APLA: Latin American infrastructure development has failed to keep pace with economic growth

07 November 2011 00:36  [Source: ICB]

 Running out of rail

 Copyright: RexFeatures

Strong economic development in Latin America has not been accompanied by investment in logistics infrastructure, creating difficulties for chemical distribution

Shipping chemicals from the US to Mexico is no longer the strange odyssey that often took place when transporting bulk liquids in the 1980s, says Jorge C. Squier, president of Panamerican Chemical Marketing, otherwise known as Panachem, in Houston, Texas.

"It's a lot easier to ship by rail to Mexico today than it was 25 years ago," says Squier. The roads and highways are in better shape and the railroads are owned by reputable US-based or international firms, he adds. "Now, you don't have to worry about the railcars not coming back," Squier explains. "In 10-15 days, you have the car back."

Panachem's specialty is the sale and distribution of industrial chemicals to Latin America, so Squier has a good knowledge of the major logistical handicaps among most of the major countries. Overall, he says, Latin American infrastructure needs to catch up with its economic growth. There are not enough trucks in Colombia, for instance, and in Peru, the roads are generally good around ports but not so good going into the Andes Mountains. Brazil has some sophisticated roadways but not enough, and many bottlenecks for truckers, he says.

"The challenge is that the infrastructure has not caught up with the economic growth. With the exception of Venezuela and what [president] Chavez is doing there, the other countries in Latin America have been growing at a very strong rate."

Nearly every country has a major logistical headache, Squier explains. In Mexico, there is a safety issue. Panachem ships bulk liquid chemicals every 45 days to Mexico in what Squier calls a "milk run" to various ports in Mexico, Guatemala, Honduras and Costa Rica.

Mexican highways, roads and railroads generally are not a problem, but the violence wrought by drug cartels, gangs and what Squier refers to as "narco-terrorists" has created what can sometimes develop into a logistical nightmare along the Rio Grande. "The only concern in Mexico right now is the security issue on the border," Squier notes.

Probably the most headlines in Latin American logistics in recent memory have been generated by the $5.2bn (€3.8bn) widening of the Panama Canal, which will allow much bigger ships - classified as Post-Panamax vessels - to go through the canal when the work is completed in 2014.

The canal expansion has already sparked a trade battle in the US between West and East Coast ports, because it will enable ships to load up with merchandise made in Asia and travel directly to Houston or New Orleans or Savannah, instead of unloading in Los Angeles or San Francisco, US, or Vancouver, Canada, and shipping the containers from there to markets in the center of the US. Many East Coast ports are doing everything from deepening their channels to handle bigger ships to buying massive cranes to move boxes around.

But the canal expansion could also be a game-changer for Latin America. Panama Canal Authority chief executive Alberto Aleman Zubieta aims to make Panama the transshipment hub for the Western hemisphere. Aleman told the Journal of Commerce recently that the 50-mile (80km) length of the canal connecting Balboa on the Pacific with Colon on the Caribbean is the same length as the Port of Antwerp from terminals at one end of the Scheldt River port to the other.

Aleman believes the canal expansion will make Panama the transshipment hub for the hemisphere, with ports on both oceans transhipping cargo up and down the east and west coasts of North and South America as well as the Caribbean.

Latin America has other logistical problems and improvements that have been well-documented. Colombia is famous for violence spawned by its drug cartels. A recent survey by Agility, the Kuwait-based logistics management company, said the country's business costs of crime and violence posed increased risks to logistics companies with operations there.

A recent study by UK-based consultancy Transport Intelligence said congestion at South American ports and airports, lack of roads and antiquated rail networks could become a major embarrassment when Brazil hosts the World Cup in 2014 and the Olympics in 2016, and become major obstacles for South America's economic growth. The world's fifth-largest country has nearly 2m km (1.2m miles) of roads, but only 10% are paved, said Marcius Braga, director of transportation for DHL Supply Chain, speaking at a recent automotive conference in Sao Paulo in Brazil.

Panama Canal 

Panama Canal expansion is underway

Copyright: RexFeatures

Brazil's poor infrastructure remains a sore point among investors in the country. The Agility survey said South America's largest country was considered the second most attractive market for logistics companies in the next five years (behind China) but the third least attractive potential logistics hub. Another speaker at the conference said Brazil's rate of investment on infrastructure compared to other countries in the region is ahead only of Columbia and Argentina.

Infrastructure problems have put Brazil on the defensive in attracting new automotive production, said another speaker, Alexandre Bernardes, vice president of Anfavea, the national carmakers association in Brazil. Brazil is not a low-cost location when competing for global production.

According to Anfavea, Brazil is 60% more expensive when it comes to total costs than China, 55% more expensive than India and 40% more expensive than Mexico, which has a free-trade agreement with Brazil allowing duty-free imports of vehicles. However, some of the most visible recent improvements in Brazil have been logistical. Two ports, in Suape and Pecem, have attracted hives of refinery activity and are transforming the economy of Brazil's poorest northeast region with industrial complexes tied to the oil and steel sectors.

The motor of economic growth in the Brazilian state of Pernambuco is at Suape, where an estimated 23,000 workers at the Industrial Port Complex are building the Abreu e Lima refinery, named after a Brazilian who fought alongside Venezuelan independence hero Simon Bolivar.

The publicly owned but privately operated complex includes a petrochemical plant and a shipyard that is already building ships and oil platforms, employing 7,400 workers - a total that could climb to 12,000 in the next few years. The refinery is expected to process up to 230,000 bbl a day of crude oil when it is completed in 2014.

Brazilian oil giant Petrobras is planning to build its Premium II refinery at Pecem, which has an industrial port complex similar to the one in Suape. The Premium II will have a processing capacity of 300,000 bbl/day when it begins operating in 2017. Premium I, under construction now in the state of Maranhao, should begin operating by 2016 and eventually process 600,000 bbl/day of oil.

To spread development to the northeast region's interior, the 1,728km Transnordestina railroad is being built to link Suape, Pecem, and areas where soy and iron ore are produced in the state of Piaui, west of Pernambuco. Plans call for the last spike in the railroad to be driven in 2013. Another large infrastructure project will divert the waters of the Sao Francisco river to other parts of the semi-arid northeast region.

It has taken decades for such projects to get going in Brazil's northeast. A recent report published by the Inter Press Service said construction in Suape began in 1970 following the same model that worked in southeastern Brazil, based on foreign investment, oil and steel leading to heavy industry, according to Tania Bacelar, a professor at the Federal University of Pernambuco.

But that model did not materialize in the northeast for quite some time, despite governmental incentives. The big impetus came when former president Luiz Inacio Lula da Silva (2003-2011) decided that new refineries should be built in the northeast. Lula also promoted the national shipbuilding industry and production of oilfield drilling equipment in the region.

Argentina has also seen railroad activity, with the restart of a railway connecting Bahia Blanca's industrial complex and the port of Buenos Aires. US chemical major Dow Chemical and a group of Argentine companies and the country's General Port Administration invested $15m to restart the line that re-opened for business in July. The route, which is over 800km long, had been out of service for 20 years.

Developers of the project included the railway company Ferrosur Roca, logistics firms Celsur Logistica and Login Transporte Maritimo, the port operations concessionary, Terminales Rio de la Plata, and Argentina's General Port Administration (AGP). The AGP invested in new installations for vehicles repairs, access to the port, and a building for the traffic, control and security of the port and the railway.

Before the restart, Dow's products were moved by truck from the Bahia Blanca complex in the southern part of the Buenos Aires province, to the city of Buenos Aires. Dow predicts that the new railway service will generate a 4% increase in activity at the Port of Buenos Aires, an additional 20,000 containers/year.

A Dow official in Latin America says the company will also install a new railway station in San Miguel del Monte, where Dow plans to unload products destined for Argentina's provinces.

Such logistical improvements must be made to sustain Latin America's growth rates. Fiat's director of logistics for Latin America, Mauricelio Gomes Faria, a speaker at the auto conference in Sao Paulo, that Chinese automakers are increasing their push into South America. "If we don't become more competitive, then the Chinese will do it," he warned.

Squier says Latin American countries have no choice but to make infrastructure improvements. "If they want to grow, they have to," he warns. "And I think they will."

By: Lane Kelley
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