War in Ukraine disrupts small industry production in Brazil

The war in Ukraine and its impacts on input and raw material chains also reached micro and small industries. The most immediate effect comes from the cost of transport, pressured by the rise in fuels, and from petroleum derivatives, in general, such as resins.

The micro and small industries in São Paulo began to recalibrate their expectations for the coming months, after an improvement in optimism until mid-February, says the president of the sector union, Joseph Couri.

“Not only the war, they still have Covid in China and rising interest rates. The costs of raw materials were already high and with many delays”, he says. The economy’s basic interest rate, the Selic, was 11.75% per year at the most recent meeting of the Central Bank’s Copom (Monetary Policy Committee). The increase in interest rates, predicts Couri, will reduce and make credit for the sector more expensive.

Last month, according to a Datafolha survey for Simpi (Union of Micro and Small Industries of São Paulo), 54% of entrepreneurs in the sector evaluated the business situation as excellent or good. Before February, the last time that many São Paulo industrialists said they were satisfied was in June 2014, with 53% of good or excellent.

The effect of rising fuel prices on transport weighs on companies on several fronts. Uréo Pereira ​, the supply chain manager at Gemü, a German company that produces valves, says that these costs have already risen 13.5% this year.

The company has its own fleet to handle part of the displacements, but it depends on other transporters to move goods for finishing and receiving inputs.

In addition to the fuel shock, the company is already preparing for new increases in plastic parts, since resins are affected by oil prices. Since 2020, plastics have seen an average increase of 60%.

On another front of recent highs, pig iron rose 25% in February. In the industry as a whole, this is a widely used material. At Gemü, says Pereira, it is used in almost 100% of what is produced.

“We tried [desde o início da pandemia] hold as much as possible the pass-through of prices. We work on cost reduction, we implement tools to improve processes, but this is a year in which we can no longer hold back”, he says.

Despite some optimism in some indicators in February, the Simpi/Datafolha survey showed the persistence of difficulties with prices and meeting deadlines, albeit at a lower level than that recorded at the beginning of last year.

In February 2022, 74% of micro and small industries in São Paulo said they faced difficulties with the high price of inputs and raw materials. Another 41% said they were dealing with a lack of materials and 39% with a delay in delivery.

At Gemü, the strategy to deal with the breakdown of supply chains was to break with the outsourcing of some processes and invest in in-house production, which required the company to purchase new machinery. Two factory routines, plastic injection and diaphragm production, no longer come from outside and are now produced in-house.

The industry supply manager says that since the beginning of the pandemic, the control and formation of stock have gained centrality in the planning of companies. “In season [em que a pandemia começou] we were talking about reduction, process optimization, but, in the end, there was no way to keep it at a low level. What was once stock for a month and a half is now four to six months,” he says.

The need to do what companies call “capital immobilization” — idle money in the form of finished products or raw materials to produce — was being rehabilitated in companies’ planning in the face of increasingly unstable deadlines between suppliers.

“What we had to receive from the foundry that took 30 days became 90 and then 120 days.”

There are cases, says Pereira, in which suppliers ended up with price lists. Input values ​​started to be negotiated daily, at the time of purchase.

According to the Simpi/Datafolha survey, in February, the percentage of industries that said they had registered a significant rise in prices in relation to the previous month fell. It was 59% in February and had reached 72% in January 2021, the peak of the series started in March 2013. Of those who said they had registered a significant increase in costs, 47% said that the increases came from raw materials and inputs.

Disenchantment with the effects of the war on the economy is not restricted to micro and small industrialists. The CNI (National Confederation of Industry) expects to review in April the country’s growth expectation in 2022, to include the impact of the new shock.

The entity says it is mainly concerned with increases in oil, energy and industrial inputs prices. In March, 22 of 29 industry sectors surveyed by the confederation registered a drop in confidence.