Realizing the Promise of Brazil Shipbuilding

By Claudio Paschoa, Rio de Janeiro September 9, 2014

If and when Brazil gets its maritime act together, oh what a shipbuilding market force it could be.

The modern Brazilian shipbuilding industry was established in the 1960s, induced by a broad and effective governmental policy. The 1960s and 1970s saw the rise of the merchant marine and shipbuilding industry in Brazil. The creation of the “Merchant Marine Fund” and the “Tax for the Merchant Marine Renewal,” in 1958, together with other specific targets set by the government at that time, made investments available to the shipbuilding industry and for the development of the merchant marine in general.
Counting on such incentives, new shipyards such as Ishibras and Verolme were built, old shipyards were renovated and in the late 70s, the Brazilian ship building industry was the second largest in the world, employing more than 40,000 workers in 1979.
The shipbuilding, maritime equipment and shipping industries, as well as engineering and other maritime related service sectors, experienced a sharp growth curve, up to the mid 1980s. The Brazilian shipbuilding Industry was second only to the Japanese shipbuilding industry, albeit relying mostly on cheap labor to reach this milestone. From that time to the beginning of this century, the Brazilian maritime industry endured a prolonged and severe death spiral downward. The industry was downsized and the merchant fleet greatly reduced, in many cases even abandoned, with most of the remaining shipyards closing or sold off to foreign investors. The marine equipment industry practically disappeared.
Today, however, the shipbuilding industry is embarked on a strong rebound exhibiting a sharp growth curve, mainly due to the discovery of deepwater pre-salt oil and gas offshore Brazil, and the state-owned tanker fleet and supply vessel fleet are the segments of the Brazilian-controlled shipping industry in better conditions.
During the last 13 years, the Brazilian shipbuilding industry has experienced massive growth. The workforce has swelled from a low of less than 2,000 to more than 78,000 workers today, a trend expected to continue as new shipyards begin operations. Brazilian shipyards have recently delivered a record amount of ships and production platforms. In 2013 deliveries included six production platforms, 21 support vessels, 10 port tugs, two oil tankers (Promef) and 44 river barges. In the same period two new shipyards were launched: Aliança Offshore in Rio de Janeiro and VARD Promar in Pernambuco, Northeast Brazil, while another two shipyards concluded expansions: São Miguel Shipyard in Rio de Janeiro and Wilson Sons in São Paulo.

Understanding the Promef Program
The Fleet Modernization and Expansion Program (Promef) has propelled the reconstruction of the Brazilian shipbuilding industry after a decades-long crisis, with an investment of R$11.2 billion in the order of 49 ships and 20 waterway convoys. Brazil currently has the world’s fourth largest backlog of orders for ships, and the third for oil tankers. With the seven first Promef ships delivered, the local content index will be higher than 65%, the quantitative figure stipulated for the first phase of the program, ensuring generation of jobs and income in the country. At the Mauá shipyard alone, where the José Alencar tanker was built, 3,400 jobs were created, of which 1,200 were directly involved in the construction of the vessel. Promef has three stated goals:
•    Build ships in Brazil;
•    Reach a minimum domestic content index of 65% for the first phase, and 70% for the second phase;
•    Attain international competitiveness, after the learning curve.
The first two goals have already been achieved, and with them, Promef has helped to resurrect cue the Brazilian shipbuilding industry. The third goal, the pursuit of international competitiveness, is the current focus, yet it may be the hardest to achieve. To attaint his objective, Transpetro has created the Production Monitoring System (SAP), which has the function of evaluating the production processes of the shipyards and suggesting alternatives to improve productivity. Even with the SAP system in place, it still remains to be seen, which shipyards and how many shipyards will make the necessary effort in infrastructure, equipment, workforce training, product quality and last but not least, meeting delivery deadlines, in order to successfully compete in the international shipbuilding market. The main players of the international shipbuilding industry, such as Japan, South Korea, and China, have had 63, 53, and 23 years, respectively, to reach maturity in the sector. According to Petrobras, in only 13 years, Brazil has already obtained results comparable to those of the Chinese market. That would be a debatable point at best.

Present and Future Outlooks
It is widely believed that the Brazilian Shipbuilding Industry is now facing a consolidation period, where it will need to continue attracting local orders, with an eye at competing for international orders in the future. Brazilian shipyards will need to reach and maintain high levels of quality and safety while keeping to all important delivery deadlines. Meeting deadlines has been one of the major problems of the industry, with significant delivery delays having been reported. The major client of Brazilian shipyards is Petrobras, Brazil’s national oil and gas operator, which also is largely responsible for this resurgence of the defunct Brazilian shipbuilding industry. According to Ariovaldo Rocha, the president of the National Union of Construction, Ship Repair and Offshore Industry (Sinaval), the increase in planned investments in E&P by Petrobras indicates that Brazilian shipbuilding orders will be maintained. “The offshore segment, platforms and drilling rigs represent about 60% of the shipbuilding order book and with the construction contracts for 35 drilling rigs this participation will increase,” he said. For the agents of the naval sector, the order book scenario remains optimistic. Sinaval also highlights that Petrobras’s investment in the local shipbuilding industry up to 2020, includes orders for 38 production platforms, 49 tankers, 28 drillships and 207 OSVs.
According to Petrobras, in 2014, Transpetro is expected to set a record in the receipt of new vessels. The planning under the Promef program foresees the receipt of six vessels and of three inland waterway barge convoys built by Brazilian shipyards. The record was set in 2013, with four deliveries: Product carrier Rômulo Almeida (January) and Suezmax ship Zumbi dos Palmares (May), both now in operation, and the José Alencar (Products) and Dragão do Mar (Suezmax) vessels, the latter two having made their maiden voyages in February 2014. By 2020, the fleet is expected to grow from 60 to 110 vessels. The ships foreseen for 2014 are two Panamax (Anita Garibaldi and Irmã Dulce), two Suezmax (Henrique Dias and another one as yet unnamed) and two gas tankers, one of which the Oscar Niemeyer, is currently in its finishing phase.
However, some policy and regulatory bottlenecks still reduce competitiveness in the domestic shipbuilding industry. Absence of core government focus on issues relating to the segment is one of the main complaints from the industry. “Shipbuilding in Brazil could be aspiring to far greater numbers than those that are circulating in the market if there was a coordinated government policy towards seriously considering a resumption of shipbuilding in this country. The Ministry of Industry [Development, Industry and Foreign Trade], which should be the father of Brazilian naval affairs, has no consistent and comprehensive rules for the industry,” said Cesar Prata, the chairman of the Sectorial Chamber for Marine and Offshore Equipment (CSEN) of the Brazilian Association of the Machinery and Equipment Industry (Abimaq). The vice president of the Federation of Industries for the State of Rio de Janeiro (Firjan), Raul Sanson, agrees.
“We feel that the government is still in the organizational phase. In our view, there is a lack of coordinated meaningful dialogue between ministries and the maximum authority,” he said. Roberto Galli, executive vice president of the National Union of Maritime Navigation Companies (Syndarma), shares this viewpoint. “Brazil is still a complex country and the complexities result from a diffuse responsibility framework amongst authorities with regard to regulatory structures. There is a superposition of government entities within the regulatory framework and this is not good, things are not well defined.”
This leads to another obstacle: the absence of an industrial policy. Cesar Prata said all that exists now are emergency measures taken to “put out small fires.” One of the most recent was the payroll tax exemption for some sectors such as machinery and equipment and for the shipbuilding industry.
Another complaint from segment representatives is in relation to Brazilian taxation, which has reduced domestic supplier competitiveness. One aspect of this taxation policy is Repetro, an artifice created by the government which allows the importation of specific equipment to be used directly in research and exploration of petroleum and natural gas fields, without the incidence of certain federal taxes. The president of the Brazilian Association of Shipbuilding and Offshore (Abenav), Augusto Mendonça, has defended tax isonomy for the sector. “From the shipyard’s point of view, I prefer to buy from abroad rather than in Brazil, it is much simpler, and here there is still residual tax that that cannot be avoided such as ICMS, for example. National and imported equipment must have the same tax burden.”
According to Prata from Abimaq, Repetro stimulates imports, since it concedes exemptions even when there are similar domestic products, thus damaging the local suppliers. Although positive in some respects, the executive points out that there should be changes in the system. “Continue with incentives on those items that Brazil does not have or want to produce, but why encourage imports for those products which Brazil has already been competently making for decades? No, domestic content must be stimulated,” he said.

Local Content Policy
The local content policy is one of the issues that has been at the forefront of debates in the sector. Petrobras, during the presentation of its new business plan, highlighted the implementation of the Measurement and Monitoring of Local Content Program. The goal is to make the most of the domestic goods and services industry’s competitive capacity to meet the plan’s demands with timelines and costs according to best market practices. “We have a program set up so that we can monitor and demonstrate that local content is feasible for accomplishing our projects. It’s no good just planning, we need to prove that we have achieved local content,” said José Miranda Formigli, Petrobras’ director of exploration and production. The first step in the company’s plan of action is defining the minimum local content in the planned projects. For this, imported goods and services, and those items already nationalized, will be identified. The next step is monitoring local content by checking the proportion in the projects and acting to correct any price or term deviations. The last phase is recording local content, in which reports will be prepared to demonstrate local content per project and updating the database for future projects.
Sinaval is ready to help Petrobras in this program. The institution has mapped the local content situation in relation to supplying ships and platforms. The document shows that for tankers the index has reached 70%. In the case of support vessels and FPSO platforms, the percentage is 61% and 63% respectively. Of the total value for ship and PSVs, local participation is on average 64% in these three groups. The National Organization of the Petroleum Industry (Onip) has also developed a set of actions relating to the matter. One is the Platform Technology Program for the Oil & Gas Industry (Platec), a joint effort by the organization and the Brazilian Institute of Oil, Gas and Biofuels (IBP), funded by FINEP with CT-Petro resources. This was designed to promote compliance with the technological innovation demands of the oil, gas and maritime industry and search for and identify suppliers with the potential for nationalizing goods and services currently being imported.

Building Partnerships Abroad
The local shipbuilding industry has also been strengthened by partnerships with major shipbuilders such as Hyundai Heavy Industries from South Korea and other major players from Japan, Singapore and Europe. These strategic partnerships generally involve not only technological transfer but also a wealth of experience in efficient ship design and shipbuilding practices and procedures which promise to sharpen the learning curve of Brazilian shipyards, decreasing the time local shipyards will need to become competitive internationally. These partnerships will also help attract foreign clients to local shipyard because they will potentially increase a prospective client’s confidence that they will receive quality products at the agreed deadline, yet there is still a long way to go in order to consolidate the Brazilian shipbuilding industry and make it attractive to international clients. For now the industry will continue to depend on Petrobras orders, which evidence from Petrobras’ business plans shows will continue to be forthcoming for at least another decade. However, the industry can by no means become complacent as foreign shipyards are also looking to attract Petrobras orders.
Brazilian President Dilma Rousseff said last April, during the ceremony prior to the maiden voyage of the tanker Sea Dragon and the baptism of the cargo ship Henrique Dias at the EAS shipyard, “I am proud that we have rebuilt the shipbuilding industry. We have radically changed our buying policy in order to choose local products.” The Brazilian President believes Brazil needs the shipbuilding industry to become richer and strongly defended federal investments in the sector. With guaranteed government support, along with large orders from Petrobras, the Brazilian Shipbuilding Industry growth curve is set to continue rising for at least another decade.