo Arcelor and local companies such as Vale do Rio Doce, Usiminas, CSN, Cosipa and Gerdau, among others.
Agriculture
Brazil has comparative advantages in important commodities such as coffee, soy beans, sugar, oranges, tobacco, cocoa, beef, poultry and pork, as well as a longstanding trajectory in research and development. Although it does not hold much clout in the Gross Domestic Product (GDP), this activity has been important in terms of employment in rural areas and exports, thus facilitating concatenation in this sector.
A large number of companies are dedicated to processing activities in this sector, many of which have been the subject of acquisitions by larger national as well as foreign corporations, including well-known Brazilian multinationals Sadia and Perdigao. Important national and international supermarket chains (such as Carrefour) are also present and are taking advantage of the size of the market and other advantages inherent to the sector.
The scenario was not that positive in 2005, in the midst of price drops which coincided with the appreciation of the exchange rate, high interest rates and droughts in the southern part of the country. The sector nevertheless continues to present interesting opportunities, according to the statement by a top executive forCarrefour, who has no doubts as to betting on the advantages offered by the Brazilian soil, which apparently partly justify the proliferation of its stores throughout the country.
The comparative advantages in this sector would be maximized if customs tariffs were reduced, especially those aimed at the larger markets: the U.S., Canada and the European Union.
Other services
The economic stability achieved in the past few years and increased household incomes have brought about positive results in the retail sector. National and foreign companies with offices in Brazil have focused on the sales of imported products, taking advantage of reduced customs tariffs.
New shopping mall concepts have been consolidated, leaving behind the traditional formats. For instance, Carrefour (France) and Walt Mart (U.S.)are present in the country and represent a direct competition for the well-known local market leader Pão de Açúcar.
Hydrocarbons
Mention must also be made that Brazil is the second country in the region with the largest crude oil reserves, after Venezuela. It is also a world leader in the know how of technologies used in deep-water exploration and production activities, through the oil company Petrobras, which is also making inroads in gas-related activities within and outside the Brazilian territory.
After a restructuring in the sector, the country has now increased its production and reserves between 2000 and 2004 by 20% (540 million barrels, up from 450 million), whereas its proven reserves have increased from 8.5 billion to 11.2 billion barrels of crude oil.
Latin America's main character
In América Economía's ranking of the 500 largest companies in Latin America, 294 are Brazilian companies or foreign companies located in this country. In the group of the top 35, 8 are of Brazilian origin and belong to sectors associated to natural resources: hydrocarbons and mining.
| Ranking |
Company |
Sector |
|
4 |
Petrobras |
Hydrocarbons |
33,138.1 |
12 |
Petrobras
Distribuidora |
Trade |
8,494.5 |
18 |
Vale
do Rio Doce |
Mining |
6,729.3 |
21 |
Odebrecht |
Holding |
5,998.3 |
24 |
Ipiranga |
Hydrocarbons |
5,889.6 |
| 27 |
Ipiranga |
Petrochemistry |
4,955.5 |
32 |
Gerdau |
Steeel |
4,626.5 |
In another ranking by the same magazine, this time measuring the global competitive edge of companies in the region, Brazil is the leader in the group, with Copesul (chemical sector). It also has the highest representation, with 39 of the 100 most competitive companies at a global level.
Exporting machine
The recovery in the external sector has been a key factor in the economic recovery experimented by that South American nation in the past two years. Exports of primary products prevailed over manufactured goods, represented primarily in soy, iron and beef sales.
Its export capacity has been strengthened since 2003, with an increased participation of manufactured goods as well as the heightened exposure of its multinationals in more robust economic sectors in the international markets.
Exports (thousands of US$ - FOB)
| Goods |
2003 |
|
Primary
products |
21,179 |
28,518 |
Semi-manufactured
products |
10,944 |
13,431 |
Manufactured
products |
39,653 |
52,948 |
|
Total
exports
(includes other products) |
73,084 |
96,475 |
Although Brazil’s commercial activity is strong, there is still much potential as far as its degree of economic openness is concerned. Compared to Chile and Mexico in terms of the weight of exports in the Gross Domestic Product (GDP), these countries are way beyond (36% and 25%, respectively), whereas in the case of Brazil it is 18%.
In terms of the weight of the current account, Brazil is positioned above countries such as the United States and Mexico.
Its main commercial partner in terms of the client portfolio is the European Union. On an individual basis, its most important customers in descending order are: the United States, Argentina, China, the Netherlands, Germany, Mexico, Chile, Japan, Italy, Russia and Spain.
The principal products for export are:
• Automobile vehicles, tractors and bicycles.
• Nuclear reactors, machinery and mechanical instruments.
• Molten iron, iron and steel.
• Minerals and slag.
• Beef and other foodstuffs.
• Electrical machinery, apparatus and materials.
• Oleaginous seeds and fruits.
• Fuels, oils and mineral waxes.
• Sugars and baking products.
• Timber and timber materials and vegetable coal.
Brazil -together with Argentina, Uruguay and Paraguay and more recently Venezuela - is a member of the Mercosur. With the exception of Argentina, the rest of these countries are not in the list of its principal commercial partners.
Leader among the emerging nations
In 2004 Brazil was the IED flow receptor leader entering the Latin American region, in the amount of US$ 18 billion, according to figures of the United Nations Conference for Trade and Development (Unctad). Manufacturing has been the activity that receives the highest amount of investments compared to the traditional leader - the service sector - since 1996.
Automobile production (together with its peer in Mercosur, Argentina), the steel industry, the food and beverage sector and sugar refining to produce ethanol for gasoline were the sectors that benefited the most. The most outstanding businesses were the acquisition of the Brazilian multinational Ambev (the Brahma group) by the Belgian multinational Interbrew by US$ 4 billion.
In 2004, Brazil’s IED flow towards other countries registered record amounts - US$ 9.5 billion - totaling an IED stock equivalent to US$ 66 billion by 2004.
The principal incentive for attracting IEDs in Brazil is financial (tax incentives). Other motivations have been the search for natural resources, taking advantage of less logistic infrastructure barriers for exports and filling the needs of local markets with less negotiable products.
According to Unctad data, companies in this country prefer to invest in new (zero-greenfield) projects. Between 2002 and 2004, they have invested in 84 projects of this kind, including 19 operations under the modality of mergers and acquisitions.
Petrobras (hydrocarbons), Odebrecht (engineering and construction), Embrear (transportation and storage), CSN, CVRD, Gerdau (mining-metal-steel mills), WEG (electric and electronic equipment), Ambev (beverages), among others, are part of the 50 non-financial transnationals with the largest foreign assets in developing nations.
Brazil and Venezuela
The trade balance between Brazil and Venezuela is favorably inclined towards the former, with exports to its partner in the order of US$ 1,238.35 billion and purchases of US$ 164.69 billion. The principal products exported by Brazil to Venezuela are automotive vehicles, tractors and its spare parts, tobacco and telecommunications equipment. Its most relevant imports are the purchase of mineral fuels, mineral oils and distillation products, bituminous materials, mineral waxes and electric power.
In spite of the commercial relationship between both nations, investments have not been that significant. Nevertheless, some important cases can be mentioned such as the presence of Petrobras in the oil sector and its derivatives, the Brahma plant in the beverage sector and now Braskem in the petrochemical sector.
Venezuela has countless advantages in the same leading sectors as Brazil, i.e., those associated to natural resources (petroleum and its derivatives, chemical products, mining, etc.), the agricultural sector, as well as access to markets, infrastructure levels and others. Companies in these coinciding sectors in these two neighbors could identify how these advantages complement each other, if the intention is to garner greater production volumes, enhanced market access and/or heightened production cost efficiency, which could take the shape of joint ventures.
Pending agenda
Brazil’s comparative and competitive advantages and its recent good performance in its principal economic indicators have earned it its inclusion in the BRIC group.
A so-called “emerging” nation obviously must deal with fundamental issues in its economic development, from the social arena (education, health, and others) to including facilitating business location and consolidation (transversal factors and sector bottlenecks, among other issues).
In regards to structural reforms, the challenges center around the development of the energy and transportation infrastructure. Within this context, attracting investments towards this sector is a strategy which must not be discarded, if the aim is relative sustainable, enhanced competitiveness - at least in its more robust economic activities.
With no significant interruptions in the prosecution of these goals, so many parties are betting on the world leadership of Brazil in the next 40 years.
Sources: CONAPRI, EIU, The Economist, América Economía, Unctad, World Bank and Aladi.
Read also: The Brazilian economy in the last two decades
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Brazil on the road to takeoff (Part II)