International | May 08 2009
By Greg Peel
It used to be that Brazil’s leading trading partners were the US and Argentina, with China coming in third. But last month Brazilian exports to China totalled US$2.23bn worth, while only US$1.34bn was exported to the US and US$0.8bn to Argentina.
Indeed, analysts at Standard Chartered suggest the growth in Brazil’s exports to a wider Asian market has been nothing short of remarkable. Exports in April grew by 36.2% over April 2008 and the specific growth to China was 76.4%. Brazil’s monthly trade surplus reached US$3.7bn, well ahead of the March figure of US$1.77bn. Year to date Brazil’s surplus is US$6.7bn, up 49.2% year on year.
Australia is a bit slower to collate its data, as the March trade data were released only this week. Economists were nevertheless suprised that a monthly suplus of US$1.87bn so exceeded expectations of a US$1.35bn result. Most surprising is that while imports fell 3%, as one might expect, exports stayed flat compared with the previous month. The numbers are likely to look a bit different in April, however, given new coal and iron ore annual contract prices will be in place.
But confounding those who have expected exports to drop dramatically out of both Australia and Brazil has been record stockpiling of iron ore by China. China-watchers are somewhat confused by these efforts given the very weak global demand for steel. It is reasonable to pass off extensive copper purchases by China as rebuilding inventories at lower prices, but iron ore prices at last year’s contract levels are still as high as they’ve ever been. China may be in the process of aggressively stimulating its domestic economy, but record iron ore stockpiles? There is some concern that many of the purchases have been made not by the government but by intermediate traders and speculators.
Nevertheless, Brazil has been a major recipient of China’s largesse as well given its two principal exports to China are soy beans and iron ore. At the semi-manufactured level, Brazil also exports steel, cellulose and soy oil, while few manufactured goods head China’s way. Not an unfamiliar break-down?
Standard Chartered further notes Brazil’s trade with China is not a one way street either. The US remains as Brazil’s biggest trading partner (import/export), and trade value has grown from US$12bn in 1990 to US$53bn in 2008. However, China’s trade with Brazil has grown from US$0.6bn in 1990 to US$36bn in 2008 and is still accelerating. It makes sense, the analysts suggest, that Asia should have close trading ties with Latin America. Latin America has an abundance of natural resources to feed Asia’s manufacturing industry, and Asia is an ideal source of relatively cheap consumer goods to feed Latin America’s growing middle class.
And as the US maintains its focus on simply preventing economic disaster, the investment and political relationship between China and Brazil is growing. Both have been vocal in their support of International Monetary Fund reform – and included in such support are polite suggestions that the US dollar should not necessarily be the world’s reserve currency any more. Brazil’s President Lula is visiting China again this month, and the two have previously talked of conducting trade in their local currencies.
Part of America’s plan not to get itself into such a mess again is its desire to reduce the need to export oil from its Middle Eastern enemies. With Russia also a questionable ally these days, friendly Brazil – just south of the border – seems a good fit. But it is expected President Lula’s visit will include talks on Brazil’s pressing need to source finance for its massive Santos Basin project. Oil and natural gas have been found deep beneath the ocean floor, and Brazil needs help to fund what will be a very expensive exercise in extracting it. The US is not in much of a position to be handing out funds at present.
In February, Brazil’s public/private oil giant Petrobras signed a deal with China to provide 100-160k barrels of oil per day. Standard Chartered suggests a likely relationship whereby China provides exploration and extraction funding in exchange for long term supply contracts at some price agreement. The talks this month will be closely watched.
This is not China’s first foray into sealing deals for energy export with South America. For much of this last decade, China has been courting the more recently socialist states of Venezuela, Bolivia, and Ecuador and Peru. Inspired by Venezuelan president Hugo Chavez – a vocal critic of the US and US corporate interests in Latin America, who has long been mentored by Fidel Castro – the Latam states are keen to send their oil and gas exports to the Pacific and north to Asia. China has also spent the decade tying up commodity production and export deals with many of the despotically governed states of Africa, and has suggested a direct pipeline to Iran.
It is not that China is a sworn enemy of the US, it’s just that China doesn’t really mind who it deals with in its quiet quest for world dominance – a quest that was well underway even before the GFC hit the US and the developing world hard. In Australia, of course, China is forced to tread lightly, but strategic acquisitions of interests in Australia’s mining companies are, as we know, well underway.
On the flipside of China’s need to source raw materials more directly and to open up export markets in the greater developing world, China also has a need to diversify away from its vast investment of its foreign currency surplus in US Treasuries. It is thus little surprise China is pushing for the IMF’s Special Drawing Rights (a basket of five major world currencies) to replace the US dollar alone as the world’s reserve currency.
