Sunday, May 29, 2011

Chongqing's Brazil Deal

Several days ago, the New York Times ran an article about Chinese investments in Brazilian soybean projects. The dim sums blog got curious and read a little on what the Chinese press says about this investment.

Dimsums read up on a $2.4 billion deal struck by Chongqing Grain Group in April with officials of the state of Bahia, one of at least two China-Brazil projects agreed to so far. The Chongqing project, set to begin construction this month, included construction of a soybean crushing plant, a soybean warehouse and a fertilizer factory. It is expected to employ 1,000 local people (presumably Brazilians). Soybeans are to come from an area covering 200,000 hectares.

More background about the project is given in an August 2010, article in the Chinese press announcing that the deal was in its final stages of approval by the National Development and Planning Commission.

The company behind this project--the Chongqing Grain Group--appears to be a company descended from the grain and edible oils bureaucracy. Most of the article consists of quotes from Wang Jianjun, vice chairman of the company. Apparently, this article is another example of company propaganda masquerading as news but it gives us some insights about what's behind the project.

Mr. Wang's explanation of the impetus for the project reveals a latent central-planning mentality. Mr. Wang explained, “Chongqing each year produces 100,000 mt or so of edible oil, but consumption is 350,000 mt, so that leaves a 250,000 mt deficit that has to come from outside the municipality." There is no mention of plans for marketing the soybean meal which provides a big part of the revenue from soybean crushing.

The Times article inferred that China imports soybeans were for animal feed, but in fact the Chongqing project is aimed at getting vegetable oil. Wang Jianjun said that this project will fulfill Chongqing's demand for edible oils in 3 to 5 years and supply some to sell outside the municipality.

Mr. Wang also said that soybeans from the project itself would only fill 45% of Chongqing's vegetable oil deficit, and the rest will be filled by importing other Brazilian soybeans. Mr. Wang explained, “After it’s completed, the Brazilian base will become the company’s platform for importing Brazilian soybeans; we can close the deficit by purchasing soybeans from the surrounding area.”

The Chinese article on the deal emphasized that Chongqing citizens would get the soy oil at a very cheap price ("价格将更便宜"). Mr. Wang, the company official, explained that the company can ship soybeans from Brazil to the Chinese port at Zhangjiagang and up the Yangtze River 350-yuan cheaper than they can ship soybeans from northeastern China. Moreover, the higher oil content of the Brazilian beans (20%) makes them even cheaper.

Two-thirds of the Chongqing Grain Group deal was to be financed by loans from the China Development Bank, a mammoth government-owned policy bank that specializes in financing foreign investments by Chinese companies--the "going out" campaign.

Why are Chinese companies spending vast sums to build projects in Brazil? Wouldn't it be cheaper to just buy soybeans on the open market? One reason may be the ingrained need for control and planning.

Another clue is revealed near the end of the Times article: "Farmers [in Brazil] say they share Chinese officials’ goal of breaking the stranglehold of international trading companies like Cargill and Archer Daniels Midland."

Chinese officials frequently complain that the "ABCD companies" [ADM, Bunge, Cargill, Louis Dreyfuss] dominate and manipulate the grain and oilseeds industries. A 2008 English article in China's Economic Observer blaming high commodity prices on the ABCD companies provides a glimpse of the vitriol. One of the goals of the "going out" strategy is to build up China's own multinationals who can escape the supposed dominance of the ABCD companies.

Some history: a sore point constantly cited in China is supposed price manipulation in 2004 that bankrupted Chinese soybean crushers in China. Describing the events in 2004, one anonymous Chinese scholar quoted in the Economic Observer article said the demise of Chinese soybean crushers was due to their own internal problems, not conspiracy theories. According to the anonymous scholar, over 1,000 soybean crusing companies--most affiliated with local governments--popped up in the space of two or three years. In the scholar's opinion, it was inevitable that these companies would fail since there were so many, each with a small market share, and they had "backward technology and management."

Now, small local companies like Chongqing Grain Group are trying to go head to head against the ABCD companies in Brazil. The thinking of the Chongqing Grain Group chairman outlined in the article portrays old school central planning mentality of filling in cells in spreadsheets that will probably not hold up against Harvard MBAs. These bureaucrats/managers have carved up China into self-contained provincial markets with fixed "demands" for each product that have to be balanced with supplies using a socialist cost-plus approach to pricing.

Why will companies like Chongqing Grain Group succeed in Brazil while similar companies failed on their home turf in China? Because they're armed with billions of dollars in cash this time?

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