Bold bid to keep Brazil’s shipbuilding hopes in the air

In the second of a series of articles looking at the most powerful shipowners in Latin America, Rainbow Nelson speaks to Sergio Machado, president of Transpetro, on his personal mission to rejuvenate shipbuilding in Brazil.
 
Sergio Machado holds the fate of thousands of Brazilians in his hands. In charge of the country’s largest shipowner, Transpetro, the transport arm of Petrobras, this amiable former senator has a big task ahead of him.

A close ally of President Luis Ignacio ‘Lula’ da Silva, and former head of the president’s Social Democrat Party in the senate, Mr Machado has been handed the important job of overseeing a $2.2bn newbuilding programme which, it is hoped, will breath new life into Brazil’s shipbuilding industry and enhance the export capacity of Brazil’s most important company, Petrobras.

With the state-owned oil giant pursuing an aggressive strategy for the country to become energy self-sufficient by 2007, one of the key pillars of such a policy has been the ability of the company to ship its own oil using tankers flagged in Brazil, crewed by Brazilians and built in Brazilian shipyards.

The figures used by Mr Machado to support the strategy are more than persuasive. “Today, only 4% of transport to and from Brazil is carried out by Brazilian ships,” he says.

In 1986, the figure was 25%. It is estimated that the subsequent charter of international vessels and the additional transport costs of moving goods using international companies for the remaining 96%, costs the Brazilian economy US$5.8bn a year. To ram home the point, the amount coincides neatly with the value of a loan recently agreed by the Brazilian government with the International Monetary Fund.

The figures have become something of a mantra for Mr Machado as he seeks to convince Brazil and the rest of the world that the only option is to reactivate the country’s shipyards.

“It’s a strategic position. Those countries that control 50% of world commerce control 72% of the world fleet. In today’s world, if you have the ships then you can be competitive,” he says.

“Because in the globalised world a product is only valuable when it is on the table. The real value is in the logistics.”

Mr Machado took control of the tanker and pipeline arm of Petrobras in June last year, a political appointment after Lula came to power in January 2003. Since then, Mr Machado has had to bring himself up to speed with the tanker business and the operation of Transpetro’s 110-strong fleet, half of which are owned with the other half on time-charter.

During his first year in charge he has often been forced to rely heavily on the powers of persuasion developed during his time as the leader of the Brazilian Social Democrat Party in the country’s senate, to force through the changes he feels are necessary.

When he was handed control of Transpetro his first step was to formulate an ambitious newbuilding strategy. As he did so, one of the things Mr Machado was told consistently was that the Japanese, the Koreans and to an increasing extent the Chinese are the only people in the world who can build tankers.

Lula and his government, however, are not fans of the prevailing orthodoxy ruling international trade and commerce and hold a firm conviction that money raised by state-owned companies should be used for more constructive purposes than simply adding to Daewoo or Hyundai’s already bulging orderbooks.

“We have the internal demand, but now there is no industry. This is the challenge,” says Mr Machado. For Petrobras, the word ‘challenge’ has been encapsulated in the oil group’s corporate slogan: “The challenge is our energy”.

For the energetic Mr Machado, his challenge is not just to renew an ageing fleet but also to provide sufficient impetus in doing so to revive the country’s shipbuilding industry.

It is a challenge, he argues, that pales into insignificance when compared with the achievements of Petrobras in exploiting its offshore oil reserves in depths of up to 3 km.

The fact that a man of Mr Machado’s stature was placed in charge of the project underlines Transpetro’s role in a national strategy to use Petrobras as an economic motor to create jobs and to make the country more competitive internationally. Petrobras has already created thousands of Brazilian jobs in the country’s shipyards and encouraged foreign investment in the largest yards, by stipulating that 60% of the work on the construction of four oil platforms must be undertaken in Brazil.

The next stage is to repeat the process with the construction of 22 tankers over the next three years and a further 20 vessels to be added to fleet between 2010 and 2015. It is estimated that the orders could create 15,000 new shipbuilding jobs.

“We are going to re-launch this industry. By building a base we will give them the economies of scale and continuity of demand,” Mr Machado says. “The idea is to give the scale, the number of ships to allow the shipbuilders to have the learning curve needed to achieve the international standards. This will give them the skills to compete for business from anyone.”

The strategy is part of the government’s determination to develop its export economy by introducing the infrastructure improvements required for sustained growth.

Under Lula, the value of Brazilian exports is set to reach $90bn this year, up from $50bn before the devaluation of the currency in 2002.

In the first phase of Transpetro’s newbuilding programme the company plans to build six suezmaxes, five aframaxes between 90,000 dwt and 100,000 dwt, four panamaxes of 60,000 dwt, four clean product carriers of 40,000 dwt and three liquefied petroleum gas carriers of 8,000 dwt, says Mr Machado.

The first wave of construction is designed to bring Transpetro in line with the needs of a modern tanker company and to keep pace with the growth in production by its parent company.

A second phase will allow Petrobras to move from the goal of self-sufficiency to become a key exporter of oil products.

Petrobras currently produces 1.7m barrels per day, a figure that will rise to more than 2m bpd in 2007 when new rigs come on stream in Petrobras’ key Campos Basin operations. Production in the Campos Basin, which accounts for 80% of the company’s total reserves, is set to increase to 1.7m bpd within the next three years.

To accommodate this additional production coupled with added domestic refining capacity, Transpetro has plans to add four more suezmaxes, two more aframaxes, three more LPG vessels and 11 more product tankers to the fleet by 2015.

The large product tanker requirement underlines the determination of the company to break into key export markets selling oil products on a cost, insurance and freight basis to maximise the returns to the company.

“The goal is to account for 100% of Petrobras cabotage moves and 50% of the company’s external demand,” Mr Machado says.

“This will also reduce the average age of the fleet and we will guarantee the demand for the shipyards until 2015.

“Our system has the demand, an enormous demand that is growing,” he says.

Although he would not specify when the long-awaited tender would be issued, it is expected that the company will call for pre-qualification of yards wishing to participate within a month.

Mr Machado presents it as a once in a lifetime opportunity to secure an order that will justify the investment in the technology required to compete in today’s shipbuilding industry.

There are already proposals on the table for more than $750m of investment in new shipbuilding facilities linked to the Transpetro order.

International shipbuilders such as Aker Yards have outlined plans to create new facilities in Itajai and Rio Grande do Sul to participate in the bid, while existing shipbuilders such as Metalnave and the Singapore-owned Brasfels are also looking to invest in facilities to increase their chances of winning a part of the order.

“The one that delays will miss their chance. The ship will depart without you,” warns Mr Machado.

He would not comment on how many companies he anticipates will carry out the work but all the shipyards, he insists, will need to invest in modern technology to participate.

A pre-qualification process will look at the financial and technological investment plans being proposed by each bidder.

The timescale laid out by Transpetro envisages the first ships to be delivered in 30 months, allowing a year for the shipyards to implement their investment programmes and then the construction of a vessel.

With investment in place, Mr Machado estimates, the second wave of vessels will be constructed with lead-times of less than two years.

“We are giving the demand and the scale, and the money is there, so it’s time for players with the technology to come forward,” he says.

“People are very motivated to invest. We are not going to exclude anyone. We are looking to the future and to continuity.”

As well as holding talks with shipyards, the company has engaged some of the country’s largest steel producers and construction groups to encourage them to participate in the process.

Camargo Correa, the Brazilian industrial conglomerate that owns a stake in steep producer Usiminas, last month was linked to a proposal to invest R$500m (US$169.4m) to construct the largest shipyard in the southern hemisphere to-date, in Suape, Pernambuco.

Brazil’s steel production of 34m tonnes a year, is one of the key advantages the country has in building a strong and competitive shipbuilding industry, according to Mr Machado.

Attempting to incorporate steel producers is part of the company’s objective of ensuring that those bidding will have adequate financial resources to provide the credit guarantees needed to secure approval from Brazilian development bank, BNDES, for preferential financing of the fleet.

Mr Machado has dismissed concerns in the shipbuilding community that a presidential veto ruling out a R$400m shipbuilding guarantee fund will create problems in securing the guarantees required. “We are reminding the industry that this is a new philosophy,” he says.

“We want the industry to be strong enough to be sustained with all the segments investing,” he says. Shipbuilders will be forced to take out a performance bond with national reinsurer IRB, to cover any delays in delivering the vessels. Those lacking the resources to do so will not be able to participate.

“What we want is a new structure where it is important to modernise. The shipyards have to be competitive,” he says, using the example of the Brazilian aviation specialist, Embraer, a Brazilian company that competes internationally by exporting “to the whole world”.

“We are constructing ships that will be competitive on price and technology with this process. The Brazilian economy cannot have ships that are more expensive. We cannot make society pay for this.”

By Rainbow Nelson, Lloyd's List