beyondbrics

By Valentina Romei and Jonathan Wheatley

President Luiz Inácio Lula da Silva will now hand power to his chosen successor, Dilma Rousseff, at the end of 2010, but during eight years as Brazil’s leader he – like his predecessors – made it a priority to substitute high-value manufactured goods for low-value commodities.

But the chart (after the break) that is launching a new feature on beyondbrics shows the structure of Brazilian exports is shifting in the wrong direction: Brazil’s export earnings from manufactured goods continue to fall while those from primary goods continue to rise – and, this year, have taken over as the main source of earning for the first time.

This has happened in spite of Lula pressuring Vale, for example, the world’s biggest iron ore producer, to make investments in steel mills it would rather leave to its customers. And in spite of his instructions to Petrobras, the national oil company, to build refineries that make little commercial sense.

More than half of the $33bn year-on-year increase in Brazilian exports in the first three quarters of 2010 came from primary products. This was mainly driven by a sharp rise in the value of exports of iron ore and crude oil, which almost doubled from the same period last year.

The game-changing factor, of course, is China, where soaring demand for both soft and hard commodities has turned the country into Brazil’s biggest trading partner, overtaking the US. At the beginning of the previous decade, China was only a marginal market for Brazil.

Brazil’s total iron ore exports reached $3.3bn last September, more than four times the value of exports in the same month in 2006. Iron ore is now the biggest Brazilian export product by far, accounting for over 17 per cent of total exports, more than half of which goes to China.

Chinese appetite for Brazilian resources is not limited to iron ore. The country recently replaced the US as the main export destination for Brazilian crude oil. China is also a leading destination for Brazilian soybeans and chemical wood pulp.

On the manufacturing side, exports of passengers cars – Brazil’s main manufactured export – slipped to $384m in September 2010 from $387m in the same period in 2006,

The obvious danger for Brazil is de-industrialisation. Its manufacturing base is too diverse for this to be an immediate threat, but some sectors such as textiles and footwear have already suffered enormously. Analysts say Brazil must decide soon whether it is happy to be an exporter of low value-added goods or whether it wants to compete in markets for higher value goods.

To compete as a manufacturer, it will have to tackle difficult issues such as government spending on payroll and pensions and the country’s enormously complex tax system. Lula’s government has shown no appetite for such politically difficult tasks. There is little sign that president-elect Dilma Rousseff will see things any differently.

This feature will appear every Monday on beyondbrics, highlighting a chart that tells the story of a current economic or financial issue from emerging markets.