Economics of China’s Brazilian railway unclear at this stage

China and Brazil announced an agreement to collaborate on an extensive list of projects within Brazil during the Chinese government’s official visit to South America last week. At first glance the size of these projects appears to be enormous, with the Chinese suggesting that the equivalent of $50bn is to be invested. As is usual with such announcements, transport schemes are to the fore.

One of the centre pieces of these notional agreements is the launch of a project to build a railway linking the Amazon region to ports on the Pacific coast of Peru. This remarkable proposal suggests that the Chinese will build a freight-line over the Andes terminating at a new container and bulk port in Peru, also to be built by the Chinese. The railway would be in excess of 5,000 km/ 3,000 miles long and it is suggested it would cost US$10bn to build. There are several suggested routes, either directly to Peru from Brazil or another passing through Bolivia.

Of course the Chinese have already built a railway at very high-altitudes through Tibet so presumably it is possible from an engineering perspective.

However as an economic prospect it is a strange proposition. Press reports are quoting Brazilian government sources as suggesting that the logistics cost of agricultural products would fall by “$30 per tonne” although it is unclear how this figure has been arrived at. Whilst transport from a Pacific port would be a more convenient means of shipping to China, marine transport either through the enlarged Panama Canal or across the Indian Ocean does seem to have considerable advantages.

The key exports from Brazil to China are bulk products, both iron ore and agri-bulk such as soya. The former has benefitted from the introduction of ‘Valemax’ vessels, which at 400,000 tonnes offered substantial economies of scale (although ironically, the Chinese resisted their introduction). The bulker’s route from Brazil to China across the south Atlantic and Indian Ocean takes around 33 days. A route from the Pacific coast would be shorter and enable greater ship utilization, however would this justify a $10bn investment? Similarly agricultural products are already well served by the growth of box-reefer capacity on container vessels on existing trade routes.

The real problem that Brazil faces is the ineffectiveness of its internal logistics infrastructure. Its ports, railways and roads are inadequate for the task of supporting sectors such as agricultural commodities. This has been recognized by the Brazilian government yet, despite a plan launched in 2012 to invest BRL54bn (US$25.9bn) in ports alone, progress in expanding logistics capacity has been slow. This is not due to a shortage of available private investment – the world is awash with capital looking for a home – but rather a traditional resistance to external competitors entering the Brazilian market. This could be overcome if Chinese infrastructure builders and operators are given privileged access to the Brazilian transport market. Alternatively we may see the newly announced projects fail to progress as so many projects have done in the past.