Six takeaways from the FT’s Americas commodities summit
Last week the Financial Times hosted its first Americas commodities summit in Buenos Aires, Argentina. At the event, some of the most powerful commodity traders and executives active in the region debated the outlook for the industry. Based on conversations at the summit and panel discussions, here are the main themes that emerged.
1. Politics. Argentina’s midterm elections were widely discussed, with October’s vote seen as a key test of support for the free market policies of President Mauricio Macri. A poor showing at the polls for the governing coalition would not only damage Mr Macri’s chances of being re-elected in 2019 but could have a chilling effect on foreign investment in the country, delegates and panellists said. But given the divisions in the opposition Peronist party, few delegates forecast a big setback. Nevertheless, Argentina’s treasury minister Nicolás Dujovne told the conference that the government would not make progress with its economic reform programme until the elections were out of the way. Mr Dujovne was confident that foreign direct investment — especially in Argentina’s vast shale reserves and renewables industry — would pick up in tandem with the “consolidation of our economic programme”.
2. Agriculture. After years of confrontation with previous governments, Argentina’s agricultural leaders were enthusiastic about Mr Macri’s administration. The sector has been one of the key foreign currency earners of the country, but it has been the target of consecutive governments’ redistributive policies, with the industry’s revenues heavily taxed. The country is the world’s biggest exporter of soyabean oil and meal, which is used to fatten chickens, pigs and fish. Much of it is sold to China whose imports of the oilseed have trebled in the past decade. After taking power, Mr Macri scrapped much of the export taxes for agricultural products and has called for Argentina to become the “supermarket” of the world. This was “the first time that a government elected in free elections does not have a confrontational attitude towards agriculture”, said David Lacroze, chairman of La Magdalena and veteran agricultural executive.
Luis Miguel Etchevehere, president of Sociedad Rural, Argentina’s biggest producers’ group, underlined the new confidence in the sector, noting that agriculture could be the engine of growth once again and create “more than 1m new jobs in the next five years”. Yet maintaining the country’s competitiveness against other agricultural producers including Brazil and the Black Sea weighed on many of the executives’ minds.
3. Infrastructure. Delegates and panellists said one of the key challenges facing Argentina was its transport infrastructure. A shortage of roads, the low level of rail usage and heavily congested main transport routes helped push up costs for many industries, particularly agriculture. With 95 per cent of the harvest transported by trucks, transportation costs are very expensive, said Alejandro Elsztain, chief of agricultural group Cresud. Guillermo Dietrich, the transport minister, agreed that infrastructure was “the bottleneck of development”. To address the problem the government last year announced a $33bn infrastructure investment programme to enhance roads, ports and rail networks, with about a quarter of the funding coming from the private sector.
4. China. Paul Padilla, the head of Bunge’s operations in Brazil, said he expected China to become more aggressive at sourcing crops and foodstuff directly from the region, saying Beijing believed it could eventually bypass the five trading houses that dominate the industry — Archer Daniels Midland, Bunge, Cargill, Louis Dreyfus Commodities and Glencore. His comments were in contrast to those made by the chief executive of Louis Dreyfus Commodities, Gonzalo Ramírez Martiarena. Changes to domestic agricultural policy — reducing subsidies and stockpiles — meant China would continue to source supplies from big grain merchants, said Mr Ramírez, adding that just because companies such as Cofco, China’s state-owned grains trader, had bought assets in Argentina and Brazil it did not mean that they “would stop buying from us”. “Their growth and size . . . is [so] big that they need to buy from us,” he said. “We have crushing plants here [in Latin America] and at destination [in China], we have the logistical assets, the network, the relationship with the farmer.”
Both Mr Padilla and Mr Ramírez were both in agreement on the outlook for crop prices, saying corn, wheat and soyabean prices would remain subdued because of bumper stocks and plentiful harvests. They also reckoned that consolidation was inevitable as a worldwide crop surplus knocked profits at grain merchants. That said, few delegates saw Cofco, which spent more than $4bn buying Nidera and the agricultural trading arm of Noble Group, making a sudden return to dealmaking. They said Cofco was struggling to integrate the two businesses in Argentina and had parted company with a half a dozen senior Nidera executives since March.
5. Oil and gas. On oil and gas, there was broad agreement that Argentina’s Vaca Muerta was a world-class shale formation capable of competing with the best plays in the US. Eventually, that would boost domestic gas supply, helping Argentina fill the gap being plugged by imports from Bolivia and Chile as well as by liquefied natural gas. But the intensification of shale production in Argentina would not be quick and would require a stable political backdrop.
“We have to compete with the next barrel coming out of the Permian [Basin], and there are not that many places in the world where you can do that — but you can here,” said Anuj Sharma, investment director at Mercuria, which has just announced plans to take control of the Argentine-focused shale explorer Andes Energia. Overall, Argentina’s lack of refining capacity meant the country would remain a “short” — trading house jargon for a country heavily dependent on imported refined fuels. As such, Trafigura’s co-head of oil for the Americas, Patricio Norris said the Singapore-based trader had its “eyes open” for acquisitions. Trafigura has just inaugurated its first branded service station in the country.
6. Renewables. Away from oil, delegates said Argentina’s plan to generate 20 per cent of the country’s power from renewables by 2025 was achievable. Mariana Schoua, president of Orazul Energy Argentina, believes that the country could produce more than that level, given its move to deregulate the sector. Sebastián Kind, undersecretary of renewable energy at the ministry of energy and mines, said he was keen to facilitate a dialogue with the industry and foreign investors and had launched a consultation on rules allowing the sale of power by renewable companies directly to industrial users. Mr Kind told the FT summit: “My door is open.”
Neil Hume & Emiko Terazono