Brazil continues highly dependent on commodities

In 2012, while Brazil was still the darling of the emerging world, Indian investor Ruchir Sharma wrote an article on Foreign Affairs describing why he was pessimistic about Latin America’s top economy. He wrote:

“this glowing image of Brazil rests on an extremely shaky premise: commodity prices. The country has grown largely in concert with surging demand for its stores of oil, copper, iron ore, and other natural resources. The problem is that the global appetite for those commodities is beginning to fall. And if Brazil does not take steps to diversify and boost its growth, it may soon fall with them.”

Mr. Sharma couldn’t be more right. A mere two years later, Brazil plunged into its worst recession on record. While it is undeniable that the Dilma Rousseff administration had its share of blame in the financial disarray of the country in 2014, we cannot ignore the impact of the drop in commodity prices on the Brazilian economy. Unfortunately, Brazil’s dependence on basic products hasn’t changed much since Mr. Sharma’s article—and we could be headed for another rough patch.


Brazilian exports since 2010

What did Brazil export between 2010 and 2016 commoditySource: CID/Harvard 


A report published by the Brazilian Association of Foreign Trade (AEB) shows that the country’s main commodity products will suffer a price drop compared to 2018. Among the reasons for this are the slowdown of the global economy, political trouble in the European Union, higher interest rates in the U.S., and the trade war between the U.S. and China—the world’s top 2 economies and Brazil’s main trading partners.

AEB President José Augusto de Castro says that when the pace of trade slows down, there is a decrease in the demand for commodities, hence the predicted price drop. All signs point to smaller growth of the world’s economy, he believes.


bloomberg commodity index


bloomberg commodity index


Brazilian exports in 2019 will total USD 220 billion, AEB estimates. This means a 7.3 percent drop compared to last year. The most significant dive should be in oil prices: 17 percent — oil is second in the ranking of Brazil’s exports. Soybeans, the number one export, will fall by 5.5 percent. Iron ore, third-place in the export list, will decrease by 5.9 percent in 2019.

There are many ways in which this scenario can impact upon the country. The biggest. Mr. Castro says, will be a smaller trade surplus than 2018. This should not immediately worry the government, as Brazil owns international reserves of almost USD 400 billion. But, of course, the drop in commodity prices will have other adverse effects.

South America is a commodity exporting region, he explains. And South American countries are the primary destination for Brazil’s manufactured goods: 43 percent of local output goes to neighboring nations. If these countries have a drop in revenue caused by lower commodity prices, they should have less money to buy from Brazil.

New government is powerless to change the scenario

According to Mr. Castro, the association did not take the new government into account in the making of the report. He says that there is little it can do to change the proportion of Brazilian exports — currently, 65 percent of what the country sells to the world are commodities. Policy cannot be changed overnight, he highlights. Even if tax and pension reforms get approved this year, it will take a few years for them to come into effect.

Also, the trade war between the U.S. and China will have a negative impact on Brazil, no matter the outcome—despite the fact that the conflict between the two governments actually increased Brazilian exports to China in 2018. “Last year,” Mr. Castro continues, “no one imagined that it was possible for Brazil to export the amount of soybeans it has.” And all because China stopped buying it from the U.S. and started buying from Brazil. However, Argentina will be able to increase its production in 2019 and, therefore, will become a fierce competitor, helping drive soybean prices down.

The country’s plan to diminish the impact of commodities on its economy is to decrease production costs. Then, AEB believes, Brazil will be able to reach new markets beyond South America. Also, he says, it is necessary to increase the quality of what is exported. According to him, in 2000, 59 percent of Brazilian exports were manufactured goods. This percentage fell to 35 today. “We need to improve the quality of our commodity products,” Mr. Castro says.

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MoneyJan 15, 2019

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BY Diogo Rodriguez

Rodriguez is a social scientist and journalist based in São Paulo.