Taxation is the hot topic

Many tanners in Brazil feel that they are being consistently failed by the government. According to Jose Waldir Dilkin, Curtume Berghan: 'The leather sector in Brazil does not have any political help.' This view is shared by Anton Eskens, director of Corium Química, who feels that the sector has been abandoned by the Brazilian government. 'We don't have a government at the moment. They are only involved in corruption scandals, there are no rules, no-one knows what will happen next. No-one in the world can predict the exchange rate. Here you pay all tax in advance (ICMS); you never get the tax back.' [CICB are currently lobbying the government on the subject of tax rebate]. 'The lack of cash flow in the industry has a knock-on effect, no-one pays on time.' According to Eskens, funds promised to companies via government initiatives take two to three years to arrive. 'The government promises a lot and does not come through with the incentives they promised. Although tax reform has been discussed at length for the last 10-15 years, no action has been taken. There are differences in the level of taxation in each state and even from town to town.' He believes that there is an urgent need for uniformity of taxation in all states. Taxes levied on gas and electricity are also very high. Labour costs are another important factor in the ability to compete. The minimum wage is R$320 per month and as the shoe and garment manufacturing industries are labour intensive, costs are high. Income tax is a further issue of contention. According to Luis Eduardo Fuga of tanning group Fuga Couros: 'A guy who earns R$2,000 has to pay 27% to the government. People in the government do not understand business and economy. People in charge should be qualified engineers and economists, not politicians.' In spite of the difficulties faced by the industry, there are a number of companies who manage to give something back to their communities. Curtume Berghan are involved in a local charitable foundation called 'Projeto Pescar', which aims to provide young people from underprivileged communities with professional training. The programme has a wide scope. Students study morality/ethics with an anti-drugs message and also receive vocational training in a profession such as hairdressing or to become future employees of the Berghan tannery. According to Jose Waldir Dilkin, the taxation situation is so bad that companies have to pay tax on funds they spend on social projects as if it were profit. Luis Eduardo Fuga believes that a major obstacle for tanners is the export process, as licences are necessary and the system of obtaining them is riddled with corruption. Eskens also believes that the infrastructure needs to be improved for the sector to move on. 'Due to bureaucracy, importation of chemicals takes 90 days [this has now been reduced to 60 days]. Brazil also suffers from transportation problems, the roads are in a lamentable state and the government has no plans to fix them. The government promises a lot and never comes through.' He concludes: 'This is a very strange situation which is no good for anyone.' Relocation Partly as a result of factory closures and job losses, there is a gradual relocation of the industry. Cattle herds are increasingly being relocated to the north of Brazil as soya plantations are taking over Rio Grande do Sul. The knock-on effect is that the wet-blue tanneries are relocating too. In terms of balance of trade (exports/ imports) São Paulo received US$409 million and the traditional tanning area Rio Grande do Sul in turn received US$301 million, an indication of the gradual loss of dominance and concentration of the leather sector in Rio Grande do Sul. However this relocation is not solely within Brazil. Eskens (Corium Química) laments the loss of Brazilian technicians to China and the fact that shoe production is steadily moving to the Far East. Exports According to Remy Vial, executive vice president of Stahl Brazil, in 2005 there were 40 million hides available in Brazil. However, there is not enough production capacity to process this number of hides although there are a large number of tanneries, with qualified and experienced workers. Brazil is importing more leather but imports are still small compared with the level of exports. In 2004, for each piece of finished leather exported, 2.04 wet-blue hides were exported. However, in terms of value, for each US$1 generated by export of wet-blue, US$1.32 was generated through the export of finished leather. Brazil is exporting more crust and less wet-blue although wet-blue sales still dominate exports. The total value of exports was up 7% in 2005 compared with the previous year. Although exports of wet-blue decreased slightly, exports of bovine crust went up 39% by volume and 31.3% in terms of value. Brazil's top three export clients are Italy, China and Hong Kong. China has taken some volume from Italy in 2005. Eskens believes that the wet-blue tax is not a particularly effective deterrent as it is far too low to be a barrier. But in general he feels it is a logical thing to make competitors pay lots of tax. Argentina for example forbids the export of wet-blue. In any case, he believes that the current level of tax (7%) is still far too low in comparison with that of other countries. Creusa Batista (CICB) claims that the federal government is encouraging companies to add value and gives support to companies who wish to modernise their machinery park. Adding value is obviously in the interest of tanners. According to CICB, Brazil currently exports hides worth US$42 (per hide), however, if the hide were finished and then turned into a finished product such as shoes, the same hide would provide US$300 of revenue. CICB programmes to improve the quality of leather coupled with Apex marketing programmes on an international scale have been very successful. CICB have played an active role in initiatives such as the 'buyers project' which this year involved 20 buyers from Japan, USA, Colombia and India. For Creusa Batista, the project's main priority is to create knowledge of Brazil's fair, technology and tanneries as well as the leather on offer for footwear, furniture, garments and leathergoods. The Brazilian industry has good infrastructure and modern plants. However, this means nothing in the face of high interest rates, taxation rates described by many in the industry as 'lamentable' and a weak dollar. As exchange rates continue to make Brazilian leather less competitive on the export market, more tanners compete for business from the domestic market, which drives prices lower. The strength of the real has continued to be a problem in recent months. The currency has climbed 20% against the dollar in the past twelve months which has made a bad climate for exporting companies even worse. Eskens, Corium Química, told Leather International that in this climate 'companies are unable to plan ahead, as all buying and selling is usually done in dollars and the exchange rate of the real with the dollar has been very erratic this year. No-one in the world can predict the exchange rate.' Interest rates of 19.75% had contributed to the bleak scenario making credit lines inaccessible and thus discouraging investments. However, as of May 3, 2006, Brazil's central bank has pushed the benchmark lending rate down four percentage points since September to a five year low of 15.75% (source Bloomberg) which while not ideal, should alleviate the situation to a certain extent. Sachelli (CICB) believes the lower interest rate will kick start the domestic market. Eskens describes 2005 as one of the worst years in the history of the Brazilian leather industry and particularly for the footwear sector. Local sources say that in Rio Grande do Sul in 2005, 25,000 jobs were lost in the leather and footwear industries and the traditional footwear centres (Rio Grande do Sul for ladies' shoes and Franca in São Paulo state for men's) are disappearing. Industry sources claim that large quantities of shoe components are being imported from China rather than being produced in Brazil and this is exacerbating the problem. The second semester of each year has traditionally been bad for the domestic footwear market as the most popular styles use small amounts of leather (eg sandals) and synthetic products are used more in summer models such as canvas shoes and flip flops. In April, Brazil's shoe sector registered the biggest drop in exports since August 2003. April 2005 saw exports of footwear totalling $126 million compared with $137 million in the same month of 2004. This decline is attributed to the continuing strength of the real in the first trimester. In contrast it is reported that Brazilian exports of leather increased by 26% during the first trimester ($403 million compared with $321 million during the same period last year). In terms of volume, leather exports grew by approximately 35%. As the market for leather chemicals in Brazil and Argentina increases, many of the major chemicals companies have opened laboratories in Brazil. Stahl Brazil have been located in Portão since 1992. Langro Chemie invested capital in Corium Química, founded in 1996 and who opened a new facility in Novo Hamburgo in June 2005. LANXESS expanded their applications development department in São Leopoldo in 2005 with a view to offering improved support and a wider range of services to customers in the rapidly growing South American market. Among other companies to have established laboratories in the area are Münzing Chemie. Conclusion Unless the government comes up with tax breaks for the industry and provide a fixed exchange rate, the panorama looks unlikely to improve. However, despite all these difficulties, there are some positives to draw on. Meat exports in 2005 (prior to the discovery of FMD) had been very strong so tanners had a constant supply of hides. Creusa Batista, believes that the positive conditions offered to the leather industry by Brazil include space, as it is a country of continental dimensions; a large cattle herd; suitable climate; and large workforce. Anton Eskens believes that the sector in Brazil is becoming more creative and increasingly technical. He concludes that in the current climate, the sector's survival depends on applying this technology and creativity to the addition of value in the chain. Part two of this Brazil Survey will be published in Leather International August/September edition 2006. Footwear crisis Having closed down a factory in Rio Grande do Sul last year, footwear manufacturer Azaleia have decided to relocate part of the production of their new collection to China. Around 30 models will be manufactured in China via a cooperation agreement. According to Paulo Ricardo Wolff, export sales executive for Azaleia, moving production to China is the only way of handling costs caused by the exchange rate problem with the US dollar. He believes the trend of relocations will be accentuated in the near future. 'Since the dollar exchange rate started to fall two years ago, we are subsidising part of our international sales in order to maintain our position in the market', Wolff commented. Whereas the company's exports previously represented 25% of turnover, this has decreased to 20%, and is continuing to decline. Heitor Klein, Abicalcados executive director, said that the flight of Brazilian companies abroad was not only limited to Azaleia, and China was not the only destination. However, other sources warn that the strategy of manufacturing in China could have a negative effect: the loss of credibility in the eyes of international clients. Footwear crisis 2 Makouros footwear leather tannery, based in Estancia Velha, ceased operations in March. The company had a strong export focus, with 65% of production exported to Asia, Europe, USA and Mexico, which suggests that they have fallen victim to the ubiquitous exchange rate problem. Makouros had 31 years' experience and in September last year employed 110 people. They were the only tannery in Latin America to produce stretch leather with Lycra. Makouros was a supplier of leather to the Brazilian footwear manufacturers Paqueta. Bertin group expand Despite the difficult circumstances, some companies such as the Bertin group are expanding. Last year Bertin and Italian group Mastrotto launched a joint-venture located in Ceará, Cascavelo, which produces very high quality upholstery leathers. Bertin and Rino Mastrotto group have been working together since 1997 and have an existing upholstery leather tannery in Fortaleza. The Bertin Group also plan to install a new plant in Campo Grande (state of Mato Grosso do Sul). The initial investment in the plant will total around $40 million and will provide 3,000 new jobs. Once the slaughterhouse operation is up and running, Bertin plan to tan the hides at the same location. Inauguration of the new slaughterhouse is scheduled for September 2006. With a total area of 150 hectares and the capacity to slaughter approximately 3,000 cattle per day, the company will also invest in environmental protection and infrastructure such as effluent treatment, rainwater collection, sewers and water reservoirs for the community. However, as we went to press, it was alleged that Bertin and Mastrotto were ending their partnership and Rino Mastrotto group were down-sizing their operations in Brazil. Further information will be published in the next edition of Leather International.