(Bloomberg) -- China has made a $1.3 billion bet that a new port in Peru will boost access to South America’s agricultural bounty. Cashing in on the investment may be harder than expected.
China’s President Xi Jinping and Peruvian President Dina Boluarte officially inaugurated Chancay port during a ceremony at Peru’s presidential palace in Lima on Thursday. The move epitomizes Beijing’s ambitions to strengthen commerce with South America as the world braces for more restrictive trade measures under US President-elect Donald Trump.
Chancay port, about 44 miles north of Lima, is majority-owned and operated by China’s Cosco Shipping. While the facility promises to slash travel times for cargo going between China and South America, significant hurdles threaten to diminish its success — especially when it comes to getting goods from Brazil.
Simply put, transporting agricultural commodities from Brazil’s key growing regions to Peru’s west coast requires traversing through the expansive Amazon and crossing over the Andes mountains. And yet, there are few good roads and no rail links connecting the regions.
“It’s geographically complicated,” said Marco Germanò, a researcher at New York University who tracks Chinese investments in the region. While Chancay port may rekindle an old dream of integrating South America’s Atlantic and Pacific coasts, he doesn’t see an effective plan to make it happen.
Even the connection between Chancay and some coffee and cocoa producing areas in central Peru isn’t fully efficient, said Rafael Zacnich, manager of economic studies at exporters group ComexPerú. He said he hopes the new port attracts more investors looking to improve infrastructure.
Chancay port’s conundrum comes as China faces renewed threats of a trade war with the US. The Asian nation has been emboldened to find other sources of supply for goods such as soybeans and corn, and agricultural powerhouse Brazil is key. The last time Trump was president, Beijing ramped up purchases of soybeans from Brazil as purchases from US diminished.
“South America is growing, they’re improving yields, they’re planting more acres, they’re doing things that that they need to do as a country, which puts those volumes on the global stage, and that is absolutely a problem,” said Matt Carstens, chief executive officer of Landus, Iowa’s biggest farm cooperative. “That port will have an additional effect, not just on what maybe happens to South America to China, but other parts of the world as well.”
Still, it’s unclear how South American governments will tackle the challenges of geography and poor transportation infrastructure.
“We have to build,” Peruvian Finance Minister Jose Arista said in an interview. “And building it requires two things: to figure out the economic viability and to figure out if the political will is there to invest the necessary resources.”
Peru is a small economy. While its exports of copper ore and other minerals could go to China through Chancay, integration with other South American countries is key to make the shipping route more relevant.
“The idea is that Peru will be the hub to export into Asia,” said Alfredo Thorne, a former finance minister who runs the investment advisory firm Thorne & Associates in Lima. “We trade very little with Brazil, but this could be an opportunity for us to increase our trade.”
The existing highway between Peru’s coast and Brazil’s most-prominent agriculture area in Mato Grosso state requires trucks to cross over the Andes. That can be a problem since larger trucks that typically carry soybeans and corn can’t navigate the road, which means transport must be done with smaller vehicles.
“It’s an extremely elevated cost,” says Edeon Vaz, executive director at Pró-Logistica Movement, which represents soybean and corn farmers in the Brazilian state.
Agricultural groups in the small Brazilian state of Acre that borders Peru see opportunity coming out of Chancay port. Pork and soybean production has been rising in the region and shipping through Peru will likely happen in the future, according to Assuero Doca Veronez, who heads the Federation of Agriculture and Livestock of Acre.
“But the logistical infrastructure needs to be set up with more quality,” he said.
The agribusiness group and local authorities want a new highway connecting the Brazilian city of Cruzeiro do Sul with the Peruvian town of Pucallpa. An attempt to build such a road, however, was halted last year by a federal court on concerns of potential harm to environmentally protected areas and to indigenous communities.
While the administration of Brazilian president Luiz Inacio Lula da Silva wants to improve roads near the Peruvian border over the coming years, building a controversial route in Acre is not contemplated in the federal government’s current plan.
The sheer size of the Chancay port represents a big step for South America, a region that has long suffered with shipment delays that often make products less competitive in overseas markets.
To enjoy such benefits, though, South American nations also need to broaden existing transportation agreements to allow trucks to flow across borders, said Wagner Cardoso, the superintendent of infrastructure at Brazil’s Industry Confederation.
--With assistance from Giovanna Serafim, Eric Martin, Marcelo Rochabrun and Kim Chipman.
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