Whither Brazilian logistics? Ticks overtaking Brics
The current crisis in Brazil, the largest national economy in Latin America, is completely homemade and is now coming to a head with a raid on ex-president Luíz Inácio Lula da Silva and impeachment proceedings against president Dilma Rousseff. The economy is in recession and logistics costs that were already high by international standards are continuing to rise.
The Petrobras scandal has plunged Brazil into yet another major political and socio-economic crisis. Trade and industry are in a downturn and logistics costs, which were already quite high by international standards, continue to rise.
Ticks leaving Brazil behind
In 2001 Jim O’Neill, at the time chief economist of the bank Goldman Sachs, coined the term Brics. Like many others he believed that Brazil, Russia, India, China and South Africa, although only loosely associated, could be considered a community of emerging economies, and that they would be the engines of global growth. After 2011 the first cracks began to appear in the Brics edifice, though not many observers would admit it.
In mid-2012 Forbes India pointed out that prices in Brazil were much too high, its national economic policy was too protectionist, infrastructure left a lot to be desired and the economy was too dependent on commodity exports. In 2013 the British magazine The Economist asked: «Has Brazil blown it?» By the time Russia as well as Brazil fell into deep recessions, at the very latest, and then South Africa began worrying about its global rating, Brics had lost its shine. Then, at the end of 2015, Goldman Sachs closed its Brics investment fund and began putting its money into Ticks (Taiwan, India, China, South Korea).
Brazil in recession
In early March 2016 Brazil’s Instituto Brasileiro de Geografia e Estatística (IGBE), the country’s federal statistical office, presented the latest national economic data. GDP had fallen by 3.8% compared to 2015 – the highest year-on-year decline since 1996. With the exception of agriculture (+1.8%) and mining (+4.9%), which benefited from the depreciation of the Brazilian real, all sectors of the national economy were in recession. Manufacturing was particularly hard hit, declining by 9.7%.
Logistics costs continue to rise
The main reason for this negative economic performance was the fact that the high global demand for mining and agricultural commodities masked the country’s weak manufacturing base. The IGBE expects this national economic decline to persist until 2029. The high cost of Brazil’s public sector, known as Custo Brasil (Brazilian costs), is also barrier to growth.
The overall economic situation impacted logistics, which shrank by 1.7% overall. The mining and agricultural commodities sectors were the only ones that compensated somewhat for the losses. At the beginning of 2016 both the Instituto de Logística e Supply Chain (Ilos) as well as the business school Fundação Dom Cabral (FDC) presented a study on the evolution of logistics costs.
The FDC study includes 2015 data. The Ilos report looks at transport costs, capital tied up in inventory and warehousing, and administrative costs, whilst the FDC research covers the costs of long-distance transport, urban transport (especially distribution in urban areas) and warehousing and administrative costs. Port costs were also considered.
Costs still rising
Despite varying terminology and different survey forms the results of the two studies are relatively similar – and the trend for price is upwards in both cases. According to Ilos the average share of logistics costs as a percentage of a company’s net sales in 2014 was 11.7%. FDC arrived at a figure of 11.5% for 2014 and 11.7% for 2015.
A closer examination of the detailed data made freely accessible by FDC shows that logistics costs varied widely between players. For medium-sized enterprises with BRL 150–200 million turnover, logistics cost were the highest, at an average of 13.5% of net sales. The costs also vary considerably between industries and sectors. The highest costs were in paper and cellulose at 19.2%, followed by the construction industry with 17.6%. Relative increases compared to 2014 were highest in the agriculture and food sectors with 14% and 9% increases respectively. According to shipping companies the price rise was highest in raw materials transport, finished goods and distribution in urban areas. Packaging materials, waste logistics and warehousing costs, on the other hand, were subject to less change. The major cost drivers were transport costs in cities, excessive paperwork and the lack of well-trained professionals.
Infrastructure considered poor
One of the main reasons for the high cost of transportation in Brazil is the low quality of transport infrastructure, which the company representatives interviewed by the researchers considered totally inadequate. The shipping companies that responded to the questionnaire considered railfreight infrastructure an absolute disaster.
58% of them rated SGV’s services as very bad and a further 36% of them rated them as poor. The verdict on port and road infrastructure was similarly devastating. Airfreight, on the other hand, was thought to be doing significantly better. 45% of the companies surveyed considered airline and airport services satisfactory and 15% even thought they offer a good service.
The state has a credibility problem
Foreign media and logistics organisations allowed themselves to get carried away by the Brazilian government’s announcements of various packages of infrastructure development. In recent years the government kept presenting new plans to the public for projects to improve and expand the country’s infrastructure. In addition to its programa de investimentos em logística (logistics investment programme PIL), the government also announced a programa de aceleração do crecimento (growth acceleration programme PAC). The results are especially sobering as far as the proposed expansion of the railway network is concerned, where intentions were not followed by action. The same is true with respect to road construction and improving port infrastructure. Neither sector was given the necessary financing. The only segment where there is any progress is the expansion of major airports. This was and is taking place mainly in the light of the 2014 football World Cup and the Olympic Games in August 2016.
According to the survey conducted by FDC, these programmes have little (27%) or low credibility (51%) with private companies. 95% of respondents did not think that the government respects the rules of a market economy, or that its barely respects the rules. This makes it extremely difficult to attract foreign private investors to Brazil.