World Economy

Brazil Crisis Hampers Infrastructure Construction

Brazil Crisis Hampers  Infrastructure ConstructionBrazil Crisis Hampers  Infrastructure Construction

Besides suffering from macroeconomic imbalances, like a drop in GDP, a high inflation rate and a large public deficit, Brazil is experiencing heavy losses as many oil industry and logistical works grind to a halt.

Much of the infrastructure under construction is part of a cycle that is coming to an end, of rising demand for and prices of raw materials, Mario Osava wrote for IPS.

China’s economic slowdown has had an especially big impact on iron ore, the price of which has plunged more than 60% since 2013. This will hinder the viability of several iron deposits in Brazil, as well as two railways under construction in the northeast, which now have an uncertain future.

“Low-grade iron ore is pushed out of the market when demand goes down, affecting the railroads that transport it,” Newton de Castro, a professor at the Federal University of Rio de Janeiro, told IPS. He criticized “badly designed projects” that have mushroomed in Brazil in recent years to fill a gap in infrastructure.

Doubts about the viability of the Caetite mine have undermined the construction of Porto Sul, the port that is the endpoint of the Fiol railway. Construction of the megaport has not yet begun, and work on the railroad has stalled, and it was left out of the government plan for the expansion of transport routes.

More progress has been made on the Transnordestina line, which benefits from the existence of two port destinations that are also industrial complexes: Suape in the northeast state of Pernambuco and Pecem in one of the country’s northernmost states, Ceara.

But the deposit of iron and other minerals that it was built to serve has been abandoned since its owner Eike Batista, once known as the richest person in Brazil, went bankrupt.

 White Elephants

The new reality of lower demand and prices “will push out of the market mines that are more costly to operate, and small mining companies,” favoring the predominance of big firms like Vale, the British-Australian Rio Tinto and the British Anglo American.

Brazil is the world’s second-largest producer and exporter of iron ore after Australia, and Vale is the world’s single largest producer of the mineral, the chief market for which is China.

The expansion in the size and number of ports along Brazil’s coastline will also be hampered by the drop in activity in the mining industry, as well as by the oil crisis caused by the drop in prices and especially the scandal that has hit the state-run oil company, Petrobras.

The drastic cutback in Petrobras’ investments has hurt the government’s strategy to develop a strong shipbuilding industry based on dozens of shipyards along the Brazilian coastline producing boats, offshore platforms and other oil exploration and drilling equipment for deepwater oil industry operations.

The crisis triggered the dismissal of tens of thousands of workers and the suspension of work in many shipyards and their port areas.

Most of the oil discovered in Brazil lies deep below the seabed off the Atlantic coast. The enthusiasm for creating a national industry for oil drilling equipment emerged after the 2006 discovery of large amounts of oil under a thick layer of salt, known as the pre-salt layer, more than 5,000 meters below the surface.

The difficulties of tapping into that newfound wealth make technology, ships, and large, complex equipment necessary. The administration of Luiz Inacio Lula da Silva (2003-2010) launched a strategy to develop the pre-salt reserves, in which Petrobras played a dominant role.

The government also set national content standards averaging 60% for the equipment used, to drive local production. And shipyards began to mushroom.

“It was an illusion. Reserving market encouraged waste not efficiency, besides favoring corruption,” Pires told IPS.

“Recovery will be slow and difficult; everything will have to be revised, and it will require a government with credibility, unlike the current one,” said the expert, an outspoken opponent of the center-left government of President Dilma Rousseff, in power since Jan. 1, 2011. “It will require a regulatory framework that offers legal security, to attract investment.”

Oil and infrastructure are the sectors that can fuel recovery of economic growth, to overcome the recession that has hit Brazil since last year, he said.