Logistics costs in Brazil 2016

By Maurício Lima e Alexandre Lobo.

Transport demand in 2015 was heavily impacted by the economic and political crisis experienced in Brazil since 2013, with the greatest impact on road transport. During this period, the 2,5% retraction in the economy led to a 4,7% drop in demand for transport, the worst result for the sector since the beginning of the historical series, in 2000. The most accentuated reductions occurred in the North and Northeast, with losses of 6,2% and 5,8% respectively.

Source: ILOS

For freight transport companies, the drop in demand represents a major challenge. Affected by the reduction in the volume of their operations and, consequently, in revenue, carriers also face difficulties in correcting freight values, due to the increase in costs recorded in 2015.

This increase in the cost of transporters can be illustrated by the variation in the price of diesel, the main cost item for transport over long distances. Between 2014 and 2015, the average price of fuel increased from R$2,76 to R$3,13, an increase of more than 13%, although the price of a barrel of oil on the international market has suffered a sharp drop even in national currency , which suffered currency devaluation in the same period.

Another item of great importance for carrier costs, especially in short-haul transport, driver salaries repeated the trend of recent years, with an increase of almost 9% in early 2015, when the category bargaining took place.

Evolution of the Price of Diesel x Price of the Barrel of Oil

Source: ANP, World Bank
Analysis: ILOS

Thus, most of the time, the 2015 freight adjustment was not enough to cover the increase in transport costs, precisely at a time when demand from transport companies also decreased. As if that were not enough, the sector still has a high degree of debt related to the purchase of vehicles in previous years.

From the shippers' point of view, the situation is also complex, as the reduction in transported volume results from the decrease in their own level of activity. The relatively low price of transport can also be seen as a vulnerability of the supplier market, which struggles to generate cash, at least enough, to cover the payments for the installments of vehicles purchased in the era of easy and cheap credit.

The crisis, however, affects the entire chain and arrives even more amplified for truck assemblers, which have already suffered a 65% retraction in 2015. In addition to the reduction in truck sales, the expectation is that there will still be a significant increase in the participation of the aggregate number of self-employed.

Because it is relatively expensive, at a time of falling demand like the one that started in 2015, the road modal ends up being the most affected, as the other modes, in general, have their movement already limited by capacity. This means that road transport is always leveraged in relation to economic growth, both in a situation of recession and expansion.

Faced with this effect, the downturn in the economy ends up bringing a small improvement in the transport matrix, but the impact is very timid considering the large imbalance. Due to the lack of infrastructure in Brazil, historically, the road modal occupies a very high space in the transport matrix. Brazil still moves 65% of its cargo by trucks and 20% by trains, while the United States has a greater balance (43% and 32%, respectively).

Participation and costs of modes in 2015 in Brazil and the United States

Source: ILOS, CSCMP

In 2015, the representativeness of the transport activity in Brazil's logistics costs in relation to GDP remained unchanged (6,8%) compared to 2014. This balance is due to the balancing of factors that act to promote an increase in the share, such as the drop in GDP , with factors acting in the opposite direction, such as a drop in transport demand and a slight improvement in the transport matrix. The increase in freight costs basically had no impact on this relationship, as it only followed inflation rates, despite the aforementioned cost increases having been higher than inflation rates.

The biggest increase among the logistical cost components in Brazil was, in fact, related to inventory costs, given the increase in the interest rate from 11,25% pa to 15,25% pa throughout 2015. logistics costs in the country now represent 11,9% of the national GDP, maintaining the upward trend that has been observed since 2012.

Representativeness of logistics costs in Brazil in relation to GDP

Source: ILOS
*Domestic Shipping Only

High interest rates and the strong imbalance in the transport matrix continue to be directly responsible for the large difference in the representativeness of logistics costs in relation to GDP in Brazil and the United States. While expenses with logistics in the country represented 11,9% of GDP, in the United States, this ratio fell from 8,3% to 7,7% in the same period, according to ILOS estimates.

In addition to the 2,4% growth in the US GDP, the reduction in logistics costs in the United States was also influenced by the drop in the price of a barrel of oil on the international market, which was passed on to fuel prices, reducing the cost of transportation. In Brazil, the control of fuel prices practiced by the Federal Government prevented this reduction in the price of a barrel of oil from being passed on to fuels and, consequently, to the final consumer.

A small account illustrates the size of the impact of the unbalanced transport matrix on Brazil's expenses with logistics. If the country had a transport matrix similar to that of the United States, even maintaining high national costs, Brazil would save around R$ 85 billion in one year, which represents more than 20% of the cost of transport.

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After a disappointing first quarter, 2016 promises to be a tough year for shippers and carriers. Cargo handling in Brazil has maintained its downward trend, with a 6,6% drop in January and February, compared to the same period in 2015, despite the comparison base for the previous year having already been relatively low. not only because of the drop in demand, but also because of the transport strike that took place in February 2015.

The scenario in the Brazilian market requires a lot of attention on the part of transporters, and the increased risk in the sector also inspires care on the part of shippers, despite the relatively low freight rates seem positive for those who are hiring.

For the moment, the lower movement of cargo relieves the hitherto overloaded Brazilian transport infrastructure, giving the false sensation of improvement in the transport matrix. However, in a medium-term scenario, when the economy recovers, the lack of investment in modal capacity will, in the next cycle, bring to the fore again the infrastructure problems that lay dormant in the recession period.

Also in the short term, the drastic drop in truck sales does not affect the supply of the transport sector, as Brazil has a fleet of more than 2 million vehicles, with a production that, in the best years, reached something close to 180 thousand vehicles. However, if the crisis lasts longer, the sharp drop in truck sales (expectation of approximately 50 vehicles for 2015) may end up reducing the supply of road transport, as the expected demand for vehicles in 2016 will already be lower the number of vehicles to be withdrawn from circulation.

The great challenge for companies at this moment is to continue to seek to increase operational efficiency, as a way to reduce their costs, and not fall into the temptation of relying solely on increasing their bargaining power, bringing more operators to the negotiation tables in processes of selection in increasingly smaller intervals to lower the freight price. The “easy” and “fast” result can be very close to abusive practices, such as overweight or travel time, actions that further increase the offer and, consequently, lower the price even further, creating a kind of vicious circle that can result in large labor liabilities and the bankruptcy of many companies, in addition to bringing even more risk to our roads and the entire population.

Thus, the moment requires extreme attention from shippers. These must not only curb possible abusive practices, but also reduce operational and financial risk in the face of a very fragile transport supplier market, with high debt and labor liabilities that are not always very clear.