USAID Ceara Transport and Logistics Executive Summary_Final

THE IMPACT OF TRANSPORT AND LOGISTICS COSTS IN SELECTED SECTORS OF CEARÁ’S FOREIGN TRADE

April 2007 This document was prepared for the United States Agency for International Development (USAID) by CARANA Corporation, in collaboration with the Federation of Industries of the State of Ceará (FIEC)

THE IMPACT OF TRANSPORT AND LOGISTICS COSTS IN SELECTED SECTORS OF CEARÁ’S FOREIGN TRADE

This document was prepared for the United States Agency for International Development (USAID) by David Schacht, Martin Sgut, Júlia Carvalhedo Studart, Rogério Couto Parente, Leopoldo Neto Nunes da Silva, Frederico Ponte and Luciana Mota Tomé, of the CARANA Corporation, under the LAC Trade III contract (Prime Contract No. GS-10F-0150K, Order No. EDG-M-00-02-00041). The information, conclusions, interpretations and opinions expressed in this publication are the responsibility of the authors, and they do not necessarily reflect the thinking of the United States Agency for International Development (USAID), nor of the Government of the United States of America.

PREFACE

The United States Agency for International Development (USAID), through the consultant, the CARANA Corporation, made available to the Federation of the Industries of the State of Ceará (FIEC) the methodology for the identification and measurement of the logistical costs relating to the foreign marketing of products. The study, entitled “The Impact of the Logistical Costs in Selected Sectors of Ceará’s Foreign Trade,” was developed by local consultants, and reveals the status of the situation of the logistical corridors for six products, which together represent approximately 50% of Ceará’s foreign trade. The study identifies the logistical impediments to the processes of exportation or importation of those products, and quantifies the extra costs generated, which impact in a negative fashion on the international competitiveness of Ceará’s industry, and, as a result, on the state’s economy. Proposals of solutions to the problems encountered have relative importance for the state, in that competitiveness is not restricted to the internal formation of pricing, but also affects all of the external factors that influence costs assumed by any given company. With that in mind, this study offers to the companies, the entities and the government a tool for the analysis of logistical costs relating to exportation/impor tation, which will contribute substantially to an increase in the competitiveness abroad of Ceará’s economy. One entity concerned with these questions, FIEC, with the invaluable support of the USAID, thereby strengthens its position as a major entity in the industrial representation in the state of Ceará. Obviously, this study would not have been made, nor its conclusions reached, without the collaboration of a valuable group of individuals, companies and entities. Finally, the strategic joining of the en tities involved in overseas trade that has been successful occurs with the commitment of all of the individuals involved in continuing to make their capabilities available, with a view to the full and continual improvement of the economy of the state, and consequently, of the improved livelihood of its inhabitants. The Northeast region of Brazil will receive quantitative and qualitative gains as soon as the methodology of the present study is replicated in the other units of the federation. FIEC remains at the disposal of the northeastern states which show interest in that regard. Roberto Proença de Macedo President of FIEC

TABLE OF CONTENTS EXECUTIVE SUMMARY..............................................................................................................xi

1. THE GEOPOLITICAL SITUATION IN THE STATE OF CEARÁ.....................................1 1.1. BRIEF OVERVIEW OF THE CEARÁ ECONOMY .............................................3 1.1.1. Evolution..........................................................................................................................................3 1.1.2. Foreign Trade Performance in Ceará – 1997-2006 .........................................................7 1.1.3. Ceará exports................................................................................................................................7 1.2. INTERNATIONAL TRADE ENTITIES IN CEARÁ..........................................10 1.2.1. Commercial Sector................................................................................................................... 10 1.2.2. Transport...................................................................................................................................... 11 1.2.3. Government and Regulatory Agencies .............................................................................. 19 2. INTERNATIONAL LOGISTICS IN THE STATE OF CEARÁ ..........................................23 2.1. IMPORTANCE OF LOGISTICS IN INTERNATIONAL TRADE ...................23 2.2. INFRASTRUCTURE OF THE INTERNATIONAL PHYSICAL

DISTRIBUTION (DFI) IN THE STATE OF CEARÁ ................24 Port System of state of Ceará............................................................................................... 24 Port of Fortaleza ........................................................................................................................ 25 Port of Pecém............................................................................................................................. 27 Productivity of the ports of Pecém and Fortaleza (container operations)32 Pinto Marins Airport................................................................................................................ 33 Land transportation infrastructure...................................................................................... 34 Railroads ....................................................................................................................................... 34

2.2.1. 2.2.2. 2.2.3. 2.2.4. 2.2.5. 2.2.6. 2.2.7.

3. METHODOLOGY ..................................................................................................................37 3.1. PRIOR EXPERIENCE ..........................................................................................37 3.2. COVERAGE OF THE ANALYSIS......................................................................38 3.3. SELECTION OF PRODUCTS AND CEARÁ EXPORT CORRIDORS ..........40 3.4. DEFINITION OF THE STRUCTURE (STAGES/CATEGORIES OF COSTS)41 3.4.1. Stages ............................................................................................................................................. 42 3.4.2. Categories of costs ................................................................................................................... 42 3.4.3. Issues involving inventory costs............................................................................................ 43 3.4.4. Issues involving indirect costs relating to port operations and the mooring of vessels..................................................................................................................... 44

3.4.5. Issues involving indirect costs relating to land transport............................................ 46 3.5. MAIN SOURCES OF INFORMATION..............................................................48 3.6. PROCESSING OF THE INFORMATION..........................................................48 4. RESULTS ................................................................................................................................51 4.1. EXPORTATION OF SHOES – MARITIME MODE ..........................................51

4.2. EXPORTATION OF CASHEW NUTS – MARITIME MODE..........................58 4.3. EXPORTATION OF FROZEN SHRIMP – MARITIME MODE........................65 4.4. EXPORTATION OF MELONS – MARITIME MODE.......................................72 4.5. EXPORTATION OF APPAREL – AIR MODE ..................................................79 4.6. IMPORTATION OF COTTON – MARITIME MODE ......................................85 5. CONCLUSIONS AND RECOMMENDATIONS.................................................................93 5.1. SECTOR COMPARISONS..................................................................................94 5.1.1. Main common extra costs...................................................................................................... 96 5.1.2. Main extra costs exclusive to certain sectors................................................................. 97 5.2. ANALYSIS OF EXTRA COSTS BY STAGE AND ACTIVITY........................99 5.2.1. Pre-shipment ............................................................................................................................101 5.2.2. Land transport..........................................................................................................................103 5.2.3. Airport and port......................................................................................................................104 5.2.4. Customs......................................................................................................................................106 5.2.5. Maritime/air transport...........................................................................................................109 5.3. MACRO-EXTRAPOLATION ANALYSIS OF EXTRA COSTS FOR CEARÁ

FOREIGN TRADE..............................................................................................112

5.3.1. Exports ........................................................................................................................................112 5.3.2. Imports........................................................................................................................................112

5.4. RECOMMENDATIONS.....................................................................................113 5.4.1. Pre-shipment.............................................................................................................................113 5.4.2. Land transport..........................................................................................................................115 5.4.3. Port...............................................................................................................................................119 5.4.4. Customs......................................................................................................................................123 5.4.5. Maritime/air transport...........................................................................................................128 5.4.6. Application of international practices for handling security in Ceará ports...........................................................................................................................129

GLOSSARY.................................................................................................................................135 BIBLIOGRAPHY ........................................................................................................................137 APPENDICES.............................................................................................................................139 Appendix A: Evolution of containerized cargo in the Ceará port system....................................141 Appendix B: Simplified exportation ............................................................................................................147 Appendix C: Extrapolation of extra costs................................................................................................150 Appendix D: Entities operating in Brazilian foreign trade...................................................................153 Appendix E: Operational process of Brazilian foreign trade.............................................................158 Appendix F: Results of the models.............................................................................................................162 ACKNOWLEDGMENTS...........................................................................................................181

LIST OF CHARTS Chart 1. Chart 2. Chart 3. Chart 4. Chart 5. Chart 6. Chart 7. Chart 8. Chart 9. Chart 10. Chart 11. Chart 12. Chart 13. Chart 14. Chart 15. Chart 16. Chart 17. Chart 18. Chart 19. Chart 20 Chart 21. Chart 22. Chart 23. Chart 24. Chart 25. Chart 26. Chart 27. Chart 28. Chart 29. Chart 30. Chart 31. Chart 32. Chart 33. Chart 34. Chart 35. Chart 36. Chart 37. Chart 38. Chart 39. Chart 40. Chart 41. Chart 42. Chart 43.

Select products ..........................................................................................................................................xii Corridors studied ....................................................................................................................................xiii Definition of logistical stages studied ...............................................................................................xv Definition of categories of logistical costs studied ....................................................................xv Extra costs calculated by stage of export and import processes (2006) ........................xvi Most significant extra costs by product/card or (2006) ........................................................xvii Activities responsible for the major portion of extra costs identified in the study .xviii Extra costs calculated for Ceará foreign trade - 2006 ........................................................... xix Main recommendations of the study............................................................................................... xx Ceará data......................................................................................................................................................1 Transport time (hours) - air mode .....................................................................................................2 Transport time (days) - maritime mode...........................................................................................2 Selected products - percentage of exports - 2005-2006 ..........................................................6 Evolution of Ceará foreign trade, 1997-2006 .................................................................................7 Ceará exports, Northeast, Brazil, 1997-2006................................................................................8 Amount of merchandise exported, selected states, 2000-2006 ............................................9 Comparison of Ceará export companies 2005-2006.................................................................9 Free rate of exchange - US dollar (buy) - period average ........................................................9 Comparison of Ceará import and export companies 2004-2005...................................... 11 Billings of companies involved in foreign trade-2005 ............................................................... 11 Evolution of transportation modes in Ceará foreign trade -1997/2006 percentage of volume (T) ..................................................................................................................... 12 Transporters and fleet of vehicles .................................................................................................... 13 Average highway freight for the ports of Pecém and Fortaleza, main exporting municipalities......................................................................................................................... 14 Direct services offered in the Ceará ports .................................................................................. 15 Transit time from Ceará to main ports of destination............................................................ 16 Cargo agents – “Ranking” Brazil (2004-2006) Mooring of ships in port of Fortaleza18 Mooring of ships in the port of Fortaleza (2004-2006) .......................................................... 25 General data on the port of Fortaleza............................................................................................ 27 Mooring of ships in the port of Pecém........................................................................................... 29 Movement of full and empty containers ........................................................................................ 30 Movement of containers, long course and coastal trade ....................................................... 30 General condensed data on the port of Pecém ......................................................................... 31 Characteristics of the Pinto Martins Airport ............................................................................... 33 Highway situation by jurisdiction (Km) 2006............................................................................... 34 Prior CARANA/USAID statistical studies and problems encountered ........................... 38 Selected products .................................................................................................................................... 40 Corridors studied .................................................................................................................................... 41 Definition of logistical stages ............................................................................................................... 42 Definition of categories of logistical costs .................................................................................... 43 Average productivity of selected ports in Latin America....................................................... 45 Productivity for loading and offloading, impact on the ship owner (Ceará 2006).............................................................................................................................................................. 46 Cost of land transport........................................................................................................................... 47 Interviews performed ............................................................................................................................. 48

Chart 44. Chart 45. Chart 46. Chart 47. Chart 48. Chart 49. Chart 50. Chart 51. Chart 52. Chart 54. Chart 55. Chart 56. Chart 57. Chart 58. Chart 59. Chart 60. Chart 61. Chart 62. Chart 63. Chart 64. Chart 65. Chart 66. Chart 67. Chart 68. Chart 69. Chart 70 Chart 71. Chart 72. Chart 73. Chart 74. Chart 75. Chart 76. Chart 77. Chart 78. Chart 79. Chart 80. Chart 81. Chart 82. Chart 83. Chart 84. Chart 85. Chart 86.

Categories of data observed and calculated for the export process ............................. 50 Principal countries of destination for Ceará exports of shoes in 2006........................... 51 Logistical costs of exportation of shoes ........................................................................................ 53 Responsibility for extra costs of exporting shoes..................................................................... 54 Principal countries of destination for Ceará exports of cashews-2006........................... 58 Logistical costs of exportation of cashews ................................................................................... 60 Responsibility for extra costs of exporting cashews ................................................................ 61 Principal countries of destination for Ceará exports of frozen shrimp-2006............... 65 Logistical costs of exporting frozen shrimp ................................................................................. 67 Principal countries of destination for Ceará exports of fresh melons-2006................. 72 Logistical costs of exportation of fresh melons.......................................................................... 74 Responsibility for extra costs of exporting fresh melons ...................................................... 75 Principal countries of destination for Ceará exports of apparel-2006............................. 79 Logistical costs of exporting apparel ............................................................................................... 81 Responsibility for extra costs of exporting apparel .................................................................. 82 Principal countries of origin for imports of cotton -2006....................................................... 85 Logistical costs of importation of cotton ...................................................................................... 87 Responsibility for extra costs of importing cotton ................................................................... 88 Report - Total FOB costs for cargo (inter-sector analysis) .................................................. 93 Report - Extra costs added to optimized cost (2006)............................................................. 94 Total extra cost by sector (2006) .................................................................................................... 94 Most significant ex tra costs by product/corridor (2006)....................................................... 95 Extra costs due to lack of security ................................................................................................... 97 Average amount of applied freightage............................................................................................ 99 Extra cost by sector and by stage...................................................................................................100 Total extra costs per activity generated in the pre-shipment/post-shipment stage (Ceará, 2006) ...............................................................................................................................102 Total extra costs per activity generated in the transport stage........................................102 Total extra costs per activity generated at the port stage (Ceará, 2006) ...........................................................................................................................................105 Total extra costs per activity generated at the customs stage (Ceará, 2006) ...........................................................................................................................................107 Total extra costs per activity generated at the maritime/air stage (Ceará, 2006)............................................................................................................................................................110 Exports of the state of Ceará by transport modality, 2006................................................112 Imports of the state of Ceará by transport modality, 2006................................................113 Calculated extra costs for Ceará foreign trade - 2006.........................................................113 Evolution of container movement at the ports of Fortaleza and Pecém vs. all of Brazil (2001-2006), in TEU...............................................................................143 Average desired productivity for loading and offloading of containers as a function of the equipment and amount of movement...........................................................145 Simulation - common parameters ..................................................................................................148 Comparative data - freight forwarders X express services (20 kg) ................................148 Comparative data - freight forwarders X express services (70 kg) ................................149 Exports of the state of Ceará – 2006 ...........................................................................................150 Extra costs by product - 2006 (US$/ton)....................................................................................150 Percentage of extra costs by cost category...............................................................................150 Extra costs for exports (1) – macro level (Ceará, 2006).....................................................151

Chart 87. Chart 88. Chart 89. Chart 90.

Imports of the state of Ceará – 2006 ...........................................................................................151 Extra costs for cotton – 2006 ..........................................................................................................151 Percentage of extra costs by cost category...............................................................................152 Extra costs for imports (1) - macro level (Ceará, 2006)......................................................152

LIST OF FIGURE S FIGURE 1. FIGURE 2. FIGURE 3. FIGURE 4. FIGURE 5. FIGURE 6. FIGURE 7. FIGURE 8. FIGURE 9. FIGURE 10. FIGURE 11. FIGURE 12. FIGURE 13. FIGURE 14. FIGURE 15. FIGURE 16. FIGURE 17. FIGURE 18. FIGURE 19. FIGURE 20. FIGURE 21. FIGURE 22. FIGURE 23. FIGURE 24. FIGURE 25. FIGURE 26. FIGURE 27. FIGURE 28. FIGURE 29. FIGURE 30. FIGURE 31. FIGURE 32. FIGURE 33. FIGURE 34. FIGURE 35. FIGURE 36.

Structure of the exportation and importation processes ......................................................xiv Rates of growth (%) PIB - Ceará and Brazil - 1990-2005..........................................................4 Annual variation (%) in Ceará exports, 2000-2006......................................................................8 Companies active in foreign trade in the state of Ceará -2005 .......................................... 12 Evolution of modes of transport in Ceará foreign trade (1997-2006)............................. 13 Scheme for contracting of regular line services (container gate) – Pecém terminal ......................................................................................................................................................... 28 Times involved in port operations ................................................................................................... 32 Structure of the processes of exportation and importation ................................................ 41 Total time for the process of exportation of shoes................................................................. 52 Percentage of extra costs for exportation of shoes................................................................. 55 Analysis of costs by stage of exportation of shoes ................................................................... 56 Macro analysis of costs for the exportation of shoes.............................................................. 57 Total time for the process of exportation of cashews............................................................ 59 Percentage of extra costs for exportation of cashews ........................................................... 62 Analysis of costs by stage of exports of cashews ...................................................................... 63 Macro analysis of costs for the exportation of cashews ........................................................ 64 Total time for the process of exportation of frozen shrimp................................................ 66 Percentage of extra costs for exportation of frozen shrimp................................................ 69 Analysis of costs by stage of exports of frozen shrimp........................................................... 70 Macro analysis of costs for the exportation of frozen shrimp ............................................. 71 Total time for the process of exportation of fresh melons .................................................. 73 Percentage of extra costs for the exportation of fresh melons.......................................... 76 Analysis of costs by stage of exports of fresh melons............................................................. 77 Macro analysis of costs for the exportation of fresh melons ............................................... 78 Total time for the process of exportation of apparel.............................................................. 80 Percentage of extra costs for the exportation of apparel ..................................................... 82 Analysis of costs by stage of exports of apparel ........................................................................ 83 Macro analysis of costs for the exportation of apparel .......................................................... 84 Total time for the process of importation of cotton ............................................................... 86 Percentage of extra costs for the importation of cotton ...................................................... 89 Analysis of costs by stage of imports of cotton ......................................................................... 90 Macro analysis of costs for the importation of cotton............................................................ 91 Percentage of extra costs by stage.................................................................................................101 Evolution of container activity at the port of Fortaleza........................................................141 Evolution of container activity at the port of Pecém.............................................................142 Evolution of container activity at the ports of Fortaleza and Pecém ..............................142

EXECUTIVE SUMMARY The changes that have occurred in the national economic scenarios -- for example, the opening up of the Brazilian economy that began in 1990 -- as well as at the international level, such as the intensification of globalization and the surge of Mercosul in 1991, have contributed to the fact that the states of Brazil have been seeking a greater role in the worldwide economy. Under this scenario, and beginning in the ‘90s, we have witnessed a more incisive effort within the state of Ceará in the areas of governmental management, economic modernization and innovation in public policies, and in more recent years, in a search for a greater role to be played by Ceará in the global context. With regard to foreign trade, and according to data from the Ministry of Development, Industry and Foreign Trade of Brazil (MDIC), the exports of Ceará amounted to US$957 million in 2006, with an average monthly amount of US$79.7 million, an increase of 2.86% as compared with 2005. Considering the relevance of exports as they relate to the generation of jobs and income, and the loss of overseas sales by Ceará in the past four years, a critical and objective evaluation of Ceará’s foreign trade becomes essential. In this sense, the worldwide trend toward the integration and globalization of trade, which has become stronger over time, makes it necessary to improve the quality of international logistics and the facilitation of trade, which both depend increasingly on the competitiveness overseas of the state's regions, as well as the importance of logistics with regard to the present situ ation. With this in mind, the present study of the extra costs relating to Ceará’s international logistics was developed. International logistics plays a fundamental role with regard to agility, and increased competitiveness of overseas sales from all of our regions. Thus, the objective of this study is to identify and quantify, in a monetary sense, the losses that have been verified with respect to six selected logistical corridors, analyzing the trail followed by merchandise from the factory to the port or airport of destination, and to present recommendations as to how to mitigate those losses, with a view to providing exporters with updated information on this matter, which may be useful as an orientation toward the reduction of expenses, with a resulting gain in international competitiveness, and as a guide to logistical costs for those who want play a part in the overseas market. The extreme importance of logistics in foreign trade. The results of this quantitative and independent analysis clearly demonstrate that logistical costs are extremely important as they relate to the competitiveness of Ceará’s foreign trade: •

The average for logistical costs as compared with FOB value for the products and product corridors studied reached 20.1% in 2006.

•

The impact of the extra costs calculated in this study for the year 2006 exceeded US$10 million, of which US$7 million related to the five selected export corridors, and US$3 million to the import corridor studied.

•

At the macro level, extrapolating these extra costs to all of the foreign trade of Ceará, the impact amounts to US$43 million for 2006, equivalent to 2% of Ceará’s foreign trade for that year.

• It happens that the obstacles are many, and the direction taken by the actions of the public and private sectors would need to be based upon a more precise diagnosis, based upon greater content relating to the Ceará export sector, so that such initiatives are aimed at expansion, in a sustained form, of the volume of foreign sales, diversification of the guidelines for manufactured products with greater added value, the reduction of dependence on just a few market buyers and the amplification of the number of small- and medium-sized export companies. Some of the difficulties observed are listed below:

xi

• • • • • • • • • •

bureaucratic and tax impediments to the exporting process; a growing rise in protectionist barriers, including some that are not tax-related; super-valuation of the real as compared to the US dollar; a fragile export culture among the exporters; low intensity of commercial marketing; concentration upon only a few markets of destination; the growing participation of China as an export market within the worldwide scenario, affecting Brazil, and Ceará in particular, within the textile industry; obstacles and high costs relating to logistics, and the marketing of merchandise; difficulties in doing business and in access to credit1 , and a reduced number of export companies.

Products and Corridors Selected For this study, the products shown in the chart below were selected: TABLE 1.

SELECTED PRODUCTS

Selected Products

Pcntge. 2005 (%)

Pcntge. 2006 (%)

1

Shoes

22,05%

24,84%

2

Cashew nuts

14,67%

14,23%

3

Shrimp

6,67%

5,35%

4

Melons

4,80%

5,17%

5

Apparel

2,77%

0,94%

50,96%

50,53%

3,45%

4,36%

TOTAL 6

Cotton(importation)

Source: MIDIC / Secex

Shoes, cashew nuts and fruits were immediately chosen. The first two are easily justified by their weight relating to Ceará exports; together, they represented 39% of everything Ceará sold to the rest of the world in 2006. The export of fresh melons, in turn, has been growing quite a bit, and has the peculiarity of requiring refrigerated containers. Ceará exports 50% of all fruits sold by Brazil. Despite the fact that freight is not a significant component of the export price of frozen shrimp, as a function of its high price per kilogram, the sector was chosen for the following reasons: i) its aspects also affect the lobster and fish sectors (important sectors of the Ceará economy); ii) the sector involves small producers; iii) it utilizes reefer containers (the cargo must be frozen), and iv) Ceará has natural features that are favorable to the sector, such as the amount of sun, its waters and the winds. Also with regard to exports, apparel completes the set of products selected. Although it represents only about 3% of Ceará’s total exports, this sector involves micro and small companies; it is a great generator of jobs, it has a freight value that is significant in relation to the merchandise. In addition, this

World Bank report, Doing Business in Brazil, 2006, classified Ceará in last place among 13 selected states. The study compares, among others, the processes of creating companies, obtaining credit and the payment of taxes. 1

xii

is a manufactured product, like shoes, and it makes use of air transport, and finally, this is a highly visible job category in our state. The five products selected represented more than 50% of total exports of Ceará in 2006. Considering that the textile industry in Ceará is a large consumer of cotton for the production of thread and cloth, and that it is a sector of great importance to the Ceará economy, the importation of cotton was included in this study. Having chosen the products, we selected the five corridors for exportation and one for importation, as follows: TABLE 2.

CORRIDORS STUDIED

Products Shoes Cashew nuts Frozen Shrimp Melons Apparel Cotton

Exp/ Imp Exp Exp Exp Exp Exp Imp

Via Marítime Marítime Marítime Marítime Air Marítime

Origin Pecém Pecém Fortaleza Pecém Fortaleza Houston (USA)

Destination Altamira (MEX) Norfolk (EUA) Algeciras (ESP) Rotterdam (HOL) Lisboa (POR) Pecém

Source: CARANA Corporation Analysis, 2007

Identification of Costs and Times Below, and with the objective of identifying and quantifying the costs and times involved in the logistical chains included in this study, we initially developed a structure with all the steps involved in these selected processes of exportation and importation, grouped in stages, in accordance with the type of transport, which was utilized in obtaining information on costs and times for each activity. Although the processes vary as a function of the mode of transport used, care was given in a search for a standard structure of activities and steps that was adapted to the different characteristics of the corridors. Each structure of the models elaborated shows the movement of the merchandise from the producer to the purchaser, in the case of exports, and from the receiving port to the factory in Ceará, in the case of imports, for each of the products and corridors selected.

xiii

FIGURE 1.

STRUCTURE OF THE PROCESSES OF IMPORTATION AND EXPORTATION

Structure of the Exportation Process (Maritime Mode)

Pre-shipping

Land Transport

Airport

Maritime Transport

Customs

Billing

Ceará

Country of Destination

Inventory and Financial Costs Structure of the Importation Process (Maritime Mode)

Country Of Origin

Maritime Transport

Customs

Land Transport

Port

PostOffloading

Ceará

Inventory and Financial Costs Structure of the Exportation Process (Air Mode)

Pre-shipping

Ceará

Land Transport

Airport

Customs

Inventory and Financing Costs

Source: CARANA Corporation, 2007

14

Maritime Transport

Billing

Country of Destination

TABLE 3.

DEFINITION OF THE LOGISTICAL STAGES STUDIED

STAGE Pre-shipping/ Post-offloading

Land Transport Port Customs

Transport to Destination (Marítime or Air) Invoicing

DEFINITION The pre-shipping activities include consolidation, packaging and warehousing of the products, and any other actions necessary or performed prior to sending the merchandise to its final destination. In the case of importation of cotton, the post-offloading stage includes payment activities and administration of the operation. Refers basically to transport of the empty container to the exporter and the domestic land freight from the exporter’s factory to the port or to any consolidation locale that is part of the process. Includes the activities of delivering the loaded container to the port, operation/mooring of the ship and warehousing in the case of importation of cotton. Covers the activities relating to the offloading of merchandise for shipment overseas (exportation) or for nationalization of the merchandise (importation). Includes certifications and inspections required by the client or by the importing country. Involves transportation to the destination and the processing of the documentation. Includes signing the exchange contract, issuance of the letter of credit and the delivery of documents abroad (courier).

Source: CARANA Corporation, 2007

The costs generated in the stages and activities described above were classified in accordance with the categories shown in the following chart: TABLE 4.

DEFINITION OF THE LOGISTICAL COST CATEGORIES STUDIED

COST CATEGORIES Direct Costs Indirect Costs (Inventory and Financial Costs) Extra Costs (Direct and Indirect)

DEFINITION Includes amounts actually paid for activities carried out, by stage. The indirect costs do not involve the disbursement of amounts. They are divided between inventory and financial costs. They are the result of sitting cargo and of delays (inventory costs) and of lost profits relating to the truck (financial costs). The inventory costs are based upon the study by Hummels, commented upon where appropriate. Extra costs of the process are those that do not contribute to the achievement of the major logistical goal, which is to transport the product of the exporter to its destination in an efficient fashion. The extra costs are calculated throughout all of the processes of exportation and importation, and include unnecessary direct costs, over and above all indirect costs.

Sou rce: CARANA Corporation, 2007

Primary Results

15

The calculated extra costs for the year 2006, for each of the sectors studied, are shown in the following chart; they totaled USD10,553,712.72. TABLE 5.

CALCULATED EXTRA COSTS BY STAGES OF THE EXPORTATION AND IMPORTATION PROCESSES (2006)

STAGE Pre-shipment / Post-offloading

CALCULATED EXTRA COSTS (IN US$) 439.896,18

% 4,2%

Land Transport

2.859.775,72

27,1%

Port / Airport

1.807.981,36

17,1%

Customs

1.091.165,46

10,3%

Marítime / Air Transport

4.354.894,00

41,3%

10.553.712,72

100%

TOTAL Source: CARANA Corporation, 2007

This impact is very significant for Ceará, and represents an obstacle to development, limiting the expansion of the state's foreign trade and its possibilities for the reduction of poverty. These extra costs directly affect the competitiveness of exports, and have a negative impact on Ceará wages, bearing in mind that export companies transfer to their employees and their producers the losses identified here. On the importation side, the extra costs are transferred to final consumers and to products with imported components destined for foreign trade, signifying an additional loss of competitiveness. These extra costs have a strong economic and social impact. In this sense, the proposal of the study is, above all, to offer opportunities for an increase in overseas competitiveness for the companies involved in foreign trade, indicating the stages that should be examined on a priority basis, with a view to the reduction of logistical costs, and a consequent increase in international competitiveness. The study does not exhaust the evaluations of logistical costs, and should be a basis for new studies of this kind, but bearing in mind that, although the study has indicated all of the costs involved in the selected logistical chains, it is limited to an analysis of the extra costs. To provide a better view of the distribution of these extra costs, Chart 6 below presents the most significant extra costs (about 80% of the total of the extra costs) that impact the logistical chain for each of the sectors analyzed. At each step in the process, activities are listed that contributed most to an impact of approximately US$10 million and extra costs for the merchandise moved in 2006 by the sectors studied herein. This analysis provides the exporter/importer with information that permits an orientation toward the concentration of efforts on the principal activities that generate extra costs.

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TABLE 6. MOST SIGNIFICANT EXTRA COSTS BY PRODUCT / CORRIDOR (2006) Product

Corridor

Stage

Most Significant Extra Costs

Cotton

importation / marítime

Maritime Transport

Demurrage

Port Maritime Transport Shoes

Shrimp

Melons

Cashews

Apparel

exportation / marítime

exportation / marítime

exportation / marítime

exportation / marítime

exportation / air

Estimated Impact on the Volume Moved in 2006 (US$)

% of Total Extra Costs

1.742.143,51

54,8%

Loading and unloading - warehouse

338.760,70

10,7%

NIC and Release of BL

278.621,16

8,8%

Customs

ICMS grant to Sefaz/Cesut

226.855,48

7,1%

Land Transport

Logistical operator service

395.290,98

21,4%

Land Transport

Freight Terminal for Empties > CD > Port

373.923,90

20,3%

Maritime Transport

Awaiting shipment

291.508,02

15,8%

Port

Ship mooring / port operation

250.130,50

13,6%

Pre-shipping

Loading of truck

123.793,40

6,7%

Customs

Customs inspection/SRF

Port

Ship mooring / port operation

Pre-shipping Pre-shipping

70.375,70

3,8%

211.415,28

47,6%

Loading of container

83.747,25

18,9%

Issuance – International Certificate (UVAGRO)

32.506,34

7,3%

Customs

Form A - Certificate of Origin

25.9 30,63

5,8%

Customs

Health oversight document (MAPA)

Land Transport

Road conditions - losses

Land Transport Port Maritime Transport

Waiting for shipment

Port

Ship mooring / port operation

Customs

25.930,63

5,8%

1.334.809,92

60,1%

Transport of empties > Farm > Port

276.655,58

12,5%

Ship mooring / port operation

222.176,52

10,0%

1.898.995,28

68,2%

343.764,72

12,3%

Gathering of inspected containers (13/cont)

68.231,28

2,5%

Pre-shipping

Processing for remittance

28.928,20

35,9%

Customs

Form A - Certificate of Origin

26.861,90

33,3%

Air Transport

Waiting for shipment

22.729,30

28,2%

8.694.086,18

82,4%

Total - Most Significant Extra Costs

Source: CARANA Corporation analysis, 2007

17

No longer relating to products individually, as in the above chart, Chart 7 below identifies the 15 principal calculated extra costs for all of the products included in this study, which total 92% of everything analyzed. TABLE 7.

15 ACTIVITIES RESPONSIBLE FOR THE MAJOR PORTION OF THE EXTRA COSTS IDENTIFIED IN THE STUDY ACTIVITY

STAGE

Waiting for shipment Demurrage Road conditions - losses Mooring of ship/port operation Transport of Empties > CD (factory) > Port Logistical service operator

Maritime/Air Transport Maritime/Air Transport Land Transport Port Land Transport

Land Transport Pre-shipment/ Loading of truck Post-offloading Loading and unloading - warehousing Port NIC release of BL Maritime/Air Transport Granting of ICMS to SEFAZ/Cesut Customs Delivery of loaded container Port DI registration Customs Removal of empty container Land Transport Customs Inspection/SRF Customs Factory freight > CD or Port Land Transport SUBTOTAL OF THE 15 ACTIVITIES RESPONSIBLE FOR THE MAJOR PORTION OF THE IDENTIFIED EXTRA COSTS TOTAL EXTRA COSTS (31 ACTIVITIES IDENTIFIED IN THE STUDY)

TOTAL US$ 2.307.804,98 1.742.143,51 1.334.809,92 1.183.545,32

% 23,77% 17,95% 13,75% 12,19%

660.199,70

6,80%

395.290,98

4,07%

376.352,45

3,88%

338.760,70 278.621,16 226.855,48 201.432,04 183.083,03 171.755,54 155.784,44 150.926,20

3,49% 2,87% 2,34% 2,08% 1,89% 1,77% 1,60% 1,55%

9.707.365,45

91,98%

10.553.712,7 2

100,00%

Source: CARANA Corporation Analysis, 2007

The amounts of the extra costs identified in the selected corridors were extrapolated for the exports and imports of the state of Ceará in 2006. The extrapolation of the extra costs relating to exports considers those made in both the maritime and air modes, while those relating to imports only take into account those using maritime transportation. Chart 8 below shows the results of the extrapolation for Ceará’s foreign trade. It can be seen that the costs for inventory represent 40.1%, while the extra financial and direct costs represent 59.9%.

18

CHART 8 -

CALCULATED EXTRA COSTS IN CEARÁ FOREIGN TRADE – 2006 CALCULATED EXTRA COSTS (US$)

CORRIDOR Inventory

%

Financial & Direct

%

Total

Importation (1)

6.543.416,16

6.558.141,75

13.101.557,91

Exportation (2)

10.831.112,24

19.348.737,92

30.179.850,16

17.374.528,40

40,1% 25.906.879,67

TOTAL

59,9%

43.281.408,07

%

100%

(1) containerized importation only (2) containerized and air exportation only Source: CARANA Corporation Analysis, 2007

The calculations of the total costs and the extra costs were made on the basis of an intense compilation and processing of crossed data. This set of data, analyzed by the team of consultants, later served as the basis for a critical evaluation with the management of the companies and entities involved. All who were interviewed and involved in the process were then invited for discussions. The discussions were restricted to the models, the conclusions, and the recommendations. The meeting resulted in important changes relating to all of the c orridors, made on the basis of the discussions held. All of the results obtained are averages derived from the data supplied, and they serve merely for reference purposes, since the times and costs of each operation involve private and confidential commercial data from each company or entity; it is quite likely that there are no actual operations that have the same values. The values for these results are useful as parameters of reference, since they permit the arrival at conclusions and recommendations based upon the averages. Also, by means of the methodology used, a model for the evaluation and tracking of all logistical costs was made available to the companies. This is not a “laboratory study” developed only by consultants. The development of the task involved the very significant participation of businessmen in the private sector and of representatives of the institutions. The conclusions of the study are based upon a broad range of opinions and data from the private sector and the consultants, which are expressed in this report, with no censorship of any of the sectors involved. The support of the Federation of Industries of the State of Ceará (FIEC) was fundamental. Its openness in exposing all of the problems, without omitting those that deriv e from inefficiencies in the private sector, is a valuable attitude, and reflects a vocation of service to the general interest.

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CHART 9. MAIN RECOMMENDATIONS OF THE STUDY – EXTRAPOLATED AMOUNTS FOR THE SECTORS INCLUDED IN THIS STUDY

STAGE Pre -shipment

Land Transport

AREA OF OPPOR-TUNITY TO LOWER COSTS Organization of foreign trade operations

EXTRA COSTS TO BE REDUCED US$

REMARKS

MAIN RECOMMENDATIONS

See remarks2

There have been cases in which the process of exportation/importation is treated in a way that is similar to that for domestic marketing. When this happens, the entire process is delayed. Regarding foreign trade as an extension of the domestic market is a mistake, and it makes difficult the success of overseas sales and purchases. The lack of planning and training are causes of this mistaken view.

In order to prioritize the area of logistics in export companies, it is recommended that a department of foreign trade be established, covering the cells of exportation/importation and company logistics so as to fac ilitate business dealings. The preparation of a list of activities, of a schedule, the indication of those who have responsibility and the control of the processes by means of an organized archive, as well as the production of statistics on costs and time s would be assigned to this department.

Loading of Containers

376,352.45

As a result of a lack of planning for the shipment of merchandise overseas, referred to above, it can be seen that the truck/container spends unnecessary time parked at the factory. The price charged by the transporter includes an additional sum in compensation for the down time, since the truck could be used to generate more profit for its owner.

? Negotiate discounts against the prices charged for the utilization of the truck for a shorter time, restricted to what is actually necessary. ? Schedule the request for the truck/container only when the merchandise is ready to be shipped. ? Review the procedure for sending the container to the port, so as to avoid its standing idle at the factory awaiting loading. ? Institute a procedure for recording the waiting times and the stay of the trucks so that goals are set.

Highway Infrastructure

2,020,892.46

The state highways, with the exception of those that connect factories with the main roads, are in better condition than the federal highways along which travel most of the trucks loaded with merchandise for exportation.

As an alternative to improving the highways, we recommend the commissioning of a study of the viability of expanding the railway system for transporting products, since this would avoid losses due to the leveling of the rails, transport large volumes at reduced cost and potentially attract companies by making it easier for them to bring their products to market.

Coordination of retrieval of empty containers

171,755.54

The retrieval of empty containers is still considered as slow, since on average, this activity requires 1.5 hours, while the international standard suggests 30 minutes.

Better coordination in the process of retrieving empties is recommended, as well as time schedules that quicken the removal of equipment.

2 The lack of organization and planning for overseas operations affects the entire logistical chain, and causes various extra costs. Among others, the following can be cited: extra costs resulting from delays in the loading process (all sectors except apparel), and in the shipping process (apparel), both of these measured in this study. See Item 5.2, “Analysis of Extra Costs by Stage and Activity.”

20

Fruit Consolidation Center

Port

864,812.00 (amount to be saved if a food consolidation center is built)3

As mentioned in the above item, presently there is a need for the removal of empty containers to the factory, creating extra costs for the process.

Administration and port operations

1,183,545.32

Both the port of Fortaleza and the port of Pecém have a structure that is capable of dealing with an increase in volume of container movement. However, the existing equipment and the infrastructure of the ports limit the speed with which ships are handled, and can cause congestion, and by extension, extra costs.

Alternatives for the development of the ports in the state of Ceará

See remarks4

The port of Fortaleza, with respect to the operation of containers, has a tool port operational model. This model is not the best kind for attracting container operations or for reducing the costs of ship owners and users. The tool port model affects the quality and cost of services, since it gives broad access to operating companies and maritime agencies, so that they can participate in port operations (activities alongside the ships and in the yard, reception and delivery of containers), creating a certain level of intra-port competition.

Inspections by the Ministry of Agriculture, Livestock and Supply (MAPA) and by the Secretariat of Federal Revenue (SRF) occur at the port, except for fruits destined for the US.

It is recommended that a study be made of the viability of establishing a fruit consolidation center on the outskirts of the port of Pecém, at which fruit will be deposited on pallets and then transferred to containers, as in a cross-docking operation. At this consolidation center it would also be possible to carry out inspections, guaranteeing that additional movements of the container within the port are avoided; the cargo would be delivered to the port already authorized for shipment. With these procedures, a great many of the extra costs relating to the pre-shipment stage, land transport and customs could be avoided. The main suggestion in this case would be the formation, at both Fortaleza and Pecém, of a consortium for the administration of an investment in an integrated container terminal, permitting an adequate return on investment for the management group, better quality of service provided and more intensive usage, making possible a reduction in costs. Do away with intra-port competition, and adopt a model of competition between both ports. Succinctly, they should: ? Discard the tool port model at both ports; ? Discard the intra-port competition; ? Establish a landlord model; ? Lease both ports, or raise public investment; ? Encourage competition between both ports.

At the port of Pecém, despite the fact that loading and unloading operations take place under a landlord model, generating little intra-port competition, and the fact that there is not an operational integration at the port, the benefits are of little significance. Under the landlord model, an operator assumes responsibility for the entire operation (loading and unloading, transfer, the yard, reception and delivery). Access to the port

201,432.04

The delivery of containers at both ports is done with delays that add extra costs to the operation. In a way, both the delivery and the removal could be improved, so that the ports have a constant flow, and the occurrence of bottlenecks is avoided.

3

It is recommended that there be a restructuring of access to the port using information technology, permitting registration in advance of containers, of the operator and of the truck driver prior to their arrival at the port; this would enhance the checking of data in the system, and the identification of the driver. With the information accessible

For details, see Item 5.4, “Recommendations” (Consolidation Center for Fruits – Case Study). The low productivity of the port operation and the delay in the delivery of full containers, extra costs measured in this study, are related to the present administration models at the ports of Ceará. See Item 5.2, “Analysis of Extra Costs by Stage and Activity.” 4

21

Ports of call in Ceará

See remarks5

Since the ports of Ceará are the last ones for lines that pass through Brazil, they suffer from problems relating to faults in Brazilian port logistics. Frequent bottlenecks, principally at the port of Santos, cause delays, and at times, due to the delays, cancellation of services that Ceará provides. There is competition between the ports of Natal and Pernambuco (Suape and Recife) for the cargo generated in the region, causing a dilution of container volume to be shipped, and making some ports of call unviable.

Customs

at the gate in digital form, and the possibility of checking between the gate operator and the driver, right at the side of the truck, it is estimated that the access time would be reduced to competitive levels, with regional standards. The solution for this restriction depends upon improvement in port efficiency, which can be achieved through a reduction in total times for the process, through better tariffs that reduce the total cost of the process and by constant improvement of the human resources that work in support of foreign trade, facilitating the capture and the offloading of cargo at the ports of Ceará. If this occurs, both the ship owners and their agents, as well as the exporters of the region, will evaluate the options for making their shipments using the ports of Ceará, with a resulting increase in the volume of cargo passing through the state, and in the number of arriving ships.

Duration of stay of containers in the port

385,958.82

The practice of warehousing cotton containers in the yard has been observed, as well as bales of cotton in the port’s warehouses, after offloading from the ship, for periods that average as much as 50 days. There is a reasonable period of time for both storage and demurrage. The presence of the product in this ambiance could result in inefficiencies of port management, due to the occupation of space designed for rapid circulation of general cargo, and space in the container yard, probably causing a greater number of operations for the stackers.

It is recommended that there be a reduction in the tax exemption for storage and demurrage for periods of more than 10 days and 5 days, respectively. Since there is an operations contract entered into by the Union and Cearáportos/Docas, extending the time period for free storage, and ceding a discount on storage taxes, it is suggested in this case that containers be segregated in the yard so as to avoid delays in the daily operation of the ports.

Health and customs inspections

313,288.64

The activities of the entities that oversee the process of importation and exportation of the Ceará ports have grown with the evolution of foreign trade; there has been an effort to make the inspections more efficient. This effort is reflected mainly in the sectors of shrimp and melons, studied in this inquiry. However, in the other sectors included in this study, it was observed that the extra costs were higher.

We recommend the adoption of health inspec tions at the plant, in the case of cashews, which can be made prior to exportation by means of evaluations of Good Manufacturing Practices (BPF) and Risk Analysis, Identification and Control of Critical Points (ARCPC). With regard to inspections of cotton, it would be necessary only to speed up the process of verification of the containers following their arrival at the port.

In the case of health inspections, it was noted that these originated in the shrimp sector, and that extra costs were eliminated; they were also quite reduced in the fruit sector, particularly melons, which are produced for export, and are inspected by the Ministry of Agriculture at the exporter’s site when the ports of destination are in the US. However, in the case of cotton and cashews, the extra costs have risen due to the lack of a more efficient treatment.

5

Delays and cancellations of moorings result in greater waiting times for shipment, an extra cost measured in this study. . See Item 5.2, “Analysis of Extra Costs by Stage and Activity.”

22

Maritime/air Transport

Customs inspection at the port for importations

122,182.23

With a view to facilitating trade and international transpor t, consideration must be given to the present worldwide scenario, with a tendency toward the recommendation of a minimization of customs inspections made in a systematic or random manner at the port. Oversight has been transferred to the factory of origin and to the final destination of the goods shipped. In this way, the inspections carried out at the ports are restricted exclusively to those cases where crimes are suspected.

For imports, the mode suggested as best is to perform the inspections at the receiving factory or at the deconsolidation center, but in a selective fashion, establishing certain criteria that take into account aspects of risk and intelligence, and abandoning random inspections. The installation of scanner equipment with high resolution at the ports is regarded as the most appropriate and recommendable approach.

Certification

137,335.53

It has been observed that the providing of the Certificate of Origin, Form A, generates a logistical bottleneck for the exporter, due to the time needed for its issuance and the necessity for transport and anticipation of at least 24 hours. Although it is similar to other certificates issued during the exportation process, for example, the Health Certificate, it becomes an extra cost to the extent that it generates an unnecessary direct cost for the exporter. The health certificate, in turn, generates an indirect cost, due to the time needed for issuance and the necessity of previously obtaining an international certificate after the container has left the plant for the port.

The issuance of certificates can be sped up through the use of information technology. By means of an internet system, the exporter could issue a certificate of origin or a health certificate, starting with the particular requirements for each certificate. After issuance from an electronic site or at the end of the exportation, the exporter would be obligated to send the copies of the documents to the responsible issuing entity, which would record them in the system at the conclusion of the process. If this does not occur, the exporter could not obtain another certificate, and he could not make new shipments. He would also be taxed and fined.

Processing of documents

108,420.55

The time taken for the processing of documents at the port or cargo terminal and at the airport is increased both by congestion in the individual response of each entity and by the need to wait for the setting of parameters on fixed schedules.

It is recommended that the dealings at the ports and airports be computerized, eliminating physical documentation.

Customs agents

See remarks6

There are difficulties and delays observed in this study which can be corrected. Errors in filling out documents and faults in communication between the agent and the exporter/importer have entered the process, making it slower.

It is recommended that the customs staff provide training for the agents and in the exportation and importation sectors of the companies, by means of groups of instructors who would multiply the knowledge acquired directly from those entities by interested parties and by participants in Ceará’s foreign trade. We would also suggest the inclusion of class registration for activities at the ports and airports after prior approval in an open bidding process.

Number of ships/planes

2,307,804.98

Despite the fact that the number of ships anchored in 2006 at Fortaleza was about 500, which represents approximately 10 ships per week, this does not represent an increased number, even with an exported volume by sea

The existence of efficient ports, with an infrastructure capable of handling a greater volume of exports catches the attention of the ship owners and permits the broadening of their line of services, serving the exporter or importer with

6

These costs are reflected in other stages of the logistical chains, and especially at the Customs stage, and are measured in this study. It is recommended that a specific study be made for the customs agent. . See Item 5.2, “Analysis of Extra Costs by Stage and Activity.”

23

Security

Demurrage

1,742,143.51

Application of international practices for the management and security of the ports of Ceará.

1,396,187.54 (The amount that could be saved if recommendable international security practices were applied)

of almost US$ 900 million in the last year. The time between the offloading of merchandise and the shipping of that merchandise is important, due to the speed of international trade and the needs of the importing client, from the marketing point of view.

greater frequency. This, along with governmental actions in broadening the poles for exportation, will lead to an increase in the number of ships and a better frequency/destination ratio.

The free time of demurrage offered by ship owners for cargo destined for Europe, North America and even some countries in South America is 5 days on average. In Brazil, the practice of ship owners is to offer 10 free days of demurrage, due to the time necessary for customs -related offloading and to certain cultural aspects. In addition, a fact worthy of note in this regard is the utilization of the port as a relatively low cost option for the warehousing of cargo that is not urgent to the production or marketing process of a given industry, or even for purposes of postponing the payment of taxes relating to the importation of the product. With regard to port security, it was verified that at both ports (Pecém and Fortaleza), security relating to merchandise is generally acceptable as compared with local parameters, but it is not at the international level. Amplifying this concept involves approval from the International Ship and Port Facility Security (ISPS); the ports of Ceará do not have certification at higher levels, nor do they have non-intrusive detection equipment (scanners). In addition, the operational models of the state’s ports (toolport) do not make possible the implementation of international security standards in the area of human resources.

It is recommended that the free time for demurrage and port warehousing be reduced, with a view to promoting a more efficient system for the offloading of imported cargo at the ports.

The Container Security Initiative (CSI) is a treaty that requires agreement among the signatory states. Since Brazil and the United States have already formalized this agreement, it would presumably be viable to advance its implementation in the state of Ceará. With regard to the “Structure of Standards for Assuring and Facilitating International Trade,” of the World Customs Organization (WCO), it is important to go forward in its broadcasting and advertising, as well as in its eventual implementation. This is a primary responsibility of the federal government. There should be promotion of the application of the Customs Trade Partnership Against Terrorism (CTPAT), both at the ports and in the private sector, thus involving all of the agents in the chain: exporter, transporter, port operator, freight forwarder, maritime agency and port terminal. In this respect, there should be propulsion from different angles and orbits of a campaign for clarification, demonstrating the benefits that would derive from its adoption. There is also a need for the establishment of customs mechanisms and security of inspection of the plant of the exporter, thereby avoiding, as much as possible, interference between the physical inspection and the document inspection at the port.

24