(Reuters) – Latin America has developed a dangerous dependency on China as a voracious consumer of commodity exports and the region now faces a potential hit as the huge Asian economy cools.
Exports to China by some of Latin America’s major economies – Brazil, Colombia, Chile and Peru – have grown 10-fold in value since 2001. China is now the top export destination for all of those counties, except Colombia.
The rise of the Asian powerhouse has helped redraw the region’s economic map, spurring investment in soybean farms in Brazil’s remote center-west, plans for a new rail link in Colombia to rival the Panama Canal and even the relocation of a Peruvian town in the Andes to accommodate Chinese miner Chinalco.
But $90 billion in direct exports to China are only part of the story. As countries in Latin America rushed to produce the fuels, ore and metals demanded by Chinese factories, dependence on the world’s No. 2 economy increased in tandem.
“If China’s economy decelerates, we are going to see a strong impact – first in prices and then in volumes,” said Carlos Gonzalez, head of economic studies at Peru’s export association, ADEX. “Ninety-seven percent of our sales to China are minerals. Because mining firms are the companies that pay the most taxes in Peru, even social programs would be affected.”
Commodities make up more than 60 percent of exports in all major Latin American economies, apart from Mexico, and slowing Chinese growth has already hit raw material prices, potentially hurting countries such as Venezuela and Argentina, too.
Since 2001, when China joined the World Trade Organization and burst onto the global economic stage, the share of exports Chile sends to the country has quadrupled to 22.8 percent.
Brazil’s exports to China have risen five-fold to 17.3 percent. In Peru – where Finance Minister Luis Castilla has said he lights a candle and prays every day for China to keep growing – the share of exports headed for China doubled to 15.3 percent.
“Latin America has enjoyed in the last five years a very big income transfer … as the prices of exports have gone up massively,” said CIBC Latin America strategist John Welch. “And it will unwind the same way.”
There are signs that is already happening.
The growth rate of Brazilian exports to China more than halved in the first six months of 2012, according to official Chinese trade data published on Tuesday.
Slowing imports of copper by the world’s biggest consumer of the metal – which is Chile’s number 1 export and Peru’s number 3 – helped depress prices to a six-month low in June. And the benchmark Thomson Reuters-Jefferies CRB commodity price index fell to its lowest since September 2010.
The lower demand and downward price trend, which started in February, was quickly felt. Peru reported its first trade deficit in more than three years in April. In Chile, copper export revenue in May was down 16 percent from a year earlier.
China’s economy slowed to a three-year low of 8.1 percent in the first quarter, despite two interest rate cuts in recent weeks. Second-quarter economic growth figures on Friday are expected to show a further dip to 7.6 percent as China’s main trade partner, Europe, battles a debt crisis.
Ratings agency Fitch says Chinese economic expansion of 8 percent this year would knock an average of 1.5 percentage points off growth in Argentina, Brazil, Chile, Colombia, Peru, Venezuela and Uruguay.
Peruvian Central Bank President Julio Velarde said Peru’s growth would reflect any reduction in China.
“If China’s pace of growth declines by 25 percent, Peru’s would too,” Velarde told Reuters in May.
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Analyzing the breakdown of trade with China, Bank of America Merrill Lynch economists found that exports from most Latin American countries are concentrated in a few primary products, such as copper in Chile and oil seeds in Argentina.
They are also more volatile in price than industrial goods, which are shrinking as a share of export revenue.
Since 2001, exports of manufactured goods have dwindled as a share of total exports in Latin America’s top seven economies as fuels and mining products have boomed. Brazilian manufactured goods made up more than half its exports in 2001, but accounted for 35 percent in 2010, according to WTO data.
Still, many exporters in the region shrug off the possible impact of slower Chinese growth. Brazil is optimistic about more sales to China by Brazilian aircraft maker Embraer as a result of a new trade pact.
The deal is a step towards easing tensions in the tricky relationship between the two huge emerging economies. China has alarmed Brazil with a flood of cheap goods, but at the same time it buys most of its soybeans and much of its iron ore.
Spot iron ore prices are down more than 2 percent this year. The chief executive of Brazilian mining start-up Ferrous Resources do Brasil SA, Jayme Nicolato, was optimistic Chinese demand would support ore prices going forward, although less than before.
In Peru, where Chinese demand has helped fuel average annual growth of 6.4 percent in the last decade, which almost halved the poverty rate to around 28 percent, lender Interbank saw an opportunity in China rebalancing towards domestic demand.
“The potential from China is in selling manufactured goods,” said the head of the bank’s Shanghai office, Juan Carlos Rios, during a visit to Lima in early July.
He added that middle-class Chinese demand for Peru’s Pima cotton clothing, grapes and avocados would remain strong, even if demand for metals dwindles.
Although Peru hopes to double agricultural exports as a share of total exports by 2016, the gap between farm and manufactured goods and raw materials remains immense.
Overall manufactured exports last year were worth 10.7 percent of total exports, down from 18.1 percent in 2001. At just $384,000, Peru’s exports of Pima cotton clothing were just 0.05 percent of copper exports.