Custo Brasil keeps rising

According to John Koppany, CIDEC, 'with the exception of some foreign-owned tanneries, the Brazilian tanning industry has not managed to develop to the same degree as cattle ranching and the meat packing industry. Obviously there has been a great expansion in wet-blue plants ready to absorb the ever-increasing offer in green hides but few tanning industries have fully developed into first-class, world players in the finished leather business.' He surmises that 'this must be due to the fact that the wet-blue business is able to move millions of hides at low industrial costs and risks with good profitability.' Brazil processes around 45 million hides and is the biggest exporter with shipments of around 35 million items. In 2005, Brazil produced 43.1 million hides and imported a further 2.2 million. (Footwear manufacturers in the North East of the country need to import goat and sheepskins because national production is not sufficient to satisfy the demand.) This gave a total availability of 45.2 million hides. Of these, 28.2 million hides were exported directly while a further 9.5 million were exported indirectly as footwear, signifying a domestic hide consumption of 7.5 million. In 2004/05 Brazil exported leather worth US$1.4 billion and imported US$128.7 million, producing a trade balance of US$1.27 billion. The sector exported leather worth US$1.87 billion in 2006, 34% more than the previous year. Brazil is also the third largest footwear producer in the world and the fifth largest exporter, producing 750 million pairs in 2006. The leather and footwear sectors combined achieved total exports to the value of US$4.5 billion in 2006, despite the continuing obstacles of a weak dollar, high interest rates and high taxation. The industry has been battling against these obstacles since late 2004. In response, a close collaboration between all sectors of the leather production chain has culminated in the establishment of a 'parliamentary front' in defence of the leather-footwear-furniture sector. In March, representatives of the front travelled to the capital, Brasilia, to voice concerns about these matters to the federal government. Subsequently, a meeting was held at Fimec on April 18 attended by representatives of all stages of the leather footwear production chain as well as state and federal politicians. They find strength in union and want ministers to look at solutions for the industry. The Parliamentary Front propose a hike in the export tax on wet-blue from 9-15% on the price stated in the Chicago exchange, not the lower price frequently reported for tax purposes. They suggest that the increased revenue be invested in a leather industry development fund for investment in cattle programmes, technology etc. The prompt return of outstanding ICMS tax credits is one of the highest priorities for action. Raul Ludwig, ABRAMEQ, emphasised that the sector was not asking for direct government help, but simply the means to compete in the medium term. Firenze Acabamentos em Couro fell victim to the ICMS tax, closing down in April with a loss of 230 jobs. The footwear leather tannery based in Ivoti, Rio Grande do Sul, was suffering from cash flow problems caused by the state government's delay in returning 1.3 million real (US$650,000) of outstanding tax credits, according to director Jorge Azeredo. Firenze produced 80,000 m of finished leather for export, mainly to China, Vietnam, Germany and Argentina. The company is Argentine owned and is reported to have relocated back to Argentina where labour costs are half those of Brazil and the exchange rate is more favourable at 3 pesos to the dollar. The government exchange rate policy is a further point of contention. According to local sources, the exchange rate has been adversely affected by the interest rate of 13%. Because the rate is so high, large amounts of dollars are being invested in Brazil from elsewhere, pushing the exchange rate up. Without this investment it is estimated that the exchange rate would be 3.5 real to the dollar rather than the current 2.1. A further proposal concerns footwear imports. Overall, Brazilian footwear exports are down 20% on last year. With imported shoes from Asia affecting the industry throughout Latin America, the Brazilian footwear sector proposed a 35% import tax at the meeting and recognised the need for this to be broached within the framework of the regional trade block Mercosul. Roberto Muller, representing a footwear workers union in Teutonia, stated that the Brazilian footwear industry was going through a 'moment of despair' as the past year has seen the greatest number of redundancies in the history of the sector. At the meeting, he demanded that the government appreciate a sector that generates jobs and take advantage of Brazil's long tradition and expertise in making shoes. Heitor Klein of Abicalcados perceives a growing understanding within the government of the problem and a political will to intervene in the 'incompetitivity' of the sector. However, he stated that excessive labour regulation and the interest rate still stand in the way of entrepreneurship. Jose Waldir Dilkin of ABQTIC believes that the problem lies in the lack of industrial planning for the country at the political level. He says that the technology, workforce and machinery park, ie capacity that is already present in Brazil, is not being taken advantage of. Gilmar Harth of Couros Bom Retiro characterises government efforts to assist the leather industry thus far as 'very fragile'. 'For example, it says it is providing credit lines, but you always have to pay that credit back at some point, and those companies who are really in trouble and therefore need credit most are unlikely to be granted it.' He also underlined the high costs associated with production in Brazil, otherwise known as the Custo Brasil, which include taxation and port tariffs among other things. Harth told Leather International: 'Instead of strengthening Brazil as an exporter of manufactured goods the government focuses simply on raw materials/commodities. Social programmes concentrate on alleviation of poverty in the short-term but not the creation of jobs or development in the long term.' However, he is confident that there will always be a tanning industry in Brazil due to the country's unrivalled raw materials supply. Despite the obstacles, Umberto Sachelli, president of Brazilian tanners' association CICB, is characteristically optimistic about the sector's future. 'Despite the difficulties of high interest rates, a heavy tax burden, low dollar valuation and delays in passing on fiscal credits from exports, shipments by February had grown by 45% over the first two months of 2006, leaping from US$241 to US$350 million.' In his estimation the leather and footwear production chain has the potential to export US$10 billion and generate 650,000 new jobs in the next five years. (The tanning industry currently employs 450,000.) In order for this ambitious goal to be achieved, there will have to be a substantial reform of both the tax system as well as the Brazilian government's exchange rate policy.