APLA: Unblocking the ports

09 November 2012 11:35  [Source: ICB]

Brazil has a long-standing problem with the poor state of its logistics infrastructure, but government plans are yet again being formulated to tackle port and road deficits

A perennial logistical issue in the Americas has been getting chemicals from the US to Brazil, says Erika Bernhardt, international business manager for The Plaza Group, a Texas, US-based international petrochemical marketer. "Brazil is always a bit of a challenge," Bernhardt says, with the most recent challenge being the port strikes.


Brazilian ports: just one part of a massive logistics bottleneck

Copyright: Rex Features

In July, customs officers who wanted better pay and working conditions initiated what became known as the "Turtle Strike" at Brazil's main ports. Customs officers deliberately slowed their work in most of the ports, slowing most cargo clearance and vessel movements in the country. "As long as I can remember, there always have been problems at the ports there," Bernhardt notes.

Brazil is the largest South American country, with the biggest economy and also the greatest logistical problems. Some experts say the country's Achilles heel is its infrastructure.

Delegates at an automotive conference in Sao Paulo earlier this year said the automotive supply chain continues to be dogged by delays because of the problems at the ports as well as congested roads and an almost total lack of multimodal transport. Conference delegates heard serious discussion of what used to be a topic for dinner conversation and bar talk, the dreaded logistics blackout coming soon in Brazil. There have also been a series of strikes across numerous unions.

Much of the problems at the ports stem from too much congestion. There are not enough ports to take the pressure off Santos and Paranagua, which have natural limitations, causing an explosion in ship line-ups and queues of trucks waiting to deliver produce. Port congestion and bottlenecks have produced a constant backlog of ships, from chemical tankers to bulk carriers and container vessels, moored outside ports.

The cost is huge. Ship owners charge demurrage of $40,000 (€30,000) for every day's delay, while truckers charge for every day they wait in line, which in turn raises freight prices in the interior. And getting from the port to the interior can also be quite an ordeal, considering that just 6% of the roads in Brazil are paved. Exporters sometimes have to pay transport costs that are four times what their US counterparts pay because of long, precarious road journeys and inefficient ports.

Many large global petrochemical producers have plants in Brazil, but Bernhardt says sometimes the logistics make it necessary to bypass a Brazilian producer. Bernhardt says she's had a tough time getting chemicals to the West Coast of South America this year and even resorted to shipping ethyl acetate from China to Chile instead of sourcing it from Brazil.

Bernhardt says finding shipping space is a tough enough problem, and then the port strikes and the road problems are other factors. Plus, she says, Chinese producers usually want the business. "Sometimes China is a bit more aggressive on the price," Bernhardt adds.

Government needs to catch up
The general consensus about Brazil's infrastructure problems is that the government needs to play catch-up in infrastructure investment, that the country is 15-20 years behind schedule. Industry observers say the government has a history of dragging its feet, of saying it will put 3-4% of GDP into infrastructure, but usually ending up settling for maybe a 1% investment. Some speakers at the automotive conference said the worst was yet to come, that Brazil has been spared from a logistics blackout because of slow growth and the eurozone crisis. In Paranagua, the port often has two to three dozen ships waiting 30 hours each to dock, "so imagine what it would be like at 4%," said Andre Perez, director of supply chain for the Americas at Renault. "Non-growth has mitigated this."

The government hopes to mitigate the problem as well, no doubt aware of all the attention Brazil will receive when it hosts the 2014 FIFA World Cup and the 2016 Summer Olympics. The government has recently announced plans for major investment in roads and rail as part of a wider economic stimulus package. Earlier this year the government announced plans to launch a programme for the private sector to invest in building new ports and improve infrastructure at existing ones.

The goal is to lower product shipping costs by 30% in order to make exports cheaper, according to Bernardo Figueiredo, the president of Brazil's state-backed Planning and Logistics Company (EPL). In late September, Figueiredo said the programme would cost reais (R) 30bn to 40bn ($14.75bn-19.66bn). "Whenever possible, the new terminals will be built with features equal to those available to our competitors overseas," Figueiredo said. "If we are going to compete internationally, then we must have costs similar to theirs."

Figueiredo has also announced plans for Brazil to build a $16.5bn, 500km (310 mile) high-speed train link between Sao Paulo and Rio de Janeiro, to begin running in 2018. Figueiredo said bidding on who will operate the train will be in May 2013 and who will build the rail line will be in 2014.

Such plans drew applause from a top executive at Eastman Chemical in August. The company's vice president and managing director for Latin America, Juan Carlos Parodi, said Brazil's plans to invest in roads, rail and ports would provide a much needed boost to chemical transportation in the country. Bulk chemical transport will benefit from wider roads with better connections to cities, resulting in improved supply chains, Parodi said.

"Brazil is a country of continental dimensions. It's almost as big as the US. But it doesn't have that infrastructure," Parodi said.

The Brazilian government announced plans in August to sell licences to build and operate roads and railways that will require as much as $66bn in investments over 25 years. Similar measures are expected for airports and seaports later this year. As long as the concessions are attractive enough to generate investor interest, the move will help clear Brazil's clogged roads, railways and airport terminals and improve supply chain efficiencies. "This shows a willingness of the Brazilian government to use private investment to expand rapidly the country's logistics network," Parodi said.

Such investments would cut the cost of transporting chemicals, Parodi said. Port improvements would help cut the operational costs of importing raw materials, he added. "It will demand huge amounts of capital and it is positive to see the government open to private industry capital for these investments," Parodi said.

Whether the government can improve Brazil's growing chemical trade deficit is another matter. Brazil's chemical trade deficit in January - September reached $19.9bn, up 3% year on year, according to the trade group Abiquim. In the January-September period, imports reached $31.1bn, down 0.5% year on year, while exports totalled $11.2bn, down by 6.3% compared with the same period of 2011, according to Abiquim.

Panama canal expansion
However, it does not take a large country with a huge economy to make big infrastructure improvements. The largest building project in the world now, and certainly one of the key logistics developments in the early 21st century, is the expansion of the Panama Canal.

The $5.25bn expansion consists of two new sets of locks being built, one on the Pacific and one on the Atlantic side of the Canal, that will double the waterway's capacity by allowing more and larger ships to transit.

The canal has two lanes, each with its own set of locks. The expansion project will add a third lane through the construction of the locks at each end of the canal. To pay for it, the canal is raising tolls on chemical tankers and other big ships by about 15%, despite protests from shipowners. The canal authority has said it needs higher rates to stay competitive.

The US is the 50-mile waterway's biggest user, accounting for 65% of trade linking the Atlantic and Pacific oceans. The canal expansion has set off a battle between US west and east coast ports, because when the expansion is completed in late 2014 or early 2015, ships from Asia will be able to unload cargo at Atlantic Ocean ports, enabling shippers to bypass ports in Los Angeles, San Francisco and Seattle to bring consumer goods directly to US midwest and east coast markets.

The ironic problem of the canal expansion is that ports wanting to take advantage from it - probably on the US Gulf or East coasts - will need to undergo their own widening and deepening projects. That is because ships that will come through the widened waterway - classified as Post-Panamax vessels - will be much bigger than existing ones and require deeper harbours and channels. Ports from Houston to New York are considering renovations including dredging, blasting, and bridge-raising in order to handle the bigger ships.

Elsewhere in Latin America, keep an eye out for port transactions soon. Dubai-based DP World (DPW), the world's third-largest port operator, said recently that it is ready to make acquisitions in Latin America to meet demand from customers and has enough cash to do it without selling assets. DP chairman Sultan Ahmed Bin Sulayem told Bloomberg News, "If the economics are good, why not? The Latin American market is very important to us."

For more news and analysis on Latin American chemicals markets

By: Lane Kelley
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