Frustrated projects and lack of planning explain Brazil’s dependence on fertilizers

Brazil’s dependence on fertilizer imports is one of the country’s main weaknesses in the face of the war between Russia and Ukraine.

The situation, however, could be different. An attempt to change this scenario was undertaken by Vale. Between 2009 and 2011, the company invested around US$7 billion in nitrogen, phosphorus and potassium mining.

The plan — frustrated — aimed to place Brazil in the restricted club of global suppliers, the threesome Canada, Russia and Belarus.

Located in Brazil, Argentina and Canada, the mines that Vale acquired would produce the three items most used by Brazilian rural producers, who annually replace the nutrients consumed by the crops, without which productivity — mainly of soybeans, corn, sugarcane and coffee—would be harmed. Or even unfeasible, from an economic point of view.

At that time, Vale’s sudden entry into fertilizer extraction surprised specialists, given the abysmal differences between this business and the company’s original specialization, focused on mining to supply metallurgy and steel.

In 2016, a few years after the peak of commodity prices (2011-13), in a very short period for a mining company, Vale accelerated the dismantling of these projects, arguing that they were no longer economically viable.

According to economist Ricardo Machado Ruiz, a professor at Cedeplar (Center for Development and Regional Planning), at UFMG (Federal University of Minas Gerais), Vale’s entry into the fertilizer business was in line with the project of the then CEO Roger Agnelli, who directed the company between 2001 and 2011. The plan was to deepen internationalization and specialization in mining, drawn from the management of the former ambassador and former president of Vale Jorio Dauster.

“Vale came to enter heavily in fertilizers. In Argentina alone, the Rio Colorado project came to have investments close to US$ 5 billion, but care must be taken with these values ​​because minerals fluctuate a lot”, says Ruiz.

The economist believes that the entry into the fertilizer segment in 2009 caught the attention of specialists because they are very different operations.

“Vale intended to be a global player in this area, despite the fact that metallic mining is very different from mining for the production of fertilizer. It entered nitrogen, phosphorus and potassium to be able to supply fertilizers, a niche where it is only possible to be a relevant supplier in the world if you sell the three items of the [fertilizante] NPK”, says the economist.

The fall in commodities after 2014 got Vale heavily indebted. “With the departure of Vale, we lost a company that has Brazil as its economic and political base, with projects worth just over US$ 7 billion, leaving the fertilizer industry because it was over-leveraged, focusing on its core business, on a defensive business strategy that the circumstances at the time demanded”, says Ruiz.

When contacted, Vale did not comment on the matter until the report was published.

For the UFMG professor, it was quite an opportunity that the country missed. “With Vale, Brazil had the possibility of becoming a global player in a strategic sector for the Brazilian economy because we have an agribusiness that accounts for part of our production and exports, and which is particularly important for exports and the trade balance “, summarizes the economist, who was a counselor at CADE (Administrative Council for Economic Defense).

“Vale’s departure shows the inability of Brazilian governments to formulate solutions for critical sectors, betting that globalization would be something undeniable. Brazil’s inability to formulate a policy with actually reliable sources for strategic inputs such as fertilizers”.

The account of inoperability now knocks on the door with the difficulties of importing fertilizers as a result of the war between Russia and Ukraine, making rural producers all over Brazil sleepless, in particular those in the Cerrado, whose soil that is less rich in nutrients requires higher doses of fertilizers applied annually.

There remains the precarious way out found by Minister Tereza Cristina, of Agriculture, who will land in Canada in search of more fertilizers, facing a game in which demand is currently finding a “locked” market, as experts say.

Brazilian agriculture was caught on the back foot, as many producers closed 2021 with the expectation that the logistical and production bottlenecks that arose in the pandemic would be solved as of the second quarter.

“At the beginning of the year, nitrogen was already falling, and it was expected that, after the planting period of the crop in the Northern Hemisphere, fertilizer prices would start to fall. But Russia’s entry into the war caused a setback in the market, and it will be very difficult to solve this problem in the short term because the lack of fertilizer is widespread”, says José Carlos Hausknecht, from the consultancy MB Associados.

“The minister said that until October we will have no problems, but until October we have not planted anything, so there will be no shortage. And we have very low stocks”, he says.

More realistic than the minister, Anda (National Association for the Diffusion of Fertilizers) estimated in a note on the 3rd that the country has stock for three months, making it clear that these products are on the market, not in official stocks that could be distributed organized.

“We have had our fertilizer production capacity stagnant for years. We have the whole problem of the Brazil cost that makes exploration difficult, and our reserves are not sufficient,” says Hausknecht.

“We could use natural gas to make the [fertilizantes] nitrogen, but the cost of gas here is very high, it ends up being cheaper to import than to produce”, evaluates Hausknecht.

The difficulty of competing increased in 1997, when the Fernando Henrique Cardoso government exempted imported fertilizers from taxes, which are taxed only in the case of circulation in more than one Brazilian state.

And the situation is even more complicated because Belarus is also embargoed – Brazilian companies that trade with the country may face reprisals from the US and the European Union, which imposed sanctions in 2020 for considering that the current president, an ally of Russian Vladimir Putin, rigged the election. presidential.

For Rabobank senior analyst Bruno Fonseca, a specialist in agricultural inputs, the federal government’s strategy of minimizing shortages is appropriate, as it is not known how long the war will last.

“It will be difficult to replace everything that Russia supplies us, it is a very large volume, but we will probably be able to increase purchases in Canada with higher prices”, summarizes Fonseca.

In the most critical case, for potassium chloride, Canada, Russia and Belarus add up to 80% of the Brazilian need. “And, in the case of potassium chloride, we will have to compete with the USA”, says Fonseca, who cites Europe as another strong competitor.

One of the biggest consumers of fertilizers and food in the world, China is building its agricultural and mineral exploration bases in Eurasia and Africa, which, in the assessment of Ruiz, from UFMG, could create a problem for Brazil in a few years.

“With this strategy, China can become a global player in agribusiness, using fertilizers from Russia. With this, there may be a shift in Russian supply to Eurasia and Africa”, says Ruiz.

“We could not have left Brazilian agribusiness with such an open flank. Today, we are suspicious of world supply and the Brazilian government is under pressure and supply restrictions from large fertilizer producers, in particular from Russia, which, incidentally, recently bought the Eurochem”, says the economist.