Latin America Boom Starts to Fade; “If commodity prices fall to 2003 levels, all that support for Latin American growth could be removed,”

Updated May 29, 2013, 7:17 p.m. ET

Latin America Boom Starts to Fade

Slowdown in China, a Major Commodities Importer From the Region, Drags on Growth; Xi to Visit

By PAULO WINTERSTEIN in São Paulo and DARCY CROWE in Bogota

A decadelong commodity boom in Latin America that lifted millions out of poverty is showing signs of fatigue, as fading demand in China hits consumers and corporate earnings from Bogotá to Brasilia. The latest evidence of a regional slowdown came Wednesday, when Brazil said its economy grew just 1.9% in the first quarter compared with the year-earlier period, far below estimates for 2.4% growth. Compared with the previous three months, Brazil’s GDP grew a modest 0.6%. Finance Minister Guido Mantega said he would lower his current forecast for 3.5% growth this year by an unspecified amount. “It’s evident that we won’t get an impulse from trade for some time to come and that the commodities boom has passed,” said Andre Perfeito, chief economist at Gradual Investimentos, a brokerage in São Paulo.Other countries in the region are also slowing after expanding at strong rates in the past few years. They did so by attracting large investments from companies seeking higher growth rates while developed economies in the U.S. and Europe stagnated and by selling to Brazil. Chinese imports from Brazil, for instance, reached $44 billion in 2011, from just over $1 billion in 2000, before falling last year.

China, a leading buyer of exports from the region, has slowed more than expected, and economists say the country’s double-digit growth is over. On Wednesday, the International Monetary Fund said China would likely grow 7.75% this year, below its previous estimate of 8%.

Xi Jinping will make his first visit to the region next week as China’s president in an effort to promote trade and cooperation, with visits to Trinidad and Tobago, Costa Rica and Mexico before arriving in the U.S.

Chile, which relies heavily on copper exports to drive economic growth, recently reported a slowdown in the first quarter, expanding by a modest 0.5% from the previous quarter. Peru’s economy grew by 2.1% in the first quarter compared with the previous quarter, the slowest rate of growth in more than three years, the government said last week.

China accounts for about two-fifths of global metals demand, and that could spell trouble for Chile and Peru, where mining makes up about one-fifth of economic output. Global prices for metals like gold have fallen this year.

“If commodity prices fall to 2003 levels, all that support for Latin American growth could be removed,” said David Rees, an emerging-market economist at Capital Economics. Last week he cut his growth estimate for Latin America to 2.8% from a previous estimate of more than 3%.

Tom Findley, a 64-year old California native who has been working in Peru for more than a decade and is the chief executive of mining exploration firm Rio Cristal Resources, RCZ.V -40.00% said, “Some projects are going to be put on hold that represented large investments and this is going to have an impact on the economy.”

Mexico is also slowing, though for different reasons. Mexico’s manufacturing-oriented economy, which is more closely tied to the U.S., also slowed in the first quarter, leading the government to cut its full-year growth estimate to 3.1% from 3.5%.

 

The Latin American slowdown is bad news for companies in the region. Spain’s Banco Santander SA,SAN.MC +0.18% the euro zone’s largest bank by market value, gets about half of its profit from Latin America. Beer giantSABMiller SAB.LN -2.98% PLC, which is based in London and Johannesburg, said this month that an economic slowdown in important Latin American markets such as Colombia was putting pressure on sales. Latin America has accounted for more than 40% of SABMiller’s earnings growth since 2007.

“Right now it’s hard to think about making new investments,” said Germán Rodríguez, the manager and part owner of Bogotá-based AyG SA, a General Motors GM +0.27%supplier in Colombia, where car sales are down 23% this year.

The drop has triggered a decline in orders for AyG, forcing the company to halt a planned $1 million expansion of its factory in Bogotá. Mr. Rodríguez also laid off about 30 workers in the past three months, leaving his staff at roughly 150 employees. He projects that sales this year will drop 12% from 2012 to about $4.3 million.

Carlos Rodolfo Schneider, vice president of Brazil-based Ciser Parafusos & Porcas, Latin America’s biggest producer of screws and nuts, said his exports have fallen to 5% of total sales from 20% a few years ago. “Profits are very tight” and sales will rise only slightly this year, Mr. Schneider said. “Asian products are coming in at low prices and we need to adapt our prices here to international levels,” he said.

There may be more pain in store. Concerns that the U.S. Federal Reserve may start to wind down its easy money policies of recent years has weakened a number of Latin American currencies, raising the cost of imports. That comes at a bad time for Brazil’s government, which is trying to rein in persistent inflation, currently at 6.5%.

Brazil’s more diversified export base may offset some of the weakness. It is the world’s biggest exporter of beef, coffee, sugar and orange juice, and is a major exporter of soybeans.

Most of South America’s exports are still tied to commodities and countries aren’t able to quickly pivot to manufacturing, said José Francisco de Lima Gonçalves, chief economist at Fator brokerage in São Paulo.

“There’s a lot of competition among the guys that sell to China,” he said. Commodities producers “have to maintain their excess capacity to guarantee their presence in the market. That’s the problem of having one big client.”