Is there such a thing as too much of a good thing - in this case currency devaluation - for an export-driven economy? In the case of Brazil, it appears the answer is yes.
With the Brazilian real tumbling and foreign trade partners scrambling to benefit from the low FX-adjusted prices, Latin America’s biggest economy should be enjoying an export boom. Only, that is not happening as a result of chaos in the country's logistics sector which started with a state of emergency following a trucker strike in May (and which required an army intervention) and has now gripped the country's shipping industry.
As the FT reports, exporters eager to capitalize on Brazil’s weakening currency and bumper harvests are booking shipping, but then having difficulty finding the trucks to deliver their goods to port on time because of an ongoing dispute with drivers over freight prices, according to Maersk Line, the world’s largest container shipping company.
The resulting competition for limited shipping space combined with uncertainty over truck freight prices has led exporters to over-book shipping by as much as 200% from 5 per cent normally, creating chaos and confusion at ports.
"What we see right now is the situation is completely out of control, and getting worse," said Antonio Dominguez, Maersk Line managing director for east coast South America.
in a world of just-in-time logistics - without to no fail safe alternatives - and where even the smallest deviation from pre-planned norms tends to ripple and cascade not only across the domestic economy, but ultimately crippled global supply chains as well. This is what has happened to Brazil.
As a result, the 10-day Brazilian truckers’ strike has become what the FT has called "the most calamitous economic events" to strike the centre-right government of President Michel Temer, crippling second-quarter GDP, undermining investor confidence and sending the currency sliding even more (paradoxically making the problem even worse as exporters push even harder to sell their wares).
With even the world's largest container shipping company in shock by what is taking place, it is no surprise that multinationals ranging from Unilever to Carrefour have been hard hit by the strike.
According to economists the worst effect of the shutdown was subsidies ceded by the government to truckers. These included a lower diesel price and a guaranteed minimum freight price that has raised transport costs for soy and corn exporters more than 800km from port by as much as 28%. To make matters worse, the price is being charged on return trips, even if a truck is empty.
“The tabela [minimum price] is creating a big pricing distortion,” said one executive from a freight company, who said the return charge in particular was “overkill”.
And since the minimum freight price was immediately challenged in the courts, leading to confusion over its enforcement and uncertainty in the market, it forced exporters and drivers into lengthy negotiations over every cargo.
Others - such as Maersk - disagree, and say the problem of over-booking has its roots as far back as 2016, when Brazil’s economy suffered the second year of its worst recession in history, leading shipping companies to cut back on the number of vessels serving the market. The economy began to rebound in 2017 and 2018 led by agricultural exports. But the overbooking problem only emerged this year after the truckers’ strike as exporters, desperate to secure limited space, began wildly over-booking despite being unable to predict with certainty when or what quantity of goods they would be able to deliver to port.
The result has been a truncated trade channel, and a nightmare for anyone involved with Brazilian logistics: Maersk said the overbook has led to 5% of cargoes being left behind each month because of the confusion, the equivalent one vessel going empty each month.
Container exports, which account for 80% of Brazilian trade, fell 6% in the second quarter of this year against the same period a year earlier, down from 6% growth in the first quarter.
The biggest irony of all is that with the Brazilian real tumbling, Brazil should be enjoying an export boom, with US President Donald Trump’s trade war with China favouring Latin American soya bean producers, in particular.
"The currency continues to depreciate, so now it`s actually crossed the R$4 to the dollar mark, that’s extremely good for exports,” Maersk’s Mr Dominguez said. “But then every day is a challenge to be able to arrange a contract with a trucker out of the places where you have those commodities."
The good news is that for now, in a worst case scenario Brazilian trade partners can still find alternative trade routes from other, just as cheap export sources.
The concern is that as the emerging market crisis spreads - and there is a reason why EM currencies are so low - the same pattern of logistical collapse will follow, as incumbent governments are overthrown and replaced with populist favorites, that focus on domestic needs at the expense of international trade. The concern is that with the world overly reliant on streamlined and functional just-in-time logistical supply chains, once a critical mass of logistics goes offline, global trade and commerce could suffer a catastrophic event, like the one David Korowicz described back in 2012 in "Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse" which had this relevant excerpt:
The growing stress in our very complex globalised economy means it is much less resilient. Thus a small shock or an unpredictable event could set in train a chain of events that could push the globalised economy over a tipping point, and into a process of negative feedback and collapse.