Commodity gains ground in exports to neighbors

Agricultural and extractive commodities gained more space in Brazilian exports in 2023, not only to China but also to neighboring countries, which changed the profile of the country’s portfolio in the year.

Together, oil, iron ore and soy accounted for 8.5% of sales to South America in 2019. Last year the share rose to 15.6%. Added to corn, another agricultural commodity among the 10 most exported last year, the share went to 17.5% from 9.3% over the same four-year period. Ten years ago, the share was 12.1%. Of the four products, only oil was among the 10 most sold by Brazil to the region in 2019.

The advance of commodities was due to the convergence of several factors. Some were cyclical, such as the drought that destroyed more than 40% of Argentina’s grain crop in 2023, but there were also factors considered more structural, such as the growth in foreign oil sales based on an increase in domestic production, according to experts. Prices that are still relatively favorable for exports have also contributed.

Unlike commodities, vehicles have lost ground in exports to South America as well as parts and accessories. The share of vehicles, including those for passenger and goods transportation, fell to 14.7% in 2023 from 18.5% in 2019.

A typical item in exports to neighboring countries, passenger cars topped the ranking until 2020. In 2021, cars were practically tied with oil, and in 2022 they lost their position to the commodity.

In 2023, oil remained the main product exported by Brazil to South America, followed by passenger vehicles and soybeans. In this ranking, iron ore rose to the eighth place last year from the 13th place in 2019. Corn rose to seventh place from the 23rd in the same period, according to data from the Secretariat of Foreign Trade (Secex).

The advance of agricultural and extractive commodities in the region, said Lucas Barbosa, an economist with AZ Quest, partly reflected what also happened to Brazilian exports as a whole in 2023. Last year, soybeans led overall Brazilian exports, with a 16% share. “There was an atypical positive scenario for Brazil, with a bumper crop that allowed for giant exports at robust prices despite the slowdown throughout 2023. At the same time, there was a local crop failure in Argentina, which led the neighboring country to buy Brazilian soybeans,” he said.

According to Secex, Argentina bought 93.9% of all Brazilian soybeans exported to South America. In 2023, Argentina bought a total of $2 billion worth of soybeans from Brazil. In the average purchase of the previous four years amounted to $130 million.

Gabriela Faria, an economist at Tendências, recalled that in 2023 there was a 43% reduction in soybean production in Argentina due to climate issues, mentioning data from the United States Department of Agriculture (USDA). The agency’s projection, she said, is that the soybeans production in Argentina will recover 100% in the 2023/2024 season.

At the same time, Brazil is expected to have a good grain harvest this year, said Ms. Faria, but not as large as last year’s crop. The situation in both countries should bring Argentine grain imports close to previous historic levels, the economist said.

On the other hand, she recalled that iron ore and oil have in common an increase in production last year, which was also reflected in the increase in the volume of exports. For 2024, in the case of iron ore, considering the targets published by companies in the sector, the expectation is that there will be an increase in production volume, but with a slowdown, without the magnitude of variation of last year, she said. As for prices, which have risen recently, the scenario is more uncertain. “The evolution of prices will depend a lot on China, especially in real estate construction.”

In the case of oil, increases in exports may be more permanent in South America, said Mr. Barbosa, from AZ Quest, given the expectation of increased Brazilian oil production. The region could be an alternative to more traditional markets, such as China and European countries. “Last year, South American demand for oil came mainly from Chile, a country that has a structural energy deficit,” he said. According to Secex, Chile bought $3.1 billion worth of oil in 2023, compared to $1.2 billion in 2019.

“Oil production increased in 2023, with an acceleration in the second half, which is expected to show effects even in 2024,” said Ms. Faria. “There’s also a question of prices, given the geopolitical risks we’ve been following. And as much as Brazil’s export capacity is growing, demand is limited by refining capacity in South American countries. But the outlook for oil is positive for 2024. With a smaller grain harvest expected in Brazil this year, oil could be a major highlight for the balance as a whole in 2024.”

According to Welber Barral, a partner at BMJ, the picture also shows that Brazil has lost relative competitiveness in the export of industrial products. The share of manufacturing goods in exports to South America fell to 84% in 2022 from 89% in 2019. With the soybean effect last year, the share dropped to 79%. Agricultural products fell to 5% in 2022 from 3% in 2019. In 2023, they rose to 9%. The extractive industry went to 11% in 2023 from 8% in 2019.

From a longer perspective and using another classification, high and medium-high technology products exported to South America represented 42% of the total in 2023, compared with 45.8% in 2022, 52.3% in 2019 and 49.9% in 2014. This classification includes vehicles. Items without technological classification, which include soybeans, corn, iron ore and crude oil, represented 22.2% of the total last year, 17% in 2022, 11.5% in 2019 and 15.9% in 2014.

Among other reasons, the loss of competitiveness is due to increased competition from China and the U.S. in South American markets, said Mr. Barral. “Countries like Chile, Peru, and Colombia have significant populations and, apart from the Covid-19 crisis, have continued to grow in recent years. Brazil hasn’t participated much in this. The tax reform is expected to help reduce Brazilian production costs, but more aggressive policies are needed in the region to increase shipments of manufactured goods.”

For José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB), cars and the production linked to them are the most structural basis of Brazilian exports to South America. Exports go through ups and downs depending on Argentina’s economy, he said.

The country is still the main South American destination for passenger cars, with exports of $1.4 billion in 2023. This was half of what Brazil sold in cars to the region in 2023, but well below the $1.9 billion sold to Argentina in 2019.

Ms. Faria, with Tendências, points out that the automotive sector has been impacted in the aftermath of the Covid-19 pandemic by the rise in the price of inputs, reflecting the global inflation resulting from the various shocks of recent years. “Sea freight prices are once again a concern due to the effects of the conflict in the Middle East on the redirecting of trade routes.”

Still regarding manufactured goods, Mr. Castro points out that Brazil is also facing competition from Mexico, which in 2023 took over from China as the largest foreign supplier to the United States. The resulting larger scale of supply to the Americans, said Mr. Castro, tends to make Mexico more competitive in supplying industrial goods to markets such as Colombia and Peru.

In Ms. Faria’s opinion, it would be important to diversify Brazil’s export portfolio to reduce the risks of depending on a few products. She points out that other South American countries are also very dependent on commodity exports, which brings additional challenges to the region.

Source: Valor International; translation by Marina Della Valle

Click here to read the original article: https://valorinternational.globo.com/economy/news/2024/02/19/commodity-gains-ground-in-exports-to-neighbors.ghtml

Sharing is caring!