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FT SPECIAL REPORT

New Trade Routes Brazil
Wednesday December 3 2014

www.ft.com/reports | @ftreports

Struggling with the transition
The end of the
commodity supercycle
is bringing challenges,
reports Joe Leahy

E

arly in October, an event took
place that showed that foreign investor interest in Brazil remains resilient, even as
the economy has slowed in
recent years.
BMW, the German carmaker, opened
its factory in the southern state of Santa
Catarina to begin producing its Series 3
sedan in an investment that is projected
to cost R$600m ($240m) and generate
1,300 jobs.
“Whether or not to export will depend
on the economy and the speed with
which we manage to nationalise production of our cars,” Arturo Piñeiro, president of the carmaker in Brazil, said at
the opening ceremony.
BMW is not the only company investing in an economy that is undergoing a
deep shift in trade flows with the end of
the commodity supercycle and the
slowdown in China. In the 10 months to
the end of October, Brazil attracted
$52bn of foreign direct investment
inflows, putting it on track to reach
about $60bn by the end of 2014, roughly
in line with previous years.
“This will be another positive year,”
says Alexandre Petry, executive manager of investments at Apex-Brasil, the
export promotion agency of Brazil.
“The principal driver for investors is our
market: 200m people with a lower middle class that is still growing.”
For a Brazil that grew accustomed to
almost automatic success by the end of

the first decade of the century, with the
rise out of poverty of much of its population and the emergence of sectors such
as agriculture and iron ore mining as
national champions, the past four years
have represented a transition period.

In a year in which Brazil hosted the
2014 soccer World Cup and staged a
closely fought presidential election, economic growth has slowed to a crawl. It is
expected to be a fraction of a percentage
point this year, while inflation has

Ready for export: stacked containers
at the Port of Santos — Paulo Fridman/Bloomberg

settled at the upper end of the central
bank’s target range of 4.5 per cent plus
or minus 2 percentage points. Lower
commodity prices are taking their toll
on trade. Iron ore prices have fallen 40
per cent this year to a five-year low of
$70 a tonne, while soyabean and other
crops are fetching lower prices. The current account deficit in October, at
$8.1bn, was the widest for the month
since the data series started in 1980,
while over 12 months it remains at 3.7
per cent of gross domestic product.
The trade balance has turned negative with $200bn of exports in the first
10 months of this year, compared with
$202.3m of imports. But foreign capital
market investment has taken up some
of the slack, rising 6.5 per cent.
“We depend a lot on foreign investors,
not only for initial public offerings but
directly and indirectly,” says Edemir
Pinto, chief executive of the company
that runs São Paulo’s stock exchange,
the BM&FBovespa. He says there are
about 60 equity offerings that could be
launched if Brazil’s economy and currency stabilises after the elections.
Much will ride on President Dilma
Rousseff’s new economic team. As the
FT went to press, finance minister
Guido Mantega was replaced by
Joaquim Levy, a capable former treasury secretary, whose main jobs are to
rebuild trust with the private sector and
get the country’s finances back on track.
One of the problems with investor
confidence has been government intervention to try to counter the effects of
the transition in the global economy following financial crises abroad.
Government controls on fuel and
energy prices and unorthodox attempts
at providing a fiscal stimulus through
Continued on page 3

Inside
Mercosur fails
to open doors
The country’s approach
to trade policy could
see it left behind
Page 2

Mining moves
A $1.4bn port terminal
in Malaysia improves
Vale’s export efficiency
Page 2

Finance
Faced with a slowing
economy at home,
institutions are
expanding abroad
Page 3

Comment
Marcos Troyjo looks
at ways to tackle
the ‘Brazil cost’ of
stifling bureaucracy
Page 4

An international hub
for R&D
Rio research and
development centre
attracts companies
from around
the globe
keen to
explore
deeper
waters
Page 4



2

Wednesday 3 December 2014

FINANCIAL TIMES

New Trade Routes Brazil

Mercosur fails
to open doors
as others seek
alternatives

Mercosur
Time to trade up?
Total value of goods exports by
Mercosur members (2012): $340bn
Brazil’s share of Mercosur goods
exports to the world (2012): $243bn
Value of goods exports by
Mercosur members to other
members (2012): $49bn
Brazil’s exports to other Mercosur
members (2012): $23bn
Mercosur members:
Argentina, Brazil, Paraguay,
Uruguay and Venezuela

Trade policy Its approach puts the country at risk
of being left behind, says Shawn Donnan

W

hen the European
Union and Mercosur
began discussing a trade
deal in 1999 the logic
seemed unavoidable
and unassailable. Here were two great
integrating regional groupings casting
an opportunistic eye on the 21st century
and the march of globalisation. What
could possibly go wrong? Who would
quibble?
It says something that, 15 years on,
the EU-Mercosur trade negotiations
have outdone the World Trade Organisation’s long stalled Doha Round of talks
in their record for stasis. And that European officials see a greater chance of
success in the difficult Doha negotiations than for any Mercosur pact.
Asked recently what the EU’s top
trade priorities for 2015 were, a senior
official in Brussels ran through a long
list of negotiations with the US, Japan
and even Vietnam without once mentioning Mercosur.
For Brazil, that sort of response

presents a problem that it needs to
address urgently, especially as it confronts slowing economic growth.
Brazil’s trade policy has had Mercosur
– the “Common Market of the South” or
Mercosul as it is known in Brazil – at its
centre ever since the bloc was formed in
the 1990s. With what ought to be good
reason: member countries Brazil,
Argentina, Paraquay, Uruguay and Venezuela have a combined population of
more than 260m and represent the
world’s fourth biggest trade grouping.
Brazil’s trade strategy has also long
been to be an active participant in the
WTO, at whose helm Roberto Azevêdo,
a veteran Brazilian diplomat now sits
Neither Mercosur nor the WTO has
been a particularly dynamic source of
trade liberalisation over the past decade
and, as a result, they have increasingly
become a liability for Brazil.
In a July paper, Carl Meacham, the
head of the Americas program at the
Washington-based Center for Strategic
and International Studies, cited the

(Source: World Trade Organisation)

Impasse: President Dilma Rousseff at talks to resolve tensions — Georges Gobet/AFP

“constraints” presented by Brasília’s
dedication to the WTO and Mercosur as
one of the great limiting factors of Brazilian trade policy.
The problem for Brazil is that the
world has moved on. Frustrated with a
lack of progress at the WTO, the US, EU
and other big economies have turned to
ambitious negotiations aimed at striking “21st-century” regional trade agreements that venture into cutting-edge
areas such as the digital economy.
Worried about being left behind,
China has also been exploring new trade
avenues outside the WTO, which it
joined to great fanfare in 2001.
Closer to home, Chile, Colombia,
Mexico and Peru have in recent years
solidified their economic ties and commitment to trade liberalisation via their
Pacific Alliance, which has become a
prime example of the potential benefits
of a new “regionalism” in trade.
The risk for Brazil is that it is sitting on
the sidelines and that in the coming

Dealmaker in charge at the WTO faces tough fight
Profile

Roberto Azevêdo is a
Brazilian who plays a global
role in trade negotiations,
writes Shawn Donnan
Will Roberto Azevêdo be able to rescue
the World Trade Organisation again?
After the Brazilian head of the WTO
led its 159 trade ministers to the first
tangible deal in its history in Bali in
December 2013, many, including the FT,
saw the victory as his.
At the very least, the arrival of Mr
Azevêdo, a career diplomat and
dealmaker, seemed to offer a distinct
change in tone for the WTO, which for
13 years now has languished under the
dark shadow of the long-stalled Doha
Round of trade negotiations.
“The WTO is back!” an exhausted
Mr Azevêdo proclaimed to hugs,
cheers and tears in Bali after ministers
approved a deal to streamline
procedures at borders around the
world that was the result of three
months of round-the-clock negotiations

that the Brazilian shepherded tirelessly.
But a year on, prospects for the WTO
look a lot less hopeful than they did
then. And the challenge facing Mr
Azevêdo is arguably twice as daunting
as it was when he took over in
September 2013 from the erudite
Frenchman Pascal Lamy.
The problem confronting Mr Azevêdo
is that, what initially appeared to have
been a successfully delivered
confidence-building episode in Bali,
descended into acrimony within
months.
A push in July by the new government
in India to renegotiate part of the
agreement led the US and others to cry
foul. The result was that, once again, for
months paralysis descended on the
WTO, just as Mr Azevêdo was beginning
work on the more complicated task of
delivering something that might be
called the Doha Round.
That stand-off was finally resolved in
November, when India and the US
negotiated a solution that hinged on the
rewriting of a single sentence and the
placing of a comma.
But that was not until the dispute had
led to what Mr Azevêdo called the “most

serious crisis” in the WTO’s 20-year
history. Mr Azevêdo now faces the task
of turning that bitter episode into
something constructive in a hurry.
That is because the Bali deal was
always about something bigger. Besides
passing the “Trade Facilitation
Agreement” to reduce red tape at
borders, ministers also agreed the WTO
should come up with a plan by the end of
this year to rescue the Doha Round,
‘I want to put
the human
dimension at
the heart of our
work’
Roberto Azevêdo

which collapsed in 2008 and has only
shown faint signs of life since.
Until the new government in India
derailed his plans, Mr Azevêdo and his
key advisers had been working
assiduously at sounding out key
members on their opening positions
and whether a deal might be possible.
Their plan was to cobble something
together that might pass muster when
ministers gather at the end of next year.

Then the world and the WTO could
move on.
“You can’t kill [the Doha Round]
unless you deliver it,” is how one senior
trade official in Geneva described the
strategy.
The uncomfortable news is that the
debate in Geneva over where to go next
remains stuck on some basic issues,
starting with what the ground rules
should be.
Some developing countries want to
resume negotiations on the basis of the
text that was produced in 2008, a
suggestion that neither the EU nor the
US is keen to accept.
The US has also made clear that it no
longer views China, now the world’s
largest trading nation, as a developing
economy or as eligible for the special
WTO treatment that entails. China,
meanwhile, has indicated it will not give
up that status without a fight.
The best bit of news may be that Mr
Azevêdo is in charge.
His stock remains high within the
WTO and he has worked hard to make
his leadership inclusive. In the lead-up
to Bali, he made sure that even the
smallest members could have a role in

negotiations if they wanted one and that
approach has endured. It helps too that
he is still seen as the candidate of the
developing world and that his ascension
to the head of the WTO has forced Brazil
to become a more constructive player in
negotiations.
But the task of reviving and delivering
something resembling the Doha Round
is still a mammoth one and may be
beyond whatever charm or negotiating
skills Mr Azevêdo can deploy.
It also remains the surest way the
WTO has to assert its role in the global
economy, even as important members
such as the US and EU turn to new
regional and sectoral agreements out of
frustration with the stasis in multilateral trade negotiations.
“I want to put the human dimension
at the heart of our work and change the
terms of the debate to change this
organisation,” Mr Azevêdo told the
opening session of the WTO’s public
forum this year.
He may still be the best candidate to
keep that promise. But whether
Roberto Azevêdo – and the WTO’s
members – can deliver that change is
still a frustratingly open one.

‘Plan B’ puts Vale back in
the driving seat – at a cost
Mining

The new $1.4bn Teluk
Rubiah port terminal allows
speedier transportation,
reports Samantha Pearson
For Vale, the world’s largest producer of
iron ore, its location in Brazil has always
been both its greatest strength and its
biggest challenge.
On the one hand, its proximity to
high-grade iron ore mines such as Carajás in the north of the country has
turned it into a world leader in the
industry and Brazil’s most international
company.
Between January and October this
year, iron ore ranked as Brazil’s secondbiggest export just behind soyabeans,
accounting for about 12 per cent of total
shipments in value terms.
However, on the other hand, with its
biggest mines more than 10,000 miles
away from the key Chinese market, its
geographical position has been its Achilles heel in its battle with rivals BHP Billiton and the Rio Tinto Group, located in
Australia, much closer to Asia.
While demand from China is slowing,
the country still accounts for 49.6 per
cent of Vale’s total iron ore sales and

Asia as a whole represents 65.4 per
cent, according to the company’s thirdquarter results.
As such, finding ways to reduce the
logistics costs of these vast delivery
routes has always been one of Vale’s top
priorities. As the global commodity
supercycle ends, pushing down iron ore
prices worldwide, these cuts have
become even more important.
So far this year, iron ore prices have
fallen by more than 40 per cent to a fiveyear low as new supply from Australia
and Brazil has hit the market just as
demand from Chinese steelmakers has
slowed.
Pedro Galdi, an analyst at SLW Corretora in São Paulo, says: “The three large
miners – Vale, Rio Tinto and BHP Billiton – sharply increased capacity,
putting more iron ore in the market, and
causing prices to fall. Many miners can’t
cope with prices at this level – miners in
China are halting operations and in Australia and Brazil too.”
Given the vast scale of its operations,
Vale is still able to make a profit with
iron ore prices at the current $70 a
tonne. However, the company is under
even greater pressure to reduce costs to
protect its margins, he says.
Under Vale’s brash former boss, Roger
Agnelli, the company came up with its
most ambitious solution to the problem
yet. At the height of the commodity

boom in 2011, the company decided
that the best way to tackle its high logistics costs was to build its own fleet of
very large ore carriers (VLOCs) known
as Valemax vessels.
Capable of carrying 400,000 tonnes
of iron each, the vessels were designed
to reduce or at least control the company’s shipping costs and help Vale
compete better with its rivals.
“With Carajás iron ore taking close to
40 days to reach China from Brazil,
compared with 13 days for Australian
producers, Vale concluded that it was in
the interest of both the company and its
clients to come up with a competitive
solution,” the Rio de Janeiro-based company said at the time.
However, in a significant blow to Vale,
the ships were instantly barred from
entering Chinese ports following opposition from the China Shipowners’ Association. In January 2012, China’s ministry of transport officially restricted
ports’ rights to accept any large bulk
carriers, effectively refusing entry to
any of the proposed fleet of Valemaxes

‘The distribution centre
brings our mines closer to
our customers in Asia’

Traffic control: Teluk Rubiah port terminal in Malaysia
and forcing Vale to rely on nearby
unloading bays in Malaysia and the Philippines. Chinese authorities have also
expressed concern over the safety of the
vessels after one developed a crack in its
hull during loading in 2011.
However, many analysts believe it
was just an excuse to ward off competition from the Valemaxes, which threatened to reduce demand for China’s own
shipping services.
In April 2013 a port in eastern China
finally allowed a Valemax to dock and
unload a cargo of iron ore. However, the
ban has largely remained in place.
Faced with opposition from the Chinese and under greater pressure to
reduce costs as iron ore demand slowed,
Vale’s new chief executive Murilo Ferreira focused his efforts on what
analysts see as a “Plan B” – a $1.4bn port
terminal in Malaysia, which opened at
the beginning of November.

— Mohd Darus bin Hasib/Flyborg Films

Valemax ships are now able to transport iron ore from Brazil to the Teluk
Rubiah terminal, where the cargo can be
redistributed to other Asian countries in
smaller vessels. While it is not as efficient as shipping iron ore in Valemaxes
directly to China. it still cuts the logistics
costs of the majority of the export route,
says SLW’s Mr Galdi.
Comprised of a deepwater wharf and
five stockyards where different types of
iron ore can be blended, the terminal
also allows Vale to customise its iron ore
shipments to the particular needs of
each country in the region.
Mr Ferreira says: “Teluk Rubiah is a
cornerstone of Vale’s business strategy
of investing in solutions that aim to
enhance the company’s capability to
supply iron ore more efficiently to Asian
markets.”
“The distribution centre brings our
mines closer to our customers in Asia.”

years it will find itself increasingly left
out of new trade blocs with all the economic consequences that could entail.
That may be about to change. There
are expectations following the October
re-election of Dilma Rousseff that, with
a recession hanging over it, her government may shift to more trade- and market-friendly economic policies in the
hope of boosting growth.
President Rousseff’s own chief of
staff, Aloizio Mercadante, fuelled some
of those expectations when he told a
November event in Brasília that Brazil
needed to pick up the pace of international trade negotiations and that
Mercosur needed to “move forward” in
its longstanding talks with the EU and
others.
But the government has played that
game before and its commitment to
Mercosur remains at least part of the
problem. In August 2013, the then foreign minister Antonio Patriota told the
Financial Times that Brazil was considering going it alone in negotiations with
the EU if the talks with Mercosur did not
progress, a threat that appears to have
gone nowhere since.
What can President Rousseff and her
government do?
The most obvious way forward may
lie in the approach of one of her fellow
left-of-centre Latin American leaders,
President Michelle Bachelet of Chile.
Chile has in recent months begun convening meetings of officials and ministers from both Mercosur and the Pacific
Alliance to discuss how to improve ties
between the two blocs. It has also been
mounting a diplomatic offensive
designed to play down any sense of
regional rivalries.
“The two blocs are neither contradictory nor competing,” Luis Felipe Cespedes, Chile’s economy minister, said in
November.
The discussions are clearly at an early
stage. But, for Brazil, they may offer a
way out of its current trade impasse
while maintaining the political ties that
Ms Rousseff values in Mercosur.

Case study
Melissa shoes
Some businesses have found ways
to cope with the dreaded “Brazil
cost” and one of the more
successful is the Melissa brand of
“jelly shoes”.
Brazil used to be regarded as a
low-cost manufacturing economy.
But in the past decade, a
combination of increased energy
prices, high labour costs, low
productivity and poor
infrastructure, have made the
country one of the most expensive
places to produce things.
According to Boston Consulting
Group, average manufacturing
costs in Brazil were 3 per cent lower
than in the US in 2004, while this
year they are estimated to be 23
per cent higher.
José Augusto de Castro,
president of the Brazilian Foreign
Trade Association, says that 50 per
cent of exported Brazilian
manufactured products remain in
South America.
Melissa has overcome the
obstacles. Its colourful plastic shoes
are identifiable from afar thanks to
their signature “tutti-frutti
bubblegum” scent that alerts its
fans a store is nearby.
The innovative combination of
trendy designs with the use of
mono-material, which can be
reused without costly separation
from any other components, have
contributed to Melissa’s global
success.
Melissa shoes began in 1979. The
brand is part of Grendene, a large
Brazilian footwear group set up by
two brothers in the 1970s. Melissa’s
success was due, in part, to its daily
appearance in a popular television
show in the 1980s called Dancin’
Day, where the main characters
wore Melissa shoes.
But when the programme ended,
sales began to fall and in the 1990s
Grendene executives were forced
into a radical rethink. There
followed collaborations with highend designers including Karl
Lagerfeld and Jean Paul Gaultier.
In 2004, Grendene listed on São
Paulo’s stock exchange and Melissa
shoes strode on to the international
stage and are now available in 80
countries.
Melissa does not publish figures,
but Grendene’s reported profit for
the third quarter of 2014 was
R$126m ($50m), with 55m pairs of
shoes sold, an increase of 1.4 per
cent on the same period of 2013.
Exports added up to 11.4m pairs,
a rise of 4.3 per cent. Grendene
accounted for 37.5 per cent of
shoes exported from Brazil
in the final quarter of last
year, and continues to
lead the footwear
industry in
exports.
Thalita
Carrico



Wednesday 3 December 2014

3

FINANCIAL TIMES

New Trade Routes Brazil

Banks forced to move abroad in search of growth
Finance Faced with a
slowing economy at
home, institutions are
expanding elsewhere,
says Samantha Pearson

F

or those who have followed
André Esteves’ career over the
past decade, the headquarters
of his investment bank BTG
Pactual could not be more fitting. São Paulo’s most ostentatious office
building arches over an 18th-century
cottage built by the Bandeirantes – the
adventurers and fortune seekers from
Portugal who carved out Brazil’s huge
territory.
Seen as a modern-day Bandeirante
himself, Mr Esteves has pursued an
equally aggressive expansion strategy
since founding BTG Pactual in 2009, following his acquisition of UBS’s Latin
American assets. After conquering parts
of Latin America to become the region’s
largest standalone investment bank,
BTG Pactual bought Swiss private bank
BSI in July in a move that doubled the
Brazilian bank’s assets under management to more than $200bn.

BTG Pactual bought the wealth management bank from Italian insurer Generali for about $1.7bn – the largest overseas acquisition by a Brazilian company
so far this year, according to Dealogic.
While BTG Pactual’s ambitious
expansion strategy partly reflects Mr
Esteves’ vision, it also reflects the internationalisation of Brazil.
As Brazilian businesses have expanded abroad, creating links with the
rest of Latin America and beyond, the
country’s banks have seen ever greater
demand for their services outside Brazil
– both from companies and wealthy
individuals. Brazil’s own slowing economy, which is set to grow just 0.2 per
cent this year, has given the country’s
largest banks even more reason to
diversify their revenue streams.
Located across the road from BTG
Pactual’s office, Itaú BBA is an even
more dominant force in Latin America.
Alongside its commercial bank, ItaúUnibanco, Itaú ranks as Latin America’s
largest bank by market value.
In January, Itaú announced the
acquisition of Chile’s CorpBanca in a
deal totalling nearly $3bn – the largest
banking merger in Latin America since
2008. US activist investor Cartica has
tried to block the deal, arguing that the

Struggling
with
the
transition
Continued from page 1
ad hoc tax breaks, stimulating lending
by state banks and other means have
created uncertainty. If the government
can stabilise investor expectations and
allow the real to settle at a more competitive level without sparking higher inflation, Brazil’s economy could begin to
rediscover its competitive balance.
“Brazil is a large economy with
dynamic companies that are creative,
aggressive and willing to grow and
embark on projects,” says Lisandro
Miguens, head of Debt Capital Markets
for Latin America at JPMorgan.
“We just need to have some sort of a
clear horizon,” he adds.
Mr Petry of Apex-Brasil says that, of
the Fortune 500 list of largest companies, 490 are already operating in Brazil.
The country held three big auctions
for airport terminals over the past couple of years, selling for R$8.3bn the concessions for Rio de Janeiro’s Galeão
international airport to Singapore’s
Changi Airport alongside domestic conglomerate Odebrecht. In the same auction, the operators of airports in Munich
and Zurich, together with a domestic
infrastructure group CCR, committed to
pay R$1.8bn for the rights to overhaul
and operate Belo Horizonte’s airport in

$52bn
Foreign direct
investment
inflows to the
end of October

6.5%
The increase in
foreign capital
market
investment

the state of Minas Gerais. “In a little
while, Brazil should return to a better
rate of growth,” says Mr Petry.
In the auto industry, producers have
total projects lined up worth $80bn,
according to consultancy Roland
Berger, although not all of this may be
realised until the market recovers.
Aside from luxury producers, such as
BMW and Land Rover Jaguar, newcomers include China’s BYD, which plans to
invest $100m in a facility to manufacture electric buses in the city of Campinas, São Paulo state.
“Along with the buses and batteries,
our dream is to build solar panels and
energy storage systems here to help the
region achieve its zero emissions goals,”
says Wang Chuanfu, BYD’s founder and
chairman.

Foreign investors are also participating in the Brazilian healthcare industry,
with Siemens setting up a R$50m factory in Santa Catarina state, not far from
BMW, for diagnostic imaging. Rivals
Philips and GE are also investing in the
same industry.
Some Brazilian exporters remain
keenly competitive. Embraer, the
world’s third largest builder of aircraft,
is planning to enter the military transport market. Its KC-390 transport jet is
designed to steal market share from the
C-130 Hercules military transport aircraft of Lockheed Martin of the US.
In spite of falling prices and drought,
agriculture remains a strong driver
of Brazilian competitiveness, with
national champions, such as JBS, the
world’s largest protein company, making foreign acquisitions.
Mario Veraldo, commercial director
in Brazil for Maersk Line, the world’s
largest shipping company, says: “When
we talk to our clients, nobody in the
agricultural export industry is bearish,
everybody is bullish because the world
needs to eat and the quality of what Brazil produces is good.”
He says that, with commodity prices
falling, clients were now talking about
how to add value rather than just shipping raw grain to markets, such as Asia,
which process the products there.
“What we see is that our clients are
talking differently about this than they
were before. It is not for the next quarter, it is for the longer term, but it is
there,” he says.
Even in Brazil’s oil and gas sector,
which has suffered negative news flow
from a political kickback scandal at the
country’s main operator, Petrobras, the
state-controlled group, there is opportunity, says Mr Petry.
The country’s giant pre-salt discoveries, so-called because they lie in ultradeep water under a layer of the compound, are gradually being prepared for
production.
“We are still seeing a lot of demand for
the oil and gas sector,” says Mr Petry.

Contributors
Joe Leahy
Brazil bureau chief

Andy Mears
Picture editor

Samantha Pearson
Brazil correspondent

Graham Parrish
Graphic artist

Shawn Donnan
World trade editor

Keith Fray
Statistics journalist

Thalita Carrico
Editorial assistant

For commercial opportunities in print,
digital and events please contact
John Moncure at [email protected],
or Ximena Martinez at Ximena Martinez
at [email protected]

Marcus Troyjo
BricLab, Colombia University
Aban Contractor
Commissioning editor
Steven Bird
Designer

All FT reports are available on FT.com at
ft.com/reports
Follow us on Twitter: @ftreports

Ambitious plans: Andre Esteves, CEO, BTG Pactual investment bank — ManuCorreia/FT
agreement undervalues CorpBanca. If
Itaú can pull off the complex acquisition, it would mark a turning point for
the bank in the region.
Jean-Marc Etlin, chief executive of
Itaú BBA Investment Bank, says the deal
“is very important in supporting our
mission in investment banking, which is
to be seen by corporations in Latin

America as the go-to bank for raising
capital, for advice on debt and equity
issues; and to be seen by people outside
the region as the bank that can guide
them through Latin America”.
Itaú has also expanded aggressively
into the key Mexican market, obtaining
a broker-dealer licence in Latin America’s second-largest economy in the

middle of November, after opening shop
earlier in the year under Alberto Mulas,
Mexico’s first national housing commissioner.
Furthermore, the expansion of its
offices in Europe has helped the bank
capture large cross-border deals. Itaú
was chosen this year to advise Spain’s
Telefónica on its $9bn acquisition of the
Brazilian broadband unit of Paris-based
Vivendi, GVT – the largest acquisition of
a Brazil-based company in 2014,
according to Dealogic.
“That’s exactly the kind of deal we
want to do: cross-border, a large transaction where a non-Latin American
company invests into the region, and
helping Latin American businesses
developing abroad,” says Mr Etlin.
Partly thanks to the deal, Itaú is now
leading the regional and Brazil fee rankings compiled by Dealogic for the yearto-date, followed by Credit Suisse and
then BTG Pactual. However, Mr Esteves
also has ambitious plans in the region,
especially in the Mexican market.
In August, he told the Financial Times
that BTG Pactual already has about 30
people working in Mexico, but is studying the possibility of making an acquisition in the country as a way to speed up
the bank’s regional expansion.

However, he emphasised that the
bank is not just looking to become a
Latin American bank.
“We don’t have a specific geographic
agenda at this stage,” said Mr Esteves.
“We consolidated our presence in Latin
America and we think we still have
plenty of space in certain parts of Latin
America, like Mexico and Argentina,
but we also have a strong presence in the
US, Europe and Asia.”
In fact, after the BSI acquisition more
than half of BTG Pactual’s assets will
now be outside Brazil.
“[The BSI acquisition] is not a Latin
American move, it’s a global move,” said
Mr Esteves. “It’s got a global base of clients and it has an important franchise in
Europe, Asia and the Middle East, and
something in Latin America.”
It is too early to say if such moves are
really part of a Bandeirantes-type strategy to conquer other continents in the
same way Itaú has done in Latin America, says Luis Miguel Santacreu at Austin
Asis, a banking sector consultancy.
“In time, we will be able to tell
whether these acquisitions are turning
[BTG Pactual] into a global player or
whether they were being opportunistic
and will later sell these assets to make a
profit.”



4

Wednesday 3 December 2014

FINANCIAL TIMES

New Trade Routes Brazil

Companies see sunny outlook for renewables
Sector unlikely to cool as
foreign interests eye
attractive auction prices and
ideal climate for alternative
power, writes Thalita Carrico
Brazil is known for having one of the
cleanest energy supplies in the world.
With hydropower supplying more than
three-quarters of the country’s electricity, there are many opportunities for
companies willing to invest in the growing market of alternative energy.
But the country is facing its second
year of drought. To compensate for a
reduction in electricity output, the government has had no option other than to
turn on more thermoelectric plants.
According to the Energy Research
Company, the result was a decrease of
6.15 per cent from 2012 to 2013 in the
share of renewables in the mix. Despite
that, in the same period, solar and wind
energy increased from 1.894MW to
2.207MW, a growth of 16.5 per cent.
To have an idea of Brazil’s potential
for solar energy, consider Porto Alegre,

the capital city of the southern state of
Rio Grande do Sul. The city lies in a
region in the country that receives less
intense sunlight, but more hours of sunlight than other regions.
Seeing big opportunities, the Chinese
electric carmaker and battery manufacturer BYD decided on Campinas, in the
São Paulo region, to open the company’s
first South American manufacturing
facility, with an investment of R$200m
($80m).
The company plans to build solar
panels and energy storage systems. In
the first phase, BYD will produce electric buses and recyclable iron phosphate
battery packs. It then plans to build a
research and development centre for its
photovoltaic, smart grid and LED lighting businesses.
Brazil is enjoying a great moment for
renewable energy, says Adalberto
Maluf, BYD’s marketing director: “With
short-term issues such as drought and
less generation of conventional energy,
we think solar energy will grow 70 per
cent for large auctions and 30 per cent
for smaller projects.”
The ministry of mines and energy
predicts a 15 per cent fall in the installation cost of solar power by 2015. By
2020, the ministry expects a cut of

Country becomes
an international
hub for research
and development

30-50 per cent, because of industrialscale production and improved performance. BYD plans to produce 1,000
electric buses a year from 2015. The bus
can travel 300km a day on a single
charge and has a battery that is charged
in two hours and has a life expectancy of
40 years. Consumption is 1kW per kilometre at a cost of R$0.20, while a conventional bus requires 1 litre of diesel
per 2km, at a cost of R$2.50.
The falling cost of renewables means
they can, at times, compete with fossil
fuels. Lower energy costs also mean
greater competitiveness. Since auctions
were introduced, prices have dropped to
a record low. At the last auction in October, the solar energy price was settled at
£54 per MWh; a few years ago it was
£127 per MWh. Last year, the cost of
onshore wind was as low as £27 per
MWh, against £95 per MWh in the UK.
Brazil’s secretary of energy planning,
Altino Ventura, says wind and solar
energy receive no government subsidies. “Because of our climate, wind
farms have greater potential of electricity per unit of installed capacity than
elsewhere,” he says. The farms have a
capacity of 60-65 per cent, against a globalaverageof40-45percent.
On the other hand, the UK think-tank

VENEZUELA

COLOMBIA

Clean energy

The falling
cost of
renewables
means that
they can,
at times,
compete
with fossil
fuels

Brazil's trading partners

S U RI N A M E
G U YA N A

Per cent of total trade
EU
China
US

AMAPÁ

RORAIMA
Negro
Am
azo
nas

AMAZONAS

ira

TOCANTINS

RONDÔNIA

BAHIA

MATO GROSSO

BOLIVIA

GOIÁS

I

t is easy to see why BG Group of the
UK is an enthusiastic investor in
Brazil.
The company hit the landmark
100,000 barrels a day mark in
October in its projects in Brazil and
averaged 81,000 bpd during the third
quarter, making the country its secondlargest contributor after the UK.
The strong promise of Brazil, in which
the company has invested $8bn over
two decades and plans to invest another
$3bn annually in the coming years, has
led it to base its chief technology officer
Richard Moore in Rio de Janeiro.
“We were prompted to come to Brazil
by the success of our exploration activity here,” says Mr Moore, who has a PhD
in sedimentology from the University of
Leeds.
BG Group and other international oil
groups have been drawn to Brazil by the
discovery of some of the largest offshore
oilfields in recent history off the southeast coast.
Known as the pre-salt, these fields lie
5km or more below the surface of the
ocean, buried under a 2km layer of salt.
Petrobras, the operator of the pre-salt
fields and BG Group’s partner, says the
average daily production of the pre-salt
fields has risen 10-fold from 2010 until
May this year, reaching 411,000 bpd.
“This currently represents approximately 20 per cent of our total production, and in 2018 it is expected to reach
52 per cent of the company’s oil production,” Petrobras says.
Just as the original discoveries were
made possible only by sophisticated
technology, so the exploitation of
the pre-salt is requiring research into
how to operate at depths that are

SÃO PAULO

PA RAGUAY

22.7

38.9

20.5

RIO DE JANEIRO

2013

17.2

SANTA
CATARINA

ARGENTINA

equivalent to the height of a Himalayan
mountain. The ultra-deep nature of the
pre-salt wells means they face higher
pressure and heat, while the salt causes
greater corrosion.
To handle the research requirements
of the discoveries, Petrobras has set up a
research centre near a technology park
hosting most of its main partners and
contractors.
The park includes oil services provider Schlumberger, oil equipment,
software and services supplier Baker
Hughes, their rival Halliburton, underwater technology group FMC, specialist
in pipes Tenaris Confab, BG Group, as
well as Siemens, General Electric and
EMC.
The presence of the research and
development centres of these multinationals is attracting other partners, such
as software services and consultancy
firm, Capgemini, which is developing
big data with EMC at the park.
“We work together on the oil and gas
sector,” says Walter Cappilati, head of
the Latam region for Capgemini.
BG Group is planning to open its global technology centre at the park next
year, reinforcing its research base in
Brazil.
As a partner of Petrobras, with interests in five big discoveries and with five
floating production, storage and
offloading platforms in operation in
Brazil, BG Group is obliged to invest
1 per cent of its revenue a year in R&D
under local regulations.
Mr Moore manages a global team of
40 in four countries from his base in
Brazil. They are researching subjects
such as the behaviour of carbonate rock
reservoirs. These are notoriously tricky

ESPÍRITO SANTO

2.0

11.3

Rio de Janeiro
São Paulo

PARANÁ

CHILE

2000

ATLANTIC
OCEAN

MINAS GERAIS

26.2

4.7

Brasília

PACIFIC
OCEAN

33.1

PARAÍBA
PERNAMBUCO
ALAGOAS
SERGIPE

PIAUÍ

BRAZIL

PERU

CEARÁ

MARANHÃO

de

Ma

ACRE

Argentina
Japan
Rest of world

RIO GRANDE
DO NORTE

PARÁ

MATO GROSSO
DO SUL

Oil Rio centre attracts companies from around the
globe keen to explore deeper waters, says Joe Leahy

Policy Exchange says that despite auctions, unusually high wind speeds and a
surplus of discount wind turbines, the
cost reductions in Brazilian wind power
reflect hidden incentives in grid charging structures.
In 2009, GE won its first contract for a
wind energy project in Brazil. “Despite
initial challenges, we are making equipment at a competitive price,” said Sergio
Souza, head of sales for Latin America.
Since 2011, GE has manufactured
equipment in Campinas. In 2012, it
developed a turbine specifically for the
Brazilian market. This year, it celebrates its 1,000th hub produced locally.
The company has invested R$1bn in a
research and development centre in Rio
de Janeiro.
Analysts predict that wind will
account for 9.5 per cent of Brazil’s
installed capacity by 2022. GE forecasts
the market will grow 40 per cent by
2016 and that 900 GE wind turbines will
be installed by the end of the year.
Mr Souza says Brazil is consolidating
as one of the main wind power markets
in the world. In addition, it is one of the
few countries that produces 2GW a year.
“There is no way this sector will cool
down in the next few years,” he says. “Its
future is bright.”

RIO GRANDE
DO SUL

3.1

URUGUAY

Brazil’s GDP growth

Growth compared

Annual % change

Real GDP, rebased
180
Brazil
Mexico
US

6

160

10

15

Merchandise trade, sum over previous
12 months, ($bn)
250
Exports
200
150

140

4

05

2

120

0

100
1991 95 2000

05

12.8

Brazilian trade

8

1991 95 2000

7.5

1000 km

10

15

Imports

100
50
0

2000 02 04 06 08 10 12 14

FT graphic. Sources: Thomson Reuters Datastream; IMF

The project
is being
powered by
one of the
fastest
supercomputers
in the region

sedimentary rock formations that
account for much of the pre-salt and
indeed global oilfields.
“There are some excellent outcrops of
carbonate rocks that are analogous to
the pre-salt,” he says.
The team also co-ordinates with universities in Brazil to harness their brainpower. The company is establishing a
national centre for studying carbonate
rock at the Federal University of Rio de
Janeiro, for instance.
“We are trying to create a world-class
facility for understanding carbonate
reservoirs,” says Mr Moore.
BG Group is also working with a technical institute in the northeastern state
of Bahia, Senai Cimatec-BA, and
another northeastern educational
facility, the Federal University of Rio
Grande do Norte, in co-operation with
Imperial College, London, and the University of British Columbia in Canada

on a “full waveform inversion project”.
The technology will allow scientists to
build detailed images from 3D seismic
data of underground geological formations, including the pre-salt oil reservoirs of the Santos Basin.
The project is being powered by one of
the fastest supercomputers in the
region.
Another project is a partnership
between Imperial College and the universities of São Paulo and Campinas to
study gases.
In particular, the project is looking at
capturing and reinjecting carbon dioxide into reservoirs to help production,
along with other measures to mitigate
greenhouse gases and harness them for
productive purposes.
“What we are doing is again leveraging the opportunity to address in a significant way a problem that is facing the
whole industry,” says Mr Moore.

Bureaucratic
quagmire is the cost
of doing business
GUEST COLUMN

Marcos
Troyjo
A group of tourists was taking a helicopter tour of the
beautiful seaside region of Angra dos Reis, south of Rio de
Janeiro. The area is made up of hundreds of tiny islands – a
tropical paradise favoured by Brazil’s wealthiest for their
second home on the beach. One of the passengers marvelled
at a sumptuous mansion that stood alone in an islet. He
asked the pilot: “Does it belong to a dotcom billionaire?”
“No,” the pilot replied, “to a tax lawyer.”
This anecdote is indicative of the complex web of winners
and losers that results from one the most distinctive traits of
doing business in Latin America’s largest economy, the socalled “Brazil cost”. The notion represents the end result of
the many different factors that make it so expensive to
produce and consume in the country.
Brazil cost essentially stems from the confluence of heavy
bureaucracy, over-regulation, meagre infrastructure and
lack of policy vision.
For most of its 500-year-plus history, Brazil’s connection
to the world economy was essentially that of a provider of
raw materials, setting the tone for the country’s economic
cycles: gold, rubber, sugarcane, coffee. All infrastructure was
orientated to the export of those commodities.
Consequently, not a lot was done in terms of transport
interconnecting Brazil’s regions. And when commodities
cycles were gone, so was the infrastructure. There are fewer
than half the railway miles in service in Brazil today than
there were in the US at the end of the Civil War.
Another consequence of an economy specialising in a few
low value-added goods is that everything else was imported
at high prices that were made even more dear by local
import taxes. This was true in 1808, when the Portuguese
royal family, fleeing Napoleon’s wrath, made Rio de Janeiro
the capital of its empire. And it is true today.
Despite talk of regional economic integration under
Mercosur, a bottle of good Argentine wine is sold in New
York at half the price you would pay at a supermarket in São
Paulo. The structure of relative prices is so absurd that one of
the priorities of middle-class pregnant couples is flying to
Miami for a week to buy as many baby-related products as
they can – not only clothing or strollers, but also diapers.
This situation did not necessarily improve when Brazil’s
industrialisation picked up after the second world war.
Capital formation was mainly aimed at strengthening the
manufacturing sector and was obtained through foreign
loans, printing money and taxes accruing from the high cost
of entry for multinational corporations into the Brazilian
market. That is why foreign debt, inflation and an onerous
tax burden as a percentage of GDP have occupied prominent
positions in enlarging the Brazil cost for the past 50 years.
Government meddling in everyday business life – a legacy
of Brazil’s Portuguese state heritage – has been made all the
more complicated by a
tendency to over-regulate.
In the past 10 years,
In the past 10 years, Brazil
Brazil approved
approved about 4m laws at
federal, state and municipal about 4m laws at
level. That is more than 800
federal, state and
a day. One law every two
minutes.
municipal level.
No wonder the country is
a paradise for legal
That’s more than
decipherers. Many have
800 a day. One law
made a living out of this
extra layer that erodes its
every two minutes
capacity to compete.
The “Brazil cost” is further
explained by a political economy model that never really
favoured investment as a driver of growth. This helps
explain the poor and outdated infrastructure that makes
logistics so expensive.
Bureaucracy tops it all. In Brazil, for each public worker
devoted to classical tasks performed by government (foreign
policy, defence, education, health) there are 60 employees
doing something else. The more regulations are enacted, the
larger the demand for more bureaucrats to execute, judge
and audit them. According to World Bank data, Brazil is one
of the most difficult countries to start a business. It takes 13
procedures for the legal establishment of a company and
about 119 days until the process is complete. Add to that the
high cost of credit and a tax burden at 37 per cent of GDP and
you will understand what Brazil cost is.
Understanding its genesis is the first step towards curbing
the Brazil cost. Next, it takes enormous political will,
technical expertise and vision on the part of those leading
the country to do so. Structural reforms would unchain
enormous wealth-building potential for all.
The writer is director of BRICLab at Columbia University, where
he teaches international affairs

Competitive Embraer spreads its wings at home and abroad
Aviation

The government hopes to
build on aircraft maker’s
success, reports Joe Leahy
Parked on the tarmac at Embraer’s
Gavião Peixoto airport, with its slightly
drooping wings, is the prototype of
Brazil’s latest proposed export product –
the KC-390 military transport plane.
A queue of people in military uniforms and civilian dress from around
the world waits to enter through a passenger side door to assess whether they
will buy the plane for their air forces.
With capacity to carry three jeeps or
80 soldiers and to be used as a tanker for
in-flight refuelling, the jet transporter
will replace the Hercules C-130 from
Lockheed Martin of the US in Brazil’s

military. Five other countries are also
said to be interested in the aircraft,
including Colombia, Portugal and
Argentina.
The ambitious project is typical of a
company that is Brazil’s highest-profile
industrial exporter. Aside from defence,
Embraer is the world’s third-largest
commercial aircraft maker. It has
placed Brazilian aviation on the map
through a willingness to tap into global
supply chains rather than seek protection from them.
“Philosophically, we are for more free
trade,” says Frederico Fleury Curado,
Embraer chief executive. “Embraer is a
living example of how free trade works.”
Brazil has long been a country with a
vibrant aviation industry. Aside from
manufacturing and exporting aircraft,
the domestic market is one of the
world’s most active for jet liners, executive aircraft and helicopters. Brazil has

the second-largest fleet of executive jets
in the world and the second-largest of
agricultural aircraft after the US,
according to the government.
The country could also become a
focus for international airport builders
and operators. The government has
auctioned off concessions for the main
airports in São Paulo, Rio de Janeiro,
Brasília and Belo Horizonte, the capital
of the populous state of Minas Gerais, to
domestic and international private sector operators.
President Dilma Rousseff is now in the
process of trying to upgrade more
regional airports by encouraging private investment.
“There are about 700 airports in Brazil, but those operating on commercial
terms number only 100. We want to
reach 270,” says Wellington Moreira
Franco, minister of civil aviation.
In a country in which businesses and

investors groan about the “Brazil cost” –
the country’s overwhelming burden of
taxes, bureaucracy, inefficiency and
corruption that increases overheads –
the aviation industry has been able to
show it is still possible to compete.
Indeed, the sector is too global and
competitive for a single company or
even country to attempt to go it alone
and try to develop all its own technology, says Embraer’s Mr Curado.
A presentation on the KC-390 to Congress shows the array of global partners
involved in the project, from German
company Liebherr, which is supplying
the air-conditioning system, to

700
The number of
airports, but only
100 operate
commercially

$2.9bn
The sum the
government
hopes to raise for
regional airports

US-based Rockwell Collins, which is
providing the basic avionics.
Proof that Embraer is globally competitive is that it is ranked third in its
own market, Brazil, and therefore not
dependent on protection or local content rules imposed on airlines in the
country. “We don’t believe in protectionism. We would not have survived if
we had depended on protectionism,”
says Mr Curado. “Brazil has to be part of
the global supply chain.”
The country’s airport building programme could go some way to helping
internationalise further the aviation
industry, says Cesar Cunha Campos,
director of FGV Projetos, a consultancy.
In a paper on the government’s
regional airport programme, he says the
aim is to attract $2.9bn, mostly from the
private sector, to upgrade the 270
regional airports in the first phase.
If the government can mobilise the

investment, the benefits to the economy
will be immediate. “In 2010, according
to the Airports Council International of
North America, airports accounted for
8 per cent of US GDP and for 7 per cent of
jobs growth, demonstrating, a significant return on investment,” he says.
Proper planning is crucial. Kuala
Lumpur began building a new international airport with a projected cost of
$2.5bn. This blew out to $4.4bn because
of constant changes in design and
delays.
Mr Moreira says it is important to create an attractive investment environment, so Brazil can overcome its limitations in terms of transport infrastructure.
Outdated regulations, such as one
limiting foreign direct participation in
airports to 20 per cent, need to be
changed. “The regulations will have to
be clear and respected,” he says.

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