Santa Catarina - Port Development and Challenges

UNCLAS SECTION 01 OF 03 SAO PAULO 000198

SIPDIS

DEPT FOR WHA/BSC, EB/TPP/IPE, AND EB/TRA/OTP
STATE PASS TO USTR FOR MSULLIVAN
STATE PASS TO USPTO/OLIA
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON
NSC FOR SUE CRONIN

SIPDIS

E.O. 12958: N/A
TAGS: ECON EWWT PGOV KIPR ETRD BEXP BR
SUBJECT: Santa Catarina - Port Development and Challenges

Reftels: A) 05 Sao Paulo 1307; B) 05 Sao Paulo 1106


1. SUMMARY. The Port of Itajai's phenomenal growth, the
development of a competing port in the neighboring city of
Navegantes, and the 2005 opening of a private port facility in
Itapoa highlight the southern Brazilian state of Santa Catarina's
prominent role in Brazilian trade. A U.S. company, Port Security
International, has partnered with the Port of Itajai to make it the
first port in Brazil to conduct scanning of inbound containers in an
attempt to deter importation of counterfeit products and other
contraband as well as evasion of taxes and customs duties. END
SUMMARY.

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Santa Catarina's Port Profile
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2. During a recent visit to the small but economically vibrant
southern state of Santa Catarina (population 5.4 million, 2004 GDP
of 21.9 billion, area 95,000 square kilometers - about the size of
Indiana),Consul General (CG) McMullen and EconOff Neel visited the
city of Itajai, home to Brazil's third largest port. During the
course of the visit, they met with the mayors of Itajai and
neighboring city Navegantes and visited the Port Authority. CG
signed a Networking with the USA (NUSA) agreement with the Port of
Itajai on behalf of the Foreign Commercial Service (ref A).
Currently, Santa Catarina has four ports:

- Itajai, with a volume of 675,000 container units a year, is the
state's largest port. Its primary cargo is meat, sugar, ceramics,
paper, machinery, chemicals, containers, and wood.

- Itapoa, the northernmost port in the state, began operating in
August 2005. By its third year of operation, the port is expected
to have a volume of approximately 300,000 container units per year,
increasing to 500,000 per year by its fifth year of operation.
Built at a cost of USD 100 million, Itapoa is currently the only
private port in Santa Catarina. 55 percent of the construction cost
was financed by the Inter-American Development Bank (IADB),the
remaining financing came from Santa Catarinense investor Grupo
Batistella, and two silent foreign investors. Itapoa's primary
cargo is wood, machinery, and meat.

- Sao Francisco do Sul, with a container volume of 280,000 units per
year, is the port closest to Joinville, Santa Catarina's largest
city (population 500,000) and the state's primary industrial pole.
The port's primary cargo is soy oil and chaff, barley, and steel.
Although Sao Francisco do Sul is the closest port to Joinville, a
good portion of the city's production travel's south to the port of
Itajai.

- Imbituba is the southernmost port, and the only port located south
of the state capital, Florianopolis. Originally, a primary export
platform for coal produced in the region, Imbituba experienced hard
times in the early 1990s when the coal mines dried up. Imbituba
exported 4.11 million tons in 1986 (the peak year of coal
production) and only 380,000 tons in 1996. Today, Imbituba exports
about 1 million tons (well below 100,000 container units) per year,
with its primary cargo being ceramics.

A fifth port, expected to handle mostly meat exports, is currently
under construction in the town of Navegantes, near Itajai.

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The Port of Itajai: Growth and Challenges
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3. An industrial city with a population of 150,000, Itajai is home
to the third largest port in Brazil, behind Santos in Sao Paulo
state (largest in Latin America) and Rio Grande in Rio Grande do Sul
state. Over the past 5 years, the Port of Itajai experienced the
second highest percentage of growth in shipping worldwide (only
Balboa in Panama grew more),growing 283 percent in container
traffic from 2000 to 2005, to 676,800 container units. By way of
comparison, Santos had a 2005 volume of over 1.5 million units and

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experienced about 100 percent growth over the same five-year period.



4. The number one export destination for shipments leaving Itajai
is the U.S., which received USD 500 million (13.4 percent) of
Itajai's USD 3.8 billion total exports. Russia is second, receiving
13.2 percent of all shipments (of which more than 85 percent is
meat, mainly pork),followed by Germany, the Netherlands, Japan, and
the U.K. (each receiving about 5-7 percent of volume).


5. The huge increase in volume has strained Itajai's existing
infrastructure. In 2002, the Brazilian firm Teconvi won a bid to
operate the port on a profit-sharing basis with the state
government-owned Port Authority of Itajai. Under the lease
agreement, Teconvi invested USD 40 million to increase port
capacity. By 2008, port expansion will include a new 250-meter
berth, 24,000 additional square meters of warehousing (bringing
storage to a total of 74,000 square meters),two new tugboats, and
three additional container cranes. USD 4 million of the investment
is earmarked to build an exclusive access road between the coastal
highway (BR 101) and the Port. The GoB has partnered with Teconvi
and has committed USD 14 million in federal funds to create this
dedicated port access road and freeway exit, since Itajai's
increased container traffic has clogged traffic on BR 101, Santa
Catarina's principal highway along the populous north-south
corridor. (COMMENT. Brazil has yet to harness the efficiencies of
multi-modal transport (including rail and waterborne freight).
While the Port of Itajai's new access road will improve safety and
decrease wait times, it will do little to offset the disadvantages
of having a highway-dependent transport route. Infrastructure
limitations remain a major hindrance to Brazil's trade expansion.
END COMMENT.)

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Navegantes: the Port Next Door
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6. The contiguous cities of Itajai and Navegantes are separated by
the narrow Itajai-Acu River, with the Port of Itajai located on the
south shore. Shortly after the CG's visit to the Port of Itajai,
construction began on the privately owned Port of Navegantes, which
will be located on the north shore of the Itajai-Acu, directly
across from the Port of Itajai. After four years of feasibility
studies, the Brazilian firm Portonave is spending USD 180 million to
build three berths, along with related support structures and
equipment. The City of Navegantes expects to spend USD 12 million
on infrastructure (paving roads, providing utility access, etc.).
Once operational in October 2007, Navegantes will be the state's
second largest port. Portonave expects the Port of Navegantes to
create 650 direct and 2,000 indirect jobs during the construction
phase, and 250 direct and 1,000 indirect jobs once operational.


7. The Port of Navegantes will focus primarily on shipping meat.
Santa Catarina is the largest Brazilian exporter of pork products
and home to several major meat processing companies, including
Seara, Sadia, Perdigao, and Aurora. To attract the meat industry,
the Port of Navegantes will include state-of-the-art cold storage
warehousing. In a recent interview, Portonave president Carlo
Botarelli stated, "Portonave's focus on the meat industry is
strategic. It is a sector in which Brazil has great growth
potential, despite suffering from sanitary setbacks." (NOTE: While
Santa Catarina has not been directly affected, neighboring Brazilian
states as well as Argentina and Paraguay have had cases of Foot and
Mouth Disease. END NOTE.) Currently, the Port of Itajai is one of
the largest shipment points for meat, including the Braskarne
Terminal, which is dedicated exclusively to shipments from Seara, a
major meat processor. Although the Port of Itajai enjoys a
diversified range of cargo (including meat, sugar, ceramics, paper,
machinery, chemicals, containers, and wood),the Port of Navegantes
will be in direct competition with the Port of Itajai for the meat
industry.

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PSI: Brazil's First Inbound Cargo Screener
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8. The Port of Itajai's recent growth has attracted the attention
of U.S. businesses. Port Security International (PSI),a U.S.
company based in Reston, VA, recently began non-intrusive container
security screening at Itajai. PSI's operations are the first of
their kind in Brazil. In September 2005, DHS began its Container
Security Initiative (CSI) operations at the Port of Santos in Sao
Paulo state, conducting non-intrusive scanning of U.S.-bound
containers (ref B). Unlike CSI, PSI focuses on scanning inbound
shipments. Inbound scanning is especially attractive to the
Brazilian Customs Service given the high incidence of contraband,
counterfeit goods, and tariff and tax evasion. PSI's services not
only help Customs deter entry of illegal cargo, but also help them
recoup otherwise lost tax and tariff revenues. PSI also plans to
bid this year on an expected (though as yet unannounced) tender by
the Brazilian Customs Service for screening devices and/or services
at ports throughout the country.


9. COMMENT: Post is encouraged by the Brazilian Customs
Authority's interest in container scanning. In recent anti-piracy
meetings with Brazilian authorities (including state and local
officials in Sao Paulo and Rio Grande do Sul as well as Santa
Catarina),CG highlighted foregone tax revenue as one of many
motives for Brazil to crack down on piracy. To this end, we think
the Port of Itajai's contract for PSI's services is a step in the
right direction. While the Port Authority's main incentive is to
crack down on contraband and tax/tariff evasion, the seizure of
pirated and counterfeit goods will be a natural side effect of
screening. END COMMENT.


10. This cable was cleared/coordinated with Embassy Brasilia.

McMullen