Industrial investment recovers with commodities – 12/10/2023 – Market

The sharp drop in the participation of the manufacturing industry in the Brazilian economy in recent years hides segments that have been breaking records for production, exports and investments.

Everything related to the main commodities that the country exports, with increasing verticalization of production, added value and volume.

In the wake of the agribusiness boom, Brazil has just consolidated itself as the world’s largest exporter of processed foods in volume, with 64.7 million tons in 2022, ahead of the United States.

In the oil and mining sectors, there is increasing processing of raw products, boosting industrial chains.

But it is in food that Brazil stands out. Bringing together 38 thousand companies with 2 million formal and direct jobs, the sector has become the largest branch of the manufacturing industry, with a 24.3% share of total vacancies.

In addition to these direct jobs, it brings together another 10 million in the production chain. In total, it accounts for 12% of all people working in the country.

The sector processes 58% of the value of rural food production, and raw grains have a growing share in the industrial gear aimed at domestic and foreign markets. In the last seven years, processed food exports jumped from US$35.2 billion to almost US$60 billion (+72%).

While the manufacturing industry in general shrank -1.2% from January to September this year, the food industry grew 3.9%. The one related to oil had an even greater increase: 4.8%.

The Luiz Inácio Lula da Silva (PT) government has been struggling to find new formulas — or try to reissue failed policies — for reindustrialization. But, without state interference, the food industry invests R$30 billion per year and is changing Brazil’s nickname from “breadbasket of the world” to “supermarket of the world”.

Oil, minerals and agribusiness guarantee a large part of the robust trade balances for the trade balance every year. This year, the difference between exports and imports could reach almost US$100 billion.

This reinforced the cushion of international reserves (around R$350 billion) and removed, from the 2000s onwards, Brazil’s main vulnerability until then: external crises due to lack of dollars.

But experts question whether Brazil’s excessive dependence on basic products would leave the country vulnerable to sharp fluctuations in these markets. Whether due to an increase in global oil supply, weather events with an impact on harvests or a greater slowdown in China, the main Brazilian agricultural and mineral market.

“Despite the risks, Brazil is well positioned in this process [de crescimento das commodities]. This normally increases domestic savings, which can generate more growth and ways to finance investments and public debt”, says Manoel Pires, coordinator of the Economic Policy Center and the Fiscal Policy Observatory at Ibre-FGV.

In the oil, natural gas and iron ore sectors, calculations by economist Bráulio Borges indicate that the additional revenue accumulated by the Union should reach R$1 trillion between 2022 and 2030, compared to the previous decade, helping to balance public accounts.

“But, in the medium term, there is an important question: how to transform temporary natural wealth into added value, knowledge, capacity for innovation, to generate quality in long-term growth? This is a big challenge, but some things are happening naturally” , says Pires.

At this point, the endogenous strengthening of the food industry would be good news. As well as growing investments in oil processing and steelmaking.

In oil, Petrobras’ US$102 billion 2024-2028 strategic plan foresees US$17 billion for the areas of refining, transportation and marketing, with the completion of some refineries, which will add value to crude oil.

According to Valéria Lima, executive director of Dowstream at the Brazilian Petroleum Institute, important investments are also planned in the more sophisticated biofuels industry, such as for aviation and those that can be mixed with conventional diesel.

Although they employ less technology than more sophisticated industries, such as electronics or machinery and equipment, these sectors would be capable of creating more and better jobs, somewhat containing Brazilian deindustrialization.

According to IBGE, the industry’s share of GDP plummeted from 36% to around 11% in the last 40 years. To a large extent, it gave way to the rise of the services sector, currently responsible for around two-thirds of the economy — but which generates far fewer formal jobs and which are paid worse than industrial jobs.

Established studies show that formal and exporting companies tend to be more productive, with specialized labor, leading them to contribute more to sustainable growth.

According to Cleber Sabonaro, manager of Economics and Competitive Intelligence at Abia (Brazilian Food Industry Association), this is what happens in food.

In addition to the industrialization of traditional products such as sugar, animal protein, soy oil and orange juice, the sector is growing in the areas of wheat derivatives (such as biscuits), dairy products and coffee, including in capsules, among others.

Sabonaro says that Brazil gained ground after the start of the war between Russia and Ukraine, in February 2022, when many food exporting countries interrupted business to supply the domestic market.

“Without prejudice to the Brazilian market, which absorbs 72% of production, we have not stopped serving exports”, he states.

In the world, the main markets for Brazilian processed foods are China (17.7% share), the 22 countries of the Arab League (16.3%) and the European Union (15.3%).

In the orange juice sector, in which Brazil developed technology to export the product without contact with oxygen, the country accounts for 75% of global trade, earns R$2.7 billion per year and generates 200,000 direct and indirect jobs, according to Ibiapaba Netto, executive director of the National Association of Citrus Juice Exporters.

According to Lia Valls, coordinator of Foreign Trade Studies at Ibre-FGV, one of Brazil’s biggest recent gains on the international agenda is providing food security.

“But there is the usual question: is it sustainable?” Valls recalls that some countries that are very dependent on commodities, such as Norway (oil), created funds with resources to be used in times of a drop in revenue flow. “But these are policies that require permanence. You don’t change a structure overnight,” he says.

In the steel industry, the rise and processing of commodities have been causing investments of R$12.5 billion per year. “The objective is to improve the ‘mix’ of products and add value”, says Marco Polo de Mello Lopes, executive president of Instituto Aço Brasil.

At this moment, however, there is a risk that expansion plans will be aborted due to what Lopes calls the “predatory” commercialization of Chinese steel in Brazil.

According to him, there is a production surplus of 560 million tons of steel in the world (190 million in China). While the USA, European Union, United Kingdom and Mexico have import tariffs of 25%, Brazil continues with 9.6% protection.

Despite the increase in industrial production related to commodities in recent years, Brazil accumulates constant deficits in the manufactured trade balance: US$ 128 billion last year and around US$ 115 billion predicted in 2023.

For Silvia Matos, coordinator of the Ibre-FGV Macro Bulletin, despite advances such as those in the food, steel and oil industries, with the creation of better jobs, Brazil has great difficulty in finding a path to reindustrialize.

“We have bad policies created in the past, but they never die. We don’t have enough human capital and the cost of money to invest is high [por causa do desequilíbrio fiscal que leva a juros altos]”, he states.

“Yes, there is an increase in income in cities and regions close to agribusiness and the oil industry, but this ends up having a greater influence on the services sector, which employs many people with low qualifications, informal jobs and lower salaries”, says Matos .