$Unique_ID{bob00133} $Pretitle{} $Title{Brazil Chapter 3C. Industry} $Subtitle{} $Author{Darrel R. Eglin} $Affiliation{HQ, Department of the Army} $Subject{percent billion alcohol million tons brazil production project fuel oil} $Date{1982} $Log{} Title: Brazil Book: Brazil, A Country Study Author: Darrel R. Eglin Affiliation: HQ, Department of the Army Date: 1982 Chapter 3C. Industry Contemporary studies point to the last decade of the nineteenth century as the beginning of Brazil's industrialization, but such dating is somewhat arbitrary. In the 1880s, for example, over 300 industrial firms were established. By 1890 there were more than 50,000 industrial employees, and the first hydroelectric power plant was in operation. In the earliest industrial census-1907-there were over 3,000 industrial establishments with a total of over 150,000 workers. The 1920 census recorded 13,000 plants and shops employing about 275,000 workers. By 1920 manufacturing was well established, providing 64 percent of the supply of manufactured goods; imports provided the remaining 36 percent. Manufacturing was concentrated in textiles and food processing, and imports of such products were below 10 percent of the total supply. During the 1920s industrialization slowed. Between 1919 and 1932 manufacturing output increased about 1.5 percent a year. Government attention and funds were concentrated on the support of coffee prices. Nonetheless, the metallurgical and chemical industries made substantial gains. An integrated steel plant, for example, began operation in 1925 to supplement the existing charcoal-fired blast furnaces. In the mid-1920s the cement industry was established. By the late 1930s Brazil supplied virtually all of its requirements for pig iron and cement. Government policies during the Great Depression curtailed imports, stimulating rapid industrial expansion. Between 1932 and 1940 manufacturing output increased an average of 11.8 percent a year, but expansion slowed to 5.4 percent a year during World War II because of limited access to equipment and raw materials. By 1950 the country had 83,000 industrial establishments employing a total of nearly 1.3 million workers. Textiles and food processing had declined to about 50 percent of the value of industrial production, reflecting the expansion of the industrial base. The government established some important firms in manufacturing-justified on the grounds of strategic or national significance-such as the Volta Redonda steelworks, as part of the long-term development of an integrated steel industry. A number of multinational businesses established large manufacturing and assembly plants in response to government efforts to adopt advanced technology and broaden industrial capabilities. Industrial output has increased an average of about 9 percent a year since shortly after World War II. Industrialization was the cause for much of the impressive economic growth during this period. In the 1980s the growth of industry will largely determine conditions in the rest of the economy and the degree of prosperity for much of the population. Energy Industrialization required a huge growth in energy consumption and a drastic change in sources. At the end of World War II the bulk of Brazil's energy was supplied by firewood, charcoal, and bagasse-the woody residue of sugarcane processing. Industrialization, with particular emphasis on the automobile and other internal combustion engines as well as a huge roadbuilding program, was adopted in an era of cheap energy. In little more than a generation, compared with centuries in Europe, Brazil leaped from a wood-burning to an oil- and electricity-based economy. The rapid rise of energy costs in the 1970s caught Brazil in a vulnerable position because of a deficiency in fossil fuels. In 1979 oil products supplied about 41 percent of the country's primary energy; hydroelectricity, 28 percent; and coal, wood, bagasse, and alcohol, 31 percent. Government energy policy after the first oil crisis in 1974 focused on conservation and maximum efficiency in the use of energy; search for and exploitation of domestic energy sources; and substitution of domestic energy, particularly renewable sources, for imported supplies. Oil was first discovered in Brazil in 1939. Proven oil reserves were small, amounting to about 1.7 billion barrels in 1982, plus about 400 million barrels equivalent of natural gas. The crude oil deposits were mainly located in the Northeast and Southeast. In 1981 domestic oil consumption was about 1 million barrels per day (bpd). Domestic production averaged close to 250,000 bpd, leaving the country dependent on imported crude for above 75 percent of total supply. The domestic production goal for 1983 was 300,000 bpd. In 1981 imported fuels (the bulk of which was crude oil) cost US$11 billion, 50 percent of total imports. Exports of small amounts of surplus refined products amounted to about US$900,000. A near monopoly in hydrocarbons (exploration, production, importing, refining, and transportation of petroleum and natural gas) was granted the national oil company, Petrobras, created in 1953 in response to a wave of nationalism. The largest Brazilian corporation, it was primarily a government-owned (federal and other levels) holding company operating through numerous subsidiaries. Petrobras, or its subsidiaries, conducted exploration and oil field development at home and abroad; produced, imported, and refined crude oil; owned petrochemical plants that produced a variety of products, such as chemical fertilizer; and carried out transportation and distribution of crude oil and products. In 1977 Petrobras began negotiating exploration contracts with foreign oil companies to obtain technology and financing to speed up the search for oil, particularly offshore. These contracts again allowed foreign oil companies to operate in Brazil's territory, although under controlled conditions and in limited areas. Modest new fields were discovered, which permitted a gradual growth in crude oil production in the early 1980s. After the formation of a national energy policy, officials managed small reductions in petroleum consumption. Oil price increases were passed on, diminishing the use of vehicle fuel. Conversion of some industries to the use of coal or other oil substitutes contributed to lower consumption. The combination of conservation, substitution, and greater domestic production reduced the country's dependence on imported oil from around 80 percent in the late 1970s to 75 percent in 1981, but it was recognized that the possibilities in such programs were limited. Much more hope and effort went into a unique plan formulated in 1975 to substitute domestic alcohol for imported fuel in vehicle use. The national alcohol program (called Proalcool) was a bold attempt to use available skills, equipment, and other resources to produce a substitute fuel from renewable sources; it was the world's first large-scale substitution effort and was watched by many other countries. The initial program concentrated on alcohol as a substitute for gasoline, but in the 1980s research and experiments were under way to produce a substitute for diesel-engine fuel from various vegetable oils. Brazil had experience dating back to the 1930s in using alcohol as a mix with gasoline for automobile fuel. Briefly, Proalcool planned the production of 10.7 billion liters of alcohol by 1985 to substitute for the equivalent of about 148,000 barrels of petroleum per day. Planned alcohol production would supply about 45 percent of projected automobile-fuel consumption in 1985, compared with about 20 percent achieved in 1980. According to the plan, the alcohol would supply about 5 percent of the nation's energy requirements in 1985. The program's estimated cost between 1981 and 1985 would exceed US$7 billion in 1980 dollars. In 1980 an earlier goal was met in which 3 billion liters of alcohol would substitute for about 20 percent of the gasoline used as automobile fuel. Brazil has long produced alcohol for chemical use and has the capability to produce the required distillation equipment as well. After the first oil crisis, alcohol production rose more than sevenfold-from 0.6 billion liters in 1973, to 3.4 billion liters in 1980, and to 4.3 billion liters in 1981. The increase went into automobile fuel, which rose from about 14 billion liters in 1973 to over 16 billion liters in 1980. Projected consumption of automobile fuel (gasoline and alcohol) in 1985 is over 20 billion liters, of which an estimated 11 billion liters will be gasoline, 6.5 billion liters will be hydrous alcohol, and nearly 3 billion liters will by anhydrous alcohol. Hydrous alcohol is used in cars built or converted to burn an all-alcohol fuel; anhydrous alcohol is blended (up to 20 percent with gasoline. In the 1970s the government required that a portion of the cars produced be capable of burning an all-alcohol fuel. Licensed garages were approved to convert existing cars to use hydrous alcohol. Distribution facilities for alcohol fuel were developed. For several years all-alcohol fuel was substantially cheaper than gasoline, but in the early 1980s it was raised to about 60 percent of the price of gasoline. Sales of cars to burn hydrous alcohol increased sharply in the late 1970s, reaching 77 percent of all car sales in December 1980. Sales of alcohol-fueled cars dropped precipitously in 1981 but picked up in 1982. An exact number was unavailable, but in 1982 about one-half million cars were alcohol fueled. Hydrous alcohol has about 40 percent fewer calories than gasoline, but motors using it burn only about 20 percent more fuel because it is more efficient. It is corrosive, however, requiring special treatment of the components of the fuel system. By 1982 research reportedly had developed processes that remedied most of the problems. Experts expected that sales of alcohol-fueled automobiles would remain around 200,000 a year in 1982-84, about one-third of annual new car sales. In 1982 a slowdown in the alcohol program appeared likely. Not all officials were convinced of its practicality. When funds became tight, help for industrial and agricultural projects related to the program was slowed. Expansion of the sugarcane acreage was less than that needed to meet the 1985 goal. By 1982 contracts for alcohol production facilities had been approved for a total capacity of only 8.9 billion liters. As a result, experts believed that alcohol production in 1985 would probably amount to about 7 to 9 billion liters instead of the planned 10.7 billion liters. Proalcool experienced considerable criticism, partly because sugarcane provided over 90 percent of the raw material for the production of alcohol up to 1982. Numerous other crops and woody plants could yield alcohol, although the technology for some was not ready for commercial application. Considerable research was being devoted to improve processing of biomass feedstocks for alcohol yields. The more immediate and threatening problem was that Proalcool was attracting fertile farmland away from food production. Manioc, a tuber believed to come originally from the Amazon region, supplied a minor part of the alcohol feedstock. Greater use of manioc would have been more satisfactory in social terms. It grows in poor soils, would provide small farmers a cash crop, would allow distilleries to work a full year instead of only a half year, and would not add to the regional disparity of incomes that sugarcane did; but valid economic and practical reasons made sugarcane the original predominant feedstock (see Agriculture, this ch.). Critics also argued that sugar would be exported when world prices were high, diminishing the material for and supply of alcohol for fuel. According to critics, the alcohol program was introduced quickly in response to a serious threat to the economy and the country's development strategy and with inadequate preparation and research. It proved costly in terms of incentives and subsidies for the retail price of alcohol fuel, but by 1983 substantial substitution had been achieved for imported petroleum. Adjustments and refinements in the program seemed likely in the 1980s, based on the experience gained. Scrapping the program seemed less likely, however, if national security considerations were as important in adopting the program as many observers believed. The country's numerous rivers provided the greatest potential energy source. By 1980 hydroelectric sites had been located that were capable of powering generators of about 213 million kilowatts of capacity and that could produce about 933 billion kilowatt-hours per year. By 1980 about 24.1 million kilowatts of hydro-generating capacity had been installed. Another 23 million kilowatts of capacity was scheduled to be installed by 1990. In 1980 some 86 percent of installed electric-generating capacity and 92 percent of the total electricity produced (137 billion kilowatt-hours) were from hydroelectric generators. Brazil had slight opportunity to conserve on the use of petroleum products in the production of electricity since hydro stations were the overwhelming source. The world's largest hydroelectric project, the Itaipu Dam, was scheduled to begin operation in late 1983. The dam, a joint project between Brazil and Paraguay, blocked the Rio Parana where it becomes the border between the two countries (see fig. 3). The dam, nearly 10 kilometers long and 200 meters high, was completed in 1982 after seven years of construction. It will begin operation in late 1983 with two 700-megawatt generators. Additional generators will be installed later in the 1980s with an eventual capacity of 12,600 megawatts. Total cost was expected to be above US$18 billion (in early 1980 dollars). Brazil provided much of the equipment for the project. Brazil and Paraguay will share the electricity produced, but it was expected that Brazil would purchase a considerable part of Paraguay's share. Half of the power generated will be at 60 cycles per second for Brazil's system and half at 50 cycles for Paraguay's system. A second large hydroelectric project, the Tucurui Dam on the Rio Tocantins in the Amazon Basin some 500 kilometers southwest of Belem, was scheduled for operation in 1984. The first stage called for 4 million kilowatts of generating capacity to be installed between 1983 and 1985 with a possible doubling of capacity by the 1990s. Total cost for the first phase was estimated in the early 1980s at nearly US$3 billion. The dam is located in an isolated part of the country, far from urban centers and in difficult terrain. Electricity from the dam will go to urban centers and mining developments in the Greater Carajas project (see Mining, this ch.). Construction schedules on both the Itaipu and Tucurui dams reportedly were being met. It was particularly important for the latter because a few months' slippage could cause a year's delay resulting from the rainfall pattern. Several large-scale metallurgical projects in the Amazon area were scheduled and dependent on the availability of large amounts of electricity. The shortage of funds and the low level of economic activity in 1981 and 1982 resulted in a stretching out of the completion of ancillary facilities on both the Itaipu and the Tucurui power plants; but officials attempted to minimize or avoid disruptions to other large development projects. The Central Electric Company of Brazil (Centrais Electricas Brasileira - Electrobras), organizationally under the Ministry of Mines and Energy, has primary responsibility for coordination of planning in the power sector of regional expansion by subsidiaries and long-term orderly growth of the national electric power supply and distribution. Since the 1930s federal and state governments have increasingly taken over private power companies, including some that were foreign owned. Electrobras was created in 1962 as the holding company and financial agency for the sector and to centralize management. It held the federal government's half-share of the Itaipu project, for example. Electrobras has generally formulated sound policies and carried them through in one of the world's largest and more complex electric power systems. An integrated grid existed for the more populous areas, and the grid was being expanded. Although electricity was available in many rural areas of the more developed states, electrification was available to less than one-fifth of the rural population nationally. About 85 percent of urban areas had electricity. Electrobras was a mixed company, but in the early 1980s over 99 percent of the firm's stock was owned by the federal government. Looking to the future when fewer hydroelectric sites would remain-particularly located relatively close to population and industrial centers of the Southeast-Brazilian officials began to lay the base for nuclear power plants. The country has uranium deposits to provide a domestic fuel source, provided that processing facilities are constructed. In late 1982 Brazilian uranium reserves were officially estimated at 301,500 tons. In 1982 a yellow-cake plant and a plant to produce nuclear fuel elements were completed. Additional processing plants were under construction, or planned, which would provide uranium enrichment and would reprocess spent fuel. The technology and much of the equipment were being imported from the Federal Republic of Germany (West Germany) under a 1975 agreement calling for that country to supply up to eight nuclear power reactors and to assist in establishing a complete nuclear fuel cycle in Brazil. The agreement roused opposition from the United States and some other countries because it would provide Brazil-which had not signed the Treaty on the Non-Proliferation of Nuclear Weapons-with the facilities and technology that could be used to fabricate atomic bombs (see Foreign Relations, ch. 4). The first nuclear power plant, Angra I, located on the coast 120 kilometers southwest of Rio de Janeiro, began trial runs in 1982, but defective parts postponed operations until 1983. Angra I was started in 1972 and was supplied by Westinghouse Electric Corporation. It had a capacity of 625 megawatts and cost about US$1.5 billion. By 1982 work had started on one of the nuclear power sites to be supplied with West German reactors. Brazil had stretched out the construction schedule for nuclear power because of lower growth of demand for electricity and a tightness of investment funds. The 1,245-megawatt-capacity West German nuclear power plants would not be completed until the 1990s, assuming all eight were ordered. In 1982 only two such plants-Angra II and III-reportedly had been definitely contracted. In 1982 coal reserves were an estimated 22.8 billion tons, primarily located in Santa Catarina and Rio Grande do Sul. The coal was low quality and contained considerable ash and sulfur. Costly facilities were required to process the coal before use, resulting in a loss of more than 50 percent of the coal mined. In 1979 production of usable coal amounted to 4.5 million tons, accounting for about 4 percent of the country's primary energy. The government encouraged substitution of coal for other fuels, particularly petroleum, in industrial uses, such as coal-fired boilers in the few thermal electric power plants and in the production of cement. Officials hoped that the mines would produce 12 million tons of usable coal by 1985. In 1973 Brazil formed a joint company with Colombia to mine high-quality coal for export to Brazil. Although wood was no longer the important energy source it had been before 1950, it still accounted for 15 to 20 percent of the country's primary energy supply. It was used in isolated small industries and for cooking in rural and low-income urban houses. Charcoal accounted for about 2 percent of the energy supply. It was used in some blast furnaces and for household cooking. Bagasse provided about 5 percent of the energy supply, almost completely in the production of sugar and alcohol. The lack of a woody residue in processing cassava into alcohol, which could provide a fuel source for the processing, was one of the reasons sugarcane was the dominant feedstock. Mining Brazil has large deposits of numerous minerals, the full range and extent of which were still unknown in 1982. The country had not been completely surveyed because of the difficulty of access in many areas. Mining of known deposits (excluding petroleum) contributed about 2 percent of GDP but accounted for about 10 percent of exports in the early 1980s. When ore extraction, metal processing, and metal fabrication were combined, mining and metallurgy contributed about one-sixth of GDP. Mineral production was valued at US$5.4 billion in 1980 and US$6.5 billion in 1981. The country's iron ore deposits (about 60 billion tons) were the second largest in the world, and in 1980 Brazil was second only to Australia in exportation of iron ore and pellets. Production in 1981 was 110 million tons (valued at US$2.3 billion), and exports were 81 million tons (valued at US$1.8 billion). Almost all of present production was from mines in Minas Gerais. Extensive deposits in the Amazon Basin were scheduled to begin producing in 1985. Brazil has the ingredients for a very large aluminum industry: abundant bauxite deposits, a huge hydroelectric potential for cheap electricity, and a large and expanding domestic market. Bauxite production increased from 1 million tons in 1976, to 2.9 million tons in 1979, and 5 million tons in 1981 as new mines were opened. Additional sizable deposits in the Amazon were being developed in the early 1980s that could more than double output by the end of the decade. In 1979 exports of bauxite were substantially smaller in value terms than exports of aluminum products. Manganese deposits were large, and Brazil was one of the world's largest producers, providing an important domestic raw material and substantial foreign exchange earnings. Potentially the world's richest gold deposit had been discovered and was being worked by rudimentary means; the value of gold production was US$355 million in 1981. Tin, lead, nickel, chromite, beryllium, and copper, as well as many lesser known metallic minerals and a wide variety of nonmetallic minerals, were produced in significant quantities (see table 7, Appendix). In the 1980s the focus of mining activities was shifting to the Greater Carajas project in the eastern Amazon region. The project was massive, costly, and risky but offered substantial rewards to investors and the country under favorable conditions. The project area covered some 800,000 square kilometers-roughly the size of France and West Germany together-south and east of Belem and Sao Luis and on the Tocantins and Araguaia rivers. The difficult, isolated, and sparsely inhabited terrain had few, if any, facilities. Initial development costs were estimated at over US$60 billion (in 1980 dollars), of which US$39 billion was for mining development and US$22 billion was for infrastructure costs. The project would not be completed in the 1980s. The pace of development would depend on foreign financing, the availability of Brazilian funds-particularly from the government-market conditions at home and abroad, and numerous other factors. In 1981 and 1982 the adverse situation in Brazil and in developed countries imposed constraints that slowed the project. Yet most of the separate undertakings were interrelated; slowing one affected others. The Greater Carajas Council, an interministerial body, was created in 1981 to oversee and coordinate the project. Public sector companies provided a guiding hand. The government-owned Companhia Vale do Rio Doce (CVRD) was a major actor, branching out from its primary role as an iron ore company into mining and processing bauxite into aluminum and mining other ores. Electrobras and its subsidiaries were building, the large Tucurui hydroelectric dam and transmission facilities. Other public sector organizations, such as the railroads and shipping, as well as government agencies for Indian affairs, agriculture, and banking, were involved. Yet much of the money, technology, and development effort came from the private sector, largely foreign companies in the individual mining and processing undertakings. The initial focus of the Carajas project is exploitation of the area's mineral wealth, which amounted to an estimated US$543 billion in 1980 dollars. Creation of farms and cattle ranches was reportedly in the early plan, but by 1982 little agricultural activity was noted. Presumably, limited funds constrained farming development. The Tucurui Dam was nearing completion in 1982, but installation of some transmission lines was slowed by a year because of the tightness of financing. The hydroelectric potential in the Carajas area was above 24 million kilowatts. Mining of iron ore was a major aspect of the Carajas project. Iron ore reserves were estimated at about 18 billion tons. Mining was scheduled to start in 1985 with production of 15 million tons and to stabilize at about 35 million tons annually from 1987 on, although capacity could be increased to 50 million tons a year. A 890-kilometer-long, specially built railroad would carry processed ore to a major port to be built near Sao Luis in the state of Maranhao. Initially, the railroad will use diesel engines, which may threaten the short-term economic return of ore mining. The railroad will be electrified later when more of the area's hydroelectric sites have been developed. The ore will be exported for the foreseeable future; purchase agreements for 25 million tons of ore a year were a prerequisite of international bankers for development loans. CVRD owns the deposits for the initial mine and is overseeing the railroad and port construction. The world's largest bauxite deposits are thought to be in the Amazon. Some 2.2 billion tons of reserves have been found, of which 1.1 billion tons were in the Carajas area. Another 1.1 billion tons of proven reserves were in the Trombetas region north of the Amazon River but usually included in the Greater Carajas project. CVRD had varying degrees of ownership in the bauxite deposits a long with large private domestic and foreign firms. The Trombetas mine began producing in 1979 and may export 4 million tons by 1985. In 1982 Brazil had three alumina refineries and four aluminum smelters. Additional refining and smelting capacity was being constructed at Sao Luis and near Belem to process Carajas bauxite. The US$1.4 billion Alumar project (capacity of 500,000 tons of alumina and 100,000 tons of aluminum) at Sao Luis was scheduled to begin operations in late 1984. A Japanese consortium, participating with CVRD in the giant Belem Albras refinery and smelter, was reportedly backing out of the smelter project in late 1982 because of low Brazilian and world demand for aluminum and its consequently low price. Substantial reserves of other minerals are known in the Greater Carajas area. One manganese deposit contained 44 million tons of ore with 42 percent manganese content. This deposit was scheduled for development, but difficulties arose between CVRD and foreign participants, and its status was unclear in late 1982. One copper deposit contained 415 million tons of ore with 0.92 percent copper content, and an additional 600 million tons of reserves existed in other sites in the Carajas area. No copper exploitation was known to have been started, although Brazil imported most of its copper. Nickel reserves of 45 million tons with 1.5 percent nickel content had been confirmed. Gold-bearing ore amounted to an estimated 100,000 tons and was being exploited, although by small-scale operations. The decision to proceed with the Carajas project came at an unfortunate time. A Brazilian and a world recession had reduced demand and lowered prices in world markets for many products, including aluminum and iron and steel. Considerable excess capacity existed. Interest rates were high. Investors were hesitant to tie up funds in large undertakings in the Carajas project that might be slow to earn a return in an uncertain future. Some Brazilians argued that these minerals would be needed later in the 1980s, and a start had to be made to exploit the area's obvious mineral wealth. Critics charged that Antonio Delfim Netto, the minister-chief of the Planning Secretariat, launched the Carajas project because the large loans that mineral development would attract would ease balance of payments pressures through much of the 1980s, but that the project would not be able to pay for itself in the long run. Much would depend on world market conditions in the next decade or two. Another setback to the Carajas project was the slippage in completing individual undertakings. The original plan carefully scheduled construction so that various phases would be completed for the next stages. The shortness of funds, particularly government and public sector investments, upset the scheduling. In 1982 journalists reported that contractors were slow to be paid by government organizations and had to cut back work because of cash-flow difficulties. In other instances the government announced delays in completing specific construction projects. How serious the disruptions have been to the schedule of phased construction was not clear in late 1982. Government critics claimed that production and export of minerals had been delayed considerably.