Give Us Your Soy, Your Iron, Your Grain...

As China gobbles up commodities from Latin America, it's forging strong financial and diplomatic ties, too

At the vast open-face iron ore mine of Companhia Vale do Rio Doce (CVRD) at Carajás in northern Brazil, men and machines work round the clock. The reason? One word: China. "If we filled every order we got from China," says Gabriel Stoliar, director for planning and strategy, "we'd have to double the size of the company." To keep up, the world's biggest producer of iron ore is racing to ramp up production. CVRD will spend $1.2 billion on expansion this year alone.

The Brazilian company is far from alone. South America is learning firsthand the insatiable demands of a fast-growing China. China's industrial and consumer revolution is fueling domestic growth of almost 10% a year. As tens of millions of Chinese move from the countryside to the city every year, demand for steel for construction is soaring. And as China's farm output reaches its limit, imports of soy and other foods are taking off.


This will bring three dramatic outcomes for Brazil and its neighbors in the Southern Cone. The first is a huge expansion in trade. The second is a leap in bilateral investment, as the Chinese buy farmland and build transportation links in South America to guarantee access to supplies and as South American companies set up factories in China to feed its giant domestic market. The third is a reshaping of the world order, as China and Brazil back each other up in diplomatic and trade forays on the global stage. The new Chinese leadership "wants to establish cordial and deeper relations with parts of the world where China has not previously played a role," says Riordan Roett, director of Western Hemisphere studies at Johns Hopkins University in Washington. "And in Brazil there is a new impetus to move out into the world."

The trade boom is already under way. Bilateral trade between Brazil and China has more than quadrupled since 1999, to $6.7 billion last year, and it has the potential to grow tenfold, according to Brazil's trade minister, Luiz Fernando Furlan. Commerce between Argentina and China more than doubled, from $1.5 billion to $3.1 billion. Meanwhile, Chile and China are in the process of negotiating a free trade agreement. By some estimates, the FTA -- China's first -- could boost two-way commerce to $10 billion a year, up from $3.5 billion in 2003. "China needs more commodities, and Latin America can offer them at low prices and of high quality," says Gu Kejian, director of the trade department at the School of Business at Beijing's People's University.

In the eyes of some South American companies, China looks like a land of unlimited opportunities -- an Asian El Dorado. When Brazilian President Luiz Inácio Lula da Silva embarked on a state visit to Beijing at the end of May, more than 400 business leaders from Brazil jumped at the chance to join him. "They need us, and we need them," says Carlo Lovatelli, president of ABIOVE, the Brazilian soy industry association, who was part of the delegation. "China consumes 40 million tons of soy a year and produces 16 million tons -- it doesn't have the land or the water for more." Soy currently accounts for 30% of Brazil's exports to China.

That mutual dependency is being cemented with billions in investment. Shanghai Baosteel Group Corp. has teamed up with CVRD to build a steel mill in northern Brazil at a cost of $1.5 billion. CVRD also has a partnership with Chinese aluminum producer Chalco to build an alumina refinery, also in northern Brazil, for $1 billion. Delegation after delegation of Chinese businesspeople and government officials has been touring the Southern Cone's fertile farmlands, with an eye to investing in production and transportation of agricultural commodities. A few small deals have already materialized. Hong Kong's Noble Group announced it would spend $25 million to build a new port facility at Timbues, in Argentina, for loading grain.

A few South American companies are also dipping their toes into the turbulent waters of the Chinese market. Embraer, the Brazilian aircraft manufacturer, has invested $25 million in a joint venture with Chinese group AVIC II to manufacture its regional passenger jets at a plant in Harbin, hoping to cash in on one of the world's fastest-growing air-travel markets. Some Latin executives think establishing a foothold in China is not just a shrewd business decision but also a matter of survival. "I swear, if I don't go and get a piece of China, it'll be them coming here, and they're going to kill me," says Gonzalo Linares, managing director of Litec, who accompanied Argentine President Néstor Kirchner on his visit to China in late June. Linares, a plant machinery manufacturer, has inked a joint venture agreement with Weihai, a woodworking outfit in Shanghai.


Diplomatically, too, the moment is right for a new alignment between China and the Southern Cone. Under Lula, traditionally insular Brazil has led the formation of the G-20, a group of developing nations pressing the U.S. and Europe to dismantle trade barriers to its members' farm products. China is a prominent member. Lula has repeatedly said he wants to create a more multipolar world and "has evidently chosen to enter into his first strategic alliance with China, in order to countervail American power," notes Thierry Wizman, head of Latin American portfolio strategy at Bear, Stearns & Co. (BSC ) in New York and an author of a new report on Latin America's growing links with China. Wizman says Washington has been unable, for instance, to dissuade Brazil from discussing sales to China of refined uranium.

Both countries stand to gain from their newfound cooperation. Brazilian diplomats hope that China will back Brasília's bid for a permanent seat on the U.N. Security Council. And while China does not need Brazil as a counterweight to the U.S., it does gain bargaining power from membership in the G-20, and may need Brazil's support as it seeks exemptions from some of the market-opening rules being laid down in the current round of global trade talks.

It is not all sweetness and light between the two giants. After international soy prices reached near-record highs in April, Chinese ports turned away Brazilian shipments, citing health concerns. The Brazilians say the Chinese move was a ploy to shake market confidence and drive down prices. "They're holding a knife to our throats," says one Brazilian in the industry, "and we don't like it." But like it or not, China and the Southern Cone are on their way to ever closer ties, in trade, investment and diplomacy.

By Jonathan Wheatley in São Paulo, with Colin Barraclough in Buenos Aires and Dexter Roberts in Beijing

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