Red flag: Brazil export basket to China not nearly diverse enough

Brazil ranked seventh in terms of sales to China in 2021, helping to ensure a record surplus in the trade balance. However, of the ten nations that exported the most items to the Asian economy, Brazil was the one that showed the most significant concentration in its export basket. The export of only ten types of goods accounted for 91.4 percent of the total value of Brazilian exports to China last year.

China’s growing presence as a destination for Brazilian exports, with a concentration on a few items, is only paralleled by large oil exporters such as Angola, Qatar, and Oman (which sell very few products to China). This dynamic exposes Brazilian shipments to the volatility of commodity prices as well as the expected slowdown in the Asian country, experts point out.

The International Monetary Fund (IMF) projects a growth of 4.4% in China’s GDP in 2022 after an increase of 8.1% in 2021.

With a dynamic similar to that of Brazil, although with a lower concentration in the export basket, is Australia, the fifth country that most sold to China last year, with its “top ten” products accounting for 88.2% of the value shipped. Russia, tenth in the ranking of the largest exporters, has a concentration of 75%. Taiwan is the number one supplier to the Chinese, with the ten best-selling products accounting for 71.2% of their shipments. The picture of these countries contrasts with those of South Korea, Japan, and the United States, which follow Taiwan as the largest supplier to China. The three countries have a much lower concentration of the ten best-selling products: 51.5%, 20.5%, and 37%, respectively, according to Chinese government data.

Among the 50 largest GDPs on the planet, only Nigeria (the 31st largest global economy) and Iraq (the 47th) have sales to China that are more concentrated than Brazil – expected to be the 10th largest in the world this year. In both cases, oil is the main product sold to the Chinese. Iraq is the third-largest commodity supplier to the Asian country, representing 99.3% of sales last year.

Despite being China’s seventh-largest commercial partner, Brazil led sales in only 48 products. The champion in this ranking was Japan, the leader in supplying 1,444 items, followed by Germany, with 856 products, and the United States, with 796.

See below the year-to-date volumes, registered from January to May 2022, of Brazil’s top 10 exports to China in containers. The data is from DataLiner.

Top 10 Products Exported to China in Containers | Jan 2022 – May 2022 | TEU

Source: DataLiner (click here to request a demo)

Figures available on the Brazilian trade side also show a concentration of exports. Last year, the Chinese absorbed 31.3% of total Brazilian exports, nine percentage points higher than in 2017, data from the Ministry of Economy show.

The participation share of the ten most sold products in value remained high, increasing from 89% in 2017 to 91.4% of exports in 2021. Even the participation of the “top ten” is unequal. The three leading products on this list – iron ore, soybeans, and oil – accounted for 80% of what Brazil sold to the country last year. These products are usually shipped in break bulk vessels and not containers.

See below the track record of Brazilian shipments of soybeans to China from January 2021 to May 2022. The data is from DataLiner.

Brazilian soybean exports to China | Jan 2021 – May 2022 | WTMT

Source: DataLiner (click here to request a demo)

The concentrated structure of the export basket favored Brazil last year when iron ore hit historical prices. In 2021, the Chinese bought US$ 87.9 billion in Brazilian products, 29.7% more than the previous year. The performance contributed to a record Brazilian trade surplus of US$ 61.4 billion.

“As keeping such a concentrated export basket has led to trade surpluses in Brazil, the productive chain grows complacent and puts little effort into diversifying sales,” says José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB).

For him, Brazil’s vocation for selling commodities should be taken advantage of, albeit with a parallel policy that encourages exports of manufactured goods.

Although prices are still making a positive contribution, Brazilian exports are beginning to feel, in 2022, the hit of adjustment effects in commodity prices. What happened to iron ore in June, highlights Castro, was a great example. According to data from the Department of Foreign Trade (Secex/ME), export revenue from the commodity dropped 40.5% in June over the same month last year. In addition, there was a reduction of 4.3% in quantity shipped, and the average prices dropped 37.8% in the same comparison frame.

This probably contributed, says Castro, to the 11.7% drop in the value of exports to China in June compared to the same month in 2021. With the performance, the Asian country absorbed 29.1% of the values exported by Brazil in June this year, nine percentage points less than the 38.1% share held in the same month last year. The numbers include Hong Kong and Macau — in Chinese foreign trade data, the two locations are measured separately.

Year-to-date through June, China’s share of Brazilian exports dropped from 35.3% in 2021 to 29.1% this year. The average price of total iron ore exported by Brazil fell 25.4% in the first half of the year compared to the same months of last year, most likely leading to a 31.5% drop in export revenue. The quantity also fell, but at a lower rate of 8.2%.

“As there are few products and they are very representative of the export basket, a shock in one of them ends up having a substantial effect in the year-to-date calculation in Brazil,” explains Livio Ribeiro, partner at BRCG and researcher at the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV Ibre).

“China is currently going through turbulent waters,” claims Ribeiro. As he explains, Beijing is trying to re-heat aggregate demand by stimuli to the “Old China,” focusing on infrastructure development. However, it is unclear whether these measures will suffice, given that economic trust collapsed after the new Covid-19 outbreaks.

“Stimulating demand among Chinese consumers has become a chronic problem, which makes sense given that people go to work not knowing if they will be able to return to their homes or get trapped in a lockdown mid-way.”

Recently, the Chinese government has signaled its wish to make some of its anti-Covid protocols milder, including by reducing the isolation period. Nonetheless, the zero covid policy has stood tall, comments Ribeiro.

“Despite the nature of this shock being specifically tied to household consumption, the bulk of Chinese policies do not tackle this issue. For example, there is no income transfer program or any financial security mechanisms. Besides, the chance of measures like those being implemented in the short term is almost zero.” Instead, he explains, Chinese measures have been focused on companies, prioritizing infrastructure, granting credit to companies, and maintaining ample liquidity.

Given this scenario, BRCG’s estimated Chinese GDP growth in 2022 is 3.8%. “Reaching a 4% growth will take a lot of fighting. Reaching 4.5% will be a monumental effort,” says Ribeiro.

Fabio Silveira, a managing partner of MacroSector, projects growth between 3.5% and 4% for the Chinese economy this year. “China’s growth is predicted to slow from an annual average of about 5.5 percent in the previous three years to between 3 and 3.5 percent in the following three years. A significant drop, given that we are discussing the world’s second-largest economy.”

In this scenario, according to Ribeiro, agricultural products exported by Brazil, such as soybeans and beef, are the ones that could be most affected in the short term. “Because there are restrictions on consumption at the moment. The restriction is not inflationary, but rather due to an increase in the marginal inclination to save, which affects everything.”

According to Ribeiro, another disadvantage of beef is that it is not the typical protein eaten by the Chinese, pork. In the instance of soy, which is used as feed for hens and pigs, he says imports are now slower since the selling price of feed in the Chinese market was lower than the cost of grinding soy, a secondary sign of the country’s lower level of consumption.

In the extractive sector, the iron ore demand will likely take a less severe blow since China will keep investments flowing. Regarding oil, China’s choice of buying from Russia can divert sales, which can affect Brazil.

In 2021, China took in, in terms of value, 70.4% of all soybeans exported by Brazil. As for iron ore, the share was 69.7%, and oil, 46.6%. The Chinese bought 56.2% of all Brazilian boneless frozen beef shipped last year. Brazil was last year the biggest supplier of soybeans and frozen boneless beef to China, the second for iron ore, and the seventh for oil.

According to Silveira, even though both global and Chinese economies are slowing down, significantly affecting the price of essential commodities in the Brazilian export basket, Brazil’s trade balance should close with a robust surplus between US$ 45 billion and US$ 50 billion. On the other hand, the yellow light is on for next year, when the trade balance may be flatter and not yield as favorable results.

Source: Valor Econômico

To read the full original article, please go to: https://valor.globo.com/brasil/noticia/2022/07/10/brasil-concentra-vendas-na-china-como-nenhuma-outra-grande-economia-e-isso-pode-ser-um-problema.ghtml

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