China’s Strategy in Brazil & the Southern Cone

What designs does the Middle Kingdom have for the energy industries of Brazil and the Southern Cone? Interfax spoke to Lisa Viscidi, director of the Energy, Climate Change, and Extractive Industries Program at the Washington-based Inter-American Dialogue, and Margaret Myers, director of the think-tank’s China and Latin America Program.

What is China’s strategy for investing in Brazil and the Southern Cone?

Chinese energy investment in Brazil and elsewhere in Latin America is driven by a complex mix of government planning and profit-based motivations. While investment decisions are sometimes made to support energy security objectives, Chinese NOCs largely operate according to profit-based incentives in Brazil, and through mergers and acquisitions are gradually expanding their portfolios to include upstream oil and gas holdings.

While developing familiarity with the local market and regulations, Chinese companies have focused on minority stake investments with experienced international entities already familiar with the local investment and regulation climate. Chinese firms of all types are also bidding across value chains, including in infrastructure and services.

Chinese energy investments in Brazil and the Southern Cone since 2005

Source: China-Latin America Finance Database
  

China has invested heavily in Brazilian oil, agriculture and other sectors over the past 10 years. China has explored the possibility of numerous land-related and agricultural infrastructure deals in Brazil, for example. Chinese foodstuff trader COFCO recently acquired Dutch agriculture firm Nidera, giving China control of that company’s assets in the Southern Cone. Chinese banks have provided Brazil in particular with approximately $22 billion in finance since 2005 for various energy, mining and infrastructure projects. During Premier Li Keqiang’s visit to Brazil in late May, China promised tens of billions more in investment and finance to the South American nation, focusing on a wider variety of sectors – including manufacturing, renewables and shipping. Petrobras received yet another multi-billion dollar infusion when the Chinese and Brazilian mining company Vale struck a much‑anticipated deal with Chinese shipping company COSCO.

Onerous upstream regulations – including local content requirements and government-imposed price caps on transport fuels and electricity tariffs – have led to project delays and inefficiencies. This has dampened the excitement of international investors – including Chinese NOCs – in projects such as the exploration of Brazil’s Libra oil fields. Revising the regulations and boosting investor confidence could pave the way for increased investment in Brazil. China National Petroleum Corp. and China National Offshore Oil Corp. each took a mere 10% stake in a consortium to explore the Libra field. However, this is significant as it represents the first purely exploratory investment by Chinese NOCs in the country, and means they will be involved with the upstream project for the long term.

Increasingly, Chinese firms are realising that, to maintain a long-term presence in the region, they will need to effectively engage with communities and adopt practices commonly used by multinationals already operating in the sector.

Chinese investment elsewhere in the Southern Cone has largely focused on infrastructure and gas, primarily in the Vaca Muerta field, although progress there has been slow. As in other countries in the region, China has invested in hydropower projects in Argentina, including a $4.7 billion loan by the China Development Bank, ICBC and the Bank of China to construct a hydroelectric dam last year.

Chile is a major destination for Chinese investment in renewables. China is a top manufacturer of solar cells and supplied 53% of Chilean photovoltaic imports in 2013. The China Development Bank and Chinese companies ReneSola, Jinko Solar, Sky Solar, and Powerway are investing in solar energy projects in the Latin American country, some in partnership with Chilean entities. Chile and China have also become major trade partners since signing a free-trade agreement in 2005 – although the relationship is based on Chilean exports of copper to China, which have dwindled somewhat in recent years. The countries plan to deepen their integration through a currency swap, however, and by setting up a clearing bank for the renminbi in Chile – which would be the first such bank in Latin America.

Increasingly, Chinese firms are realising that, to maintain a long-term presence in the region, they will need to effectively engage with communities and adopt practices commonly used by multinationals already operating in the sector. For example, State Grid Corp. of China – which plans to reach $10 billion of market investments in Brazilian transmissions this year – has implemented a highly successful approach to community engagement and public relations over the past few years, which could be easily replicated by Chinese firms struggling to build a positive image in the region. State Grid hires local managers, invests in local communities and sponsors local cultural events. The company also has many Brazilian managers, and many of the company’s Chinese employees speak Portuguese.

What does China stand to gain from investing in the region’s energy projects?

Latin America is an important destination for Chinese investment because of its wealth of natural resources, including oil and gas. Investment in Latin America’s energy sector is also part of the Chinese energy bureaucracy’s broader interest in diversifying its oil supply. China has already invested in many energy projects throughout the region by engaging in oil exploration and production; negotiating oil-backed lending schemes with Venezuela, Ecuador and Brazil; providing loans to national oil companies; and investing in hydropower, energy and transportation infrastructure.

Latin America is an important destination for Chinese investment because of its wealth of natural resources, including oil and gas.

Latin American crude is increasingly exported to Asian markets, with 10% of China’s total crude imports coming from Latin America in 2013. Venezuela, Colombia and Brazil – China’s top three Latin American suppliers – contributed almost 350,000 barrels per day of Chinese crude imports in 2014. China’s persistent interest in developing trans-regional infrastructure could eventually carry more energy resources to Pacific ports.

Where do you think China is looking next in Latin America?

China has established an economic presence in nearly every country in Latin America and the Caribbean, including those that are diplomatically affiliated with Taiwan. But China’s economic interests are still largely focused on the Southern Cone, countries rich in natural resources and raw materials.

That said, a wider range of Chinese investors is now involved in the region, including new small and medium-sized firms, commercial banks and, increasingly, individual investors looking to make a profit in various sectors in the region. China’s ‘1+3+6’ cooperation framework identifies six sectors in which state and private firms are encouraged to focus. These include areas of traditional interest – such as oil, gas and agriculture – but also manufacturing and high-tech industries, which far fewer Chinese investors have focused on.

However, as China’s investments in Latin America grow, so will the potential for conflicts with communities in the region. China’s investments are still largely concentrated in the energy, mining and infrastructure sectors – where social conflict is endemic. The possibility of conflict in Ecuador is especially high as a result of China’s plans to exploit the highly biodiverse Yasuni national park.

As China’s investments in Latin America grow, so will the potential for conflicts with communities in the region.

Though potential for conflict exists, both Latin America and China benefit greatly from the relationship. Many countries in the region are dependent upon Chinese loans and investments to keep their vulnerable economies afloat. China’s leaders also depend on Latin America and other regions to help them achieve their domestic food and energy security objectives.