STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.com SHIPBUILDING IN BRAZIL: A Sector Assessment Jan. 20, 2010 1
SHIPBUILDING IN BRAZIL: A Sector Assessment Overview Brazil is entering an unparalleled period of development. Not only has the country s economy grown to be the largest in Latin America, it also has produced an indigenous base of technologically talented companies that occupy niches in industries ranging from metals to avionics. In the last few years, topping off a decade of responsible fiscal activity and economic growth, Brazil has discovered massive deposits of oil and natural gas beneath the waters of the Santos basin. Located offshore of the country s densest population centers, the deposits have opened up a new world of opportunity for Brazilian companies and international investors. The impact of these developments on the shipbuilding industry has been profound, if not particularly orderly. Numerous new shipyard projects have been proposed across the country. While the two ports of Rio de Janeiro and Santos are perhaps the largest and closest to the new hydrocarbon deposits, they also are highly developed and have little of the available land needed for constructing large shipand rig-building facilities. With the field of play opening for shipbuilding investors, STRATFOR believes there will be a fair number of operations offering investment opportunities at various levels. There appears to be a great deal of activity and investment in the Atlantico Sul (EAS) shipyard in the Suape complex in Pernambuco. With construction of suezmax tankers already under way, this shipyard not only has the jump on the competition but also has secured a large portion of the government contracts offered so far. The Grupo WTorre shipbuilding complex in Rio Grande do Sul is almost equally ahead of the game (with the final touches scheduled for February) and plans to focus on drill ships in cooperation with Petrobras. The Sao Roque do Paraguacu Shipyard in Paraguacu, Bahia, near the city of Salvador, is also under way with its own platform construction projects, and the yard itself is expected to be completed in 2010. Other projects are more ephemeral but should be taken seriously because of the political connections and hefty resources that will be brought to bear. These include Synergy Group investments in Alagoas and EBX investments in Biguacu. The overall picture is one of increased investment at or near already built-up areas around Rio de Janeiro, Santos and further south. In the northeast, a cluster of promising shipbuilding projects are being developed within just several hundred miles of the Suape complex. The clear emphasis on investments in the northeast is a new development for the region, which has historically been more or less neglected by major industry in favor of the Sao Paulo region. With Brazilian President Luiz Inacio Lula da Silva hailing from Pernambuco (not far from the Suape complex), it is perhaps not surprising that investments have grown in this area of the country. The South Koreans In STRATFOR s estimation, the involvement of South Korean companies, which tend to be highly protective of their technologies and planning processes, in Brazil s energy sector represents a new type of investment strategy for the Koreans: committing to build large high-tech shipbuilding operations on foreign soil. Nevertheless, the benefits of involvement in the Brazilian market at a time when oil exploration and production is revving up are clearly key incentives for companies like Samsung, Keppel, Hyundai and Daewoo. Their decision to abide by Brazilian rules appears to have paid off, with serious commitments coming from Brazil in the form of $1 billion in ship orders for Daewoo as well as partnerships for Samsung Heavy Industries and Hyundai Heavy industries. It remains clear, however, that this kind of investment paradigm for the Koreans, who are accustomed to more stable methods of doing business, is new and untested. We do not think it is necessarily a 2
dangerous strategy, but tensions already exist between the Koreans, who would prefer to keep their more complex technologies close to their vests, and the Brazilians, who are dead set on acquiring the technologies for themselves. Atlantico Sul The EAS shipyard is located in the industrial port complex of Suape in Ipojuca, Pernambuco, near Recife. At 1.62 million square meters, the shipyard has the capacity to process 160,000 tons of steel per year and has a dry dock 400 meters long, 73 meters wide and 12 meters deep and capable of constructing ships of up to 500,000 tons deadweight. The consortium that operates the shipyard includes shareholders Camargo Corrêa, Queiroz Galvão and PJMR. The technological expertise for the project comes from Samsung Heavy Industries, which currently holds a 10 percent stake in the operation. The site underwent the first stages of construction in February 2007 and held a keel-laying ceremony in September 2009 for the first ship utilizing Samsung technology. Through the Promef fleet upgrading program, the transportation arm of Petrobras (Transpetro) has ordered a total of 22 ships from EAS -- 14 suezmax and eight aframax tankers. A law passed in December 2009 that provided federal financing for seven of the oil tankers, which will be built using dynamic positioning at the EAS shipyard. The Merchant Marine Fund will administer the funding for the seven tankers. Petrobras has expressed the intention of building seven ships at the EAS facility every year for the next three years. With Samsung Heavy Industries having invested heavily in EAS, and with the project already in operation and having secured numerous orders, this appears to be the most promising area for additional investment. Synergy in Alagoas The Colombian-owned Synergy Group is planning to build a $1.5 billion shipyard complex in Alagoas state, close to the port of Maceio in the town of Coruripe. The facility, 2 million square meters in size, will employ as many as 6,000 people and will host training/education centers as well as residential housing for workers, who are expected to be sourced from the surrounding area and farther inland. The facility will be designed to build bulk carriers for mining company Vale S.A. as well as tankers for Petrobras. Construction is slated to begin in March 2010, with the first ship scheduled to float in 2013. Synergy head German Efromovich appears to have collaborative relationships with Alagoas Gov. Teotônio Vilela Filho, Coruripe Mayor Marx Beltrão, State Legislator John Beltrão, Rep. Joaquim Beltrão and Sen. John Tenorio. The shipyard project in Alagoas likely will prove to be a profitable expansion for Synergy, which, as the proprietor of the EISA shipyard in Rio de Janeiro, has orders for 22 vessels, not all of which can be built in Rio de Janeiro. The company boasts at least $2 billion worth of orders, including panamax tankers, bulk carriers and container vessels. According to Efromovich, the proposed Alagoas shipyard will be able to build very large crude and ore carriers in order to satisfy demand from both Vale and Petrobras. Efromovich wields a lot of weight as an investor in Brazil and appears to have worked out a deal with local officials to secure preferential tax rates. The project has a high likelihood of proceeding as planned, although ground has not yet been broken. The site is near the industrial centers of Suape and Recife, proximity that could benefit the project. 3
Sao Roque do Paraguacu Shipyard A Brazilian consortium consisting of construction giant Odebrecht, engineering firm UTC and construction firm OAS is constructing the $400 million Estaleiro Bahia S.A. in Sao Roque do Paraguacu near Salvador, Bahia, on Todos os Santos Bay. The project is expected to be three-quarters operational by July and to be completed in late 2010. Unconfirmed reports indicate that talks may be under way with Korean company Daewoo to secure needed technological expertise. The site lies at the mouth of the Paraguacu River and covers an area of 1.5 million square meters. The consortium, which expanded on existing facilities at Sao Roque in constructing new shipbuilding berths and installing a 700-ton crane, expects to employ as many as 1,500 people and process up to 110,000 tons of steel per year once the shipyard is completed. The facility is designed to produce large bulk tankers, platforms and drilling rigs. Its first two confirmed contracts are for the construction of two super-116e jack-up rigs for Petrobras offshore operations. The rigs, numbered Petrobras 59 and Petrobras 60, are expected to drill at depths of up to 110 meters. The two rigs will be built at a total cost of $700 million and are scheduled for delivery in 2011 and 2012. It is unclear at this point whether Daewoo will be participating in the project. However, should negotiations bear fruit, the project could be a promising venture. Although unfinished, it already has begun production and is considered to be one of the major shipyard projects currently under way in Brazil. Its proximity to the Atlantico Sul shipyard complex reflects the trend of developing shipbuilding facilities in the northeast. EBX in Biguacu In September 2009, the EBX Group signed a memorandum of understanding with Hyundai Heavy Industries to develop a shipyard complex in Biguacu, Santa Catarina. EBX is owned by Eike Batista -- the Brazilian entrepreneur who became the country's richest man in 2009 -- and holds as subsidiaries OSX, which will operate the shipyard, and oil and natural gas company OGX. The shipyard reportedly will begin construction in 2010 and is projected (optimistically) to begin producing deliverable output by 2011. This will include drill ships, fixed platforms, jackets and floating production, storage and offloading vessels. The location for the shipyard was chosen in part because of tax breaks offered by local authorities in order to attract EBX and in part because of the natural protection offered by a nearby harbor. According to announced plans, the Biguacu shipyard is projected to be the largest in Latin America. Although there have been few recent developments to indicate that the project is moving apace, Batista s wealth and political influence put EBX in an excellent position to forge the partnerships needed for the financing and to move the project forward. In terms of NOV s needs, there is one important factor that would probably lessen the usefulness of the project: Output from the yard is intended primarily to satisfy the needs of EBX subsidiary OGX, which is the largest private oil and natural gas company in Brazil. The company reports reserves of about 3.578 billion barrels of oil and about 200 million cubic meters natural gas, over half of which is in the Campos Basin. Despite the size of EBX and its operations, the fact that it currently plans to service primarily OGX from the Biguacu shipyard means that whatever is produced by the shipyard would not involve Petrobras. A greater number of opportunities would likely be found closer to operations that do. Santos Port As Brazil s most developed port, Santos hosts a significant number of Petrobras managers as well as a high volume of traffic and rate of local employment. Several improvement projects already have begun in Santos, including the deepening of the access channel from a depth of 12.5 meters to 15 meters 4
and the widening of the channel from 150 meters to 220 meters at its narrowest point. The government also plans to build perimeter roads to facilitate transport around and through the port area. Santos main flaw is its overdevelopment. There is little room for the expansion of shipyards or support facilities. However, the Barnabe-Bagres expansion plan is expected to be implemented, which would double the port s capacity to a total of about 6 million square meters, creating more room for investment as well. The feasibility study is due in January 2010, and it is unclear at this point what the target date is for beginning or completing the expansion project, which ultimately would include warehouses, silos, yards, ship-loading facilities, 11,000 meters of docks and 45 berths. Nor is it clear that the project could be completed fast enough to meet the growing needs of the shipbuilding and energy industries. While Brazil s existing ports are overdeveloped, its port system is relatively underdeveloped, and there will be a high demand for space in Barnabe-Bagres from multiple sectors anxious to expand imports and exports. Minister of Ports Pedro Brito also has announced the planned development of a new Santos shipyard dedicated to the construction and maintenance of oil drilling platforms. Brito emphasized in his announcement in October that there are not enough servicing facilities for ships and rigs in the Santos port area. The investor group slated to participate in the project is still unnamed and the status of the project is unclear. Rio Grande do Sul Shipyard The Estaleiro Rio Grande (ERG) is a shipyard under construction by Grupo WTorre at the port of Rio Grande in the state of Rio Grande do Sul. The shipyard, wholly owned by WTorre, will cover an estimated 550,000 square meters. The dry dock at Rio Grande is 350 meters long and 133 meters wide. The installations already in place at the shipyard are being used to construct P-55 offshore drilling platforms for Petrobras. Construction began in 2007 and the first stage of the project (known as ERG 1) was originally scheduled for completion in December 2009; it currently is unclear when it will be completed. Once it is completed, the shipyard will be used to construct fixed offshore drilling platforms and floating production, storage and offloading vessels. Petrobras offshore platforms P-55 and P-56 have already been mentioned as possible projects for the Rio Grande shipyard. According to consortium owner Walter Torre, construction of the second stage of the shipyard (ERG 2) already has begun. The project employs 600 people directly and another 900 contract workers. Once production of platforms begins, the total number of employees could rise to 2,000. According to WTorre, as many as 2,000 houses for workers will be constructed near the project site. 5