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Brazil remains committed to Africa: Brazilian trade with Africa collapsed after the commodity price crash of 2016, but as Neil Ford reports, a new trade agreement and increased Brazilian agricultural exports hint at a recovery.

African trade with Brazil suffered hugely from the commodity price crash of 2014-16. Bilateral trade between the two regions had jumped from $4.2bn in 2003 to $28.4bn a decade later but collapsed to $12.4bn in 2016 and is yet to recover. However, a new trade agreement and increased Brazilian agricultural exports to the continent suggest that there could be some light at the end of the tunnel.

Brazil's massive corruption scandal, known as Lava Jato--Operation Carwash --revealed that some of the country's biggest conglomerates had paid bribes to officials in many countries. The revelations surrounding numerous Latin American politicians and business leaders attracted most of the headlines but the story also had significant repercussions in Africa.

Construction firm Odebrecht has been particularly active in Angola but the scale of its activities in the future could be affected by its involvement in the scandal. The firm admitted that it has paid bribes totalling $788m, including $50m in Angola and $900,000 in Mozambique. Its dominant position in Angola may also be affected by the replacement of Jose Eduardo dos Santos as president of Angola with Joao Lourengo.

The Brazilian firm is still the biggest private sector investor in Angola, developing a wide range of projects that were financed by Angolan oil revenues. The biggest of these is the 2,070 MW Lauca hydro scheme, which has provided a step increase in national generating capacity, supplying power to Bie and Huambo provinces. Odebrecht secured the engineering, procurement and construction (EPC) contract on the scheme and is also developing the 750km of transmission interconnectors needed to supply electricity to customers.

Much of the funding for the $43bn venture has been provided by Brazil's National Bank for Economic and Social Development (BNDES) but the bank had to reduce its financial commitment to the project in the wake of Lava Jato. However, the Angolan government managed to cover the shortfall with a 247.8m [euro] loan from the UK's Standard Chartered Bank.

Most of the project's turbines are already producing electricity and the last two 333 MW turbines should come on stream by the end of this year. Last year, Odebrecht won a $993.4m contract from the Angolan government to operate and maintain Lauca, plus the 960 MW Cambambe and 520 MW Capanda hydro schemes on the same river--the Kwanza --while the Capanda project also needs to be upgraded.

BNDES had agreed total financing of $4.7bn for African projects prior to Operation Carwash but many of its activities have been suspended. The bank had agreed to finance the development of the Moamba--Major hydro scheme in Mozambique's Maputo Province. It cancelled the agreement because of the corruption scandal but also because construction costs spiralled from $460m to $700m. There have been repeated obstacles to restructuring the BNDES' assets, including in mid--October the resignation of Andre Laloni, the director in charge of privatisations and asset sales, amid disagreement over strategy.

New trade

Brazilian investment in Africa is still concentrated in Portuguese--speaking African countries but more diverse economic relations have started to take off, thanks to the ratification of a preferential trade agreement between the Southern African Customs Union (Sacu) and the Southern Common Market (Mercosur) in 2016. A total of 778 items can now be exported to Brazil from Southern Africa duty free, while 469 products can be shipped duty free in the opposite direction.

The South African government in particular had been keen to conclude a trade agreement between the two BRICS nations. The value of South African exports to Brazil increased from just $43m in financial year 2016-17 to $183m the following year. South Africa's economic representative in Brazil, Shanaaz Ebrahim, said: "According to trade statistics our trade deficit with Brazil has shrunk considerably in 2018. The deficit is now at $700m, down from $1.2bn in 2017."

However, the ongoing dispute over Brazilian agricultural exports to South Africa threatens to undermine the relationship. South African farmers complain that Brazil is dumping sugar and chickens on the South African market. The issue could be addressed at the 11th BRICS summit, which will be chaired by Brazil, in November.

The governments of Brazil and South Africa have worked hard to promote trade between the two regions but private sector companies have become better at identifying opportunities themselves. Speaking at the African Green Revolution Forum (AGRF) in Ghana in September, the president of the Brazil Africa Institute (IBRAF), Joao Bosco Monte, said: "Government policies for development are of great importance, but the private sector also plays a crucial role in south--south and triangular cooperation issues." IBRAF, which helps to promote trade between Africa and Brazil, has set up its Youth Technical Training Program to train young African farmers in Brazil on the latest agricultural techniques that have increased Brazilian yields.

Brazilian farmers have already begun to export a wide range of agricultural commodities to Africa. For instance, while Brazil exported no maize to the continent until 2009, the figure reached 4.9m tonnes in 2018, mainly to North Africa but also to 25 Sub--Saharan African countries.

This comprised 20% of the country's total maize exports, which have taken off after higher yielding strains were introduced that allow two harvests per year, while the UN's Food and Agriculture Organisation has praised improvements in transport infrastructure, particularly new port terminals, for the big increase in exports. Brazil is now the world's second biggest maize exporter, accounting for 26% of the global market.

Vale in Mozambique

While low global coal prices have deterred other firms from opening up frontier mining areas, Brazilian mining giant Vale has pressed ahead with the development of its Moatize project in Mozambique's Tete Province. The province holds most of Mozambique's 25bn tonnes of proven coal reserves but the lack of transport infrastructure had long prevented their development. However, Vale has built a railway from Moatize to the deepwater port of Nacala on the Indian Ocean coast.

Another railway offers export via the port of Beira, while a third coal export terminal is planned at Macuse, near the mouth of the River Zambezi. In August, Vale Mozambique, in which Mitsui holds a 15% stake, cut its production forecast for this year from 14m tonnes to 10m tonnes but still intends to increase output to 20m tonnes a year by 2021. It blamed low global prices on the impact of the Chinese--US trade war.

Apart from generating export revenues, the project is set to benefit Mozambican economic development more directly by supplying feedstock to domestic power plants. In August, Vale Mozambique announced that it would supply a new coal fired plant that China Energy Engineering Corporation will construct in Nacala. It followed this in September with a nonbinding power purchase agreement to supply coal to Kibo Energy's planned 300 MW Benga coal fired plant.

Amid fears over the environmental cost of burning coal, Kibo Energy hopes to source high quality coal to minimise pollution and increase efficiency. In a statement, the company said: "This control is possible because of the certainty and diversity of feed supply specifications able to be delivered from the mine and is in contrast to many coal--fired power plants, especially integrated mine--mouth coal-fired plants, where there are very few, if any, options for materially varying the quality of fuel supply, which in turn denies them the ability to achieve and maintain optimal production, emission and cost efficiencies."

Caption: Brazilian construction firm Odebrecht has been particularly active in Angola.
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Title Annotation:South South: Special Report
Comment:Brazil remains committed to Africa: Brazilian trade with Africa collapsed after the commodity price crash of 2016, but as Neil Ford reports, a new trade agreement and increased Brazilian agricultural exports hint at a recovery.(South South: Special Report)
Author:Ford, Neil
Publication:African Business
Geographic Code:3BRAZ
Date:Nov 1, 2019
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