Brazil is in the throes of the pandemic while its economy faces headwinds from rising political uncertainty and low commodity prices. The timing is more than unfortunate, as the project logistics sector in the country was poised for growth. Sophie Barnes reports.
The Brazilian government’s response to the coronavirus pandemic has drawn criticism both at home and abroad. President Jair Bolsonaro trivialised the pandemic and mishandled the country’s response, before being diagnosed with coronavirus himself in July.
Before that, however, the departure of health minister Nelson Teich during May – just four weeks after the exit of his predecessor Luiz Henrique Mandetta – spurred a political crisis that called into question Bolsonaro’s ability to govern Latin America’s largest country.
As he faces growing calls for impeachment, a number of political risk consultancies have warned foreign investors and businesses to steer clear. Economists, meanwhile, have suggested that the deepening health and political crises could plunge its economy into the deepest recession in the country’s history.
Perhaps the most damning statement came from Armando Castelar, an economist at the Gavekal Research consultancy, in May. He said: “My investment advice would be not to run into a burning building… Right now, Brazil is best left to the specialists, crazies, long-term opportunists and those without other options.”
Capital expenditure drives
The timing is more than unfortunate, as the project logistics sector in Brazil was poised for growth, propped up by ambitious privatisation and infrastructure spending plans. At the heart of these initiatives was a revamp of the country’s infrastructure – including highways, railways, ports and airports – as well as the privatisation of the oil and gas and energy sectors.
Vitor Paulo Amaral, director at BrazGlobal Projects Shipping, noted that the market was preparing for one of the most important capital expenditure drives in the Brazilian economy. “It is now unclear how fast the country will be able to get back on the previous track of reasonable growth,” he added.
The immediate impact of Covid-19 has seen projects postponed. Several have been shelved entirely, said Amaral, and although the number of cancelled projects is fewer than those delayed, it will surely take a chunk out of the once growing project logistics opportunities.
It is now unclear how fast the country will be able to get back on the previous track of reasonable growth. – Vitor Paulo Amaral, BrazGlobal Projects Shipping
However, Amaral commented that the administration’s endeavour to debureaucratise Brazilian state agencies has seen the launch of short and medium-term investment programmes that have the ability to swiftly inject capital and reactivate the economy. “There are major port and airport privatisation programmes and further tax incentives for clean energy projects,” he said.
“The Brazilian investment bank BNDES, under the leadership of economy minister Paulo Guedes, unleashed a series of capital expenditure approvals in a variety of segments but most notably in infrastructure and energy, which will contribute to a faster resumption of the economic activities.”
Murilo Caldana, projects director at FOX Brasil, said that by the end of this year, the Brazilian government will have made significant progress in selling off public property, whether it is through public-private partnerships, the privatisation of certain sectors or through concessions. Resulting investments in infrastructure projects could total over USD6.4 billion, he said.
According to Caldana, after the auction of a dozen publicly owned Brazilian airports in 2019, the federal government intends to sell off 22 additional airports this year, divided into three blocks – South, North 1 and Central. The most lucrative block on offer will be the South, which includes the international airports of Curitiba and Foz do Iguaçu.
The Ministry of Infrastructure is also seeking to improve the country’s ailing railway network; new railway lines are key to the government’s infrastructure privatisation plans. The extension of the current 177 km railway between the cities of Lucas do Rio Verde and Sinop in Mato Grosso state to the Amazonian port of Miritituba, and the East-West project, consisting of a 1,527 km route stretching from the coastal town of Ilhéus across to Figueirópolis, are two notable developments in this arena.
Caldana added that the government aims to attract local and foreign investment for these grand infrastructure plans.
However, the Covid-19 crisis – and accompanying political chaos – has seen currency fluctuations that could deter potential investors. The Brazilian real is down 30 percent this year and the benchmark Ibovespa index has lost more than half its value in dollar terms. The real was trading at record low levels during May before rebounding to BRL5.05 per USD in June – a 16.5 percent appreciation over the previous month.
Nevertheless, uncertainties are par for the course when investing in emerging economies, and particularly infrastructure. The projects are long term with a lifespan of three, five or even ten years. As a result, investors are used to riding the lows in order to enjoy the highs.
Speaking at the ‘Proximo Brazil: Energy and Infrastructure Finance Exchange’ virtual event, Pablo Otin, ceo at large-scale solar photovoltaic developer Powertis, said that if you want to invest in infrastructure in Latin America, you will end up in Brazil. “To put [the crisis] in perspective, Brazil is still the largest economy in Latin America and if you look around it is not in a worse situation than its peers.”
The current privatisation drive has been touted as a potential answer to calm investor nerves. It is also seen as one way that the government can counter the perception of controversy and corruption.
One industry vertical that is expected to benefit from privatisation is the country’s oil and gas sector; at the same time an improving regulatory framework should create an environment that fosters greater investment.
State-owned Petrobras is embarking on a divestment programme and its monopoly is waning. According to Amaral, this will open up the Brazilian market to the private sector. He referenced “two new mid-sized refineries that were announced by Oil Group – one in the Porto do Açu and the other in the state of Espirito Santos” – as examples.
Historically, Petrobras focused its efforts on deepwater, pre-salt projects and as a result onshore fields in Brazil suffered from a significant lack of investment. With the sector now moving away from the company’s shackles, signification portions of the country’s onshore fields are available for acquisition, including the majority of Petrobras’ onshore producing portfolio.
Prior to the outbreak of Covid-19, major offshore upstream oil projects also received a capital expenditure boost. “Three major oilfields and at least half a dozen floating production, storage and offloading (FPSO) projects are in the pipeline, with a similar amount about to become reality. This is where we usually see the heaviest transports in the market and the local content requirements are again boosting local logistics,” said Amaral.
Indeed, Brazil had plenty of opportunities on the horizon with regard to oil and gas projects, especially for FPSOs. According to Boudewijn van Schaik, head of corporate finance at SBM Offshore, the country is a “fantastic area if you are in deepwater oil and gas production”. He explained: “If you look at all the rounds that there have been over the last few years, the number of fields, discoveries and the flow rates that they are able to get from wells that are drilled… nobody produces as much oil per well.”
He acknowledged that the pace of development will be impacted by Covid-19 but argued that this segment is somewhat shielded from the current low oil price, as operators adopt more of a long-term view.
Rebalancing supply and demand
“If you are more commoditised, the impact is instantaneous,” explained van Schaik – in this arena, the dramatic fluctuations in the oil price have seen many leading players cut capital expenditure to rebalance the supply and demand. However, with a lead time of five to ten years to develop an FPSO project, and the resulting unit operating for 20-25 years, “you are not going to make a decision based on a few months”, said van Schaik.
“The whole world is focusing on Covid-19. It is very topical and needs to be taken into consideration but, speaking as a longterm FPSO operator, you have to look through the current cycle and instead look at the before, during and after,” he added.
As Brazil is still in the throes of the pandemic, Amaral warned that it could be another couple of months after a clear reduction in the virus infection before it is possible to accurately understand how hard Covid-19 will affect the oil and gas industry as whole. He said: “We cannot disregard the temporary postponements in the upstream projects, at least until a clear global economic picture is apparent.
“More projects were in the pipeline but the question mark about the new [and as yet unknown] global consumption may put off many of the developments, at least until the new economic scenario becomes evident to investors,” he added.
While many benefactors will wait for the dust to settle before they reinvigorate their investment portfolios, other opportunities for the logistics sector will come from projects that require less capital expenditure. Amaral pointed to the oilfield extension cycle revamps, projects from mid-sized oil operators or the decommissioning of equipment at oilfields that have ceased production. “These types of project will involve a considerable amount of actors in the supply chain and will keep people busy while the future unfolds.”
The federal government intends to sell off 22 additional airports this year, divided into three blocks – South, North 1 and Central. – Murilo Caldana, FOX Brasil.
Another positive, according to Amaral, is the resumption of the local contents driver and a series of capital expenditure programmes in the Sepia, Mero and Buzios oilfields.
Before the pandemic, power generation was also a good source of work for the country’s project logistics industry. Amaral noted the arrival of three major power plant projects in 2019 – GNA, Parnaiba and Santa Cruz – as well as developments in the fossil fuel energy segment with the movement of a large natural gas processing unit (NGPU) in Comperj, “not to mention the wind power energy industry moves.”
Wind energy in Brazil is certainly advancing; the country has approximately 16 GW of wind power installed and this is expected to increase to 24.2 GW by 2024, factoring in auctions that have already been held and contracts that have been signed for wind farms on the free market.
Brazilian wind energy association AbEEólica said that wind energy represent 9 percent of the country’s electricity mix, behind only hydroelectric generation, which accounts for 59.6 percent.
Even with the possibilities on offer, however, the sector faces challenges in the years ahead.
Rudiger Glanzel, managing director of Vitória-based Direct Intercontinental, believes that the project logistics sector in the country is hamstrung by the Brazilian state of mind. “The country underestimates its possibilities. There are opportunities but people are of the belief that there will always be hurdles, operating with the mindset of ‘Brazil is always slow’.” He argues that this is a self-fulfilling prophecy and, “if you think like that, then it will be slow.”
He used the port of Itapoá as an example of what can be achieved. “It started operations around 10 or 12 years ago and has had excellent growth – even through the downturns of 2015/16. It is run by forward-looking people with open minds that are always adapting to see what growth they can absorb.”
With excellent relations with Customs authorities and open communication, the port has what Glanzel describes as a can-do attitude. Despite focusing on containers, the port is a preferred gateway for Direct Intercontinental, even if the distance to the final destination is further away. “When there are breakbulk shipments, they work with us to find solutions to problems.” Direct Intercontinental moved close to 80-tonne units from breakbulk vessels at the port by using a pair of gantry cranes. “There was full use of facilities and machinery – they know that the vessel must not get into any detention so they are good with deadlines and have a strict plan for when the vessels arrive – that is fairly unique for Brazil.”
Other perennial problems for the country are extremely high import duties and port costs – the former having a big impact on project cargo shipments. “Typically, machinery is coming in from abroad,” commented Glanzel, “and most of them will come under an ad valorem tax [where the tax is based on the assessed value of the product]” – with high-value project cargo shipments, this can quickly become expensive.
To avoid these spiralling costs, Glanzel explained, it is necessary to prove the machinery or cargo being imported is not something that could have been bought in Brazil. If that is the case, import taxes can be reduced drastically. “It is these types of procedures that do not make things easy,” he added.
At Direct Intercontinental, the company tends to avoid the oil and gas sector – which Glanzel described as “too crowded” – and instead is actively involved in mining projects as well as in cement and the woodworking industry, among others.
“In Vitória there are around 30 vessels waiting for minerals and the bulk of it goes to China. You can imagine how much machinery is necessary to produce that much quantity of ore and a large part of it must be imported. For project shipments, the sector struggled during the crisis of 2015/16 but it has come back again – a lot of machinery is required and while there are not many large-scale projects where you need to transport a whole factory, for example, there are shipments of big trucks and equipment.
“These are ad-hoc shipments where the mine sites that are already up and running require more sophisticated and more modern machinery.”
In terms of projects being postponed or cancelled as a result of Covid-19, Glanzel was not fazed. “It is typical in Brazil that delays happen. Many projects were already postponed before the Covid-19 outbreak due to political and economical uncertainty; one project that was envisaged to get off the ground in 2018 at the latest has only just started running. There are similar projects that were put in the drawers and have not come back out,” he explained.
There will be significant challenges ahead as the market navigates its way out of the crisis. Amaral considered the new business models and legal regulations that may lie in wait as companies and governments find ways “to cope with the new market reality”.
He said: “Players will need to keep in close contact with their counter parties… in order to make the best of what may come around. But first we need to survive this virus by carefully following guidance and sanitary measures to protect people’s lives.”
Part of that will be limiting face-to-face contact with business partners, relying instead on online communication. He hopes that the previous personal touch returns once the pandemic is left in the past.
The country under-estimates its possibilities. There are opportunities but people are of the belief that there will always be hurdles, operating with the mindset of ‘Brazil is always slow’. – Rudiger Glanzel, Direct Intercontinental
Caldana remains positive about what lies ahead. “FOX Brasil is still growing. Apart from São Paulo, we have opened offices in Curitiba, Paraná and Belem,” he said. A recent project saw the company move ABB transformers, ranging from 100 to 260 tonnes, from a manufacturing plant to substations across the country.
Other large-scale projects that will provide further opportunities, according to Caldana, include the Puma II project for Klabin – Brazil’s biggest paper producer, exporter and recycler. The project, which is the largest investment in Klabin’s history, consists of the assembly of two packaging paper machines, with integrated pulp production, which will be installed at the company’s industrial unit in Ortigueira, Paraná. Bracell is also undertaking major expansion works – Project Star – at its pulp mill in São Paulo, said Caldana.
He added that there are different brewery projects for Ambev and Heineken, as well as the Angra 3 nuclear power plant project, which has been revived once again after being suspended in mid-2015. Further still, added Caldana, pre-pandemic forecasts from BNDES suggest that if GDP grows by 2.3 percent on average per year, nearly USD466 billion of investment in infrastructure – covering electricity, logistics, telecommunications, sanitation and urban mobility – will be required.
Even if only part of that investment comes to fruition, there will be plenty of opportunities ahead for project logisticians active in the country.
Delivering mining units amid a pandemic
Handling project cargo during the coronavirus pandemic has thrown up a range of unique challenges.
Over Projects, for example, had to develop special health and safety procedures to deliver 11 CAT 785 offhighway trucks and accompanying components from a mine site in Itagibá, Bahia, to a harbour 150 km away. These included doctor appointments upon arrival; temperature checks every morning; segregated lunch spaces to avoid contact with its customer’s employees; a change of masks every two hours; and the organisation of a hotel 50 km from the project site to guarantee isolation from the local community.
To move the components and reduce costs, Over Projects transported the trucks fully assembled except for the dump bodies. The 90-tonne units, which measured 9.7 m x 6.7 m x 5.2 m, were then moved on 10-axle hydraulic trailers.
As the cargoes were destined for Australia, Over Projects had to coordinate the washing of the trucks to meet strict quarantine standards. Once prepared, the units were loaded on board a BBC Chartering vessel for onward delivery.
The longer term impact of Covid-19 is a concern though. Marcelo Braga, Over Projects managing director, believes that “many industrial sectors will continue to suffer until demand is back to pre-Covid levels, with a direct impact on project logistics.”
He continued: “Fortunately, Over Projects has been diversifying its portfolio during the past years, acting as a trader of used mining equipment, commercial agent for SAL Heavy Lift, and also introducing a very innovative tracking device and data logger to the Brazilian market. The idea is to stay away from competitive business, while supporting local forwarders with our products and international representations.”