🌊 Dams, rates, and steel

Hello, and welcome to the Latin America Weekly newsletter! In this issue: How droughts caused an energy crisis in Ecuador and Colombia. Regional startups feeling the sting of higher interest rates. And the protectionist response to China’s growing steel exports.

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Cheap Chinese steel spreads dumping fears across the region

China’s economic slowdown has led the Asian giant to look for new markets for its over-abundant steel output, and Latin American industries are already feeling the sting of cheaper competition.

Why it matters. China manufactures more than half of the world’s steel, and reduced demand at home can throw the sector into global disarray.

• Large players from the U.S. to Brazil are already complaining about dumping and unfair practices, and countries like Mexico and Chile are already hiking tariffs, as Beijing protests against increased protectionism.  

Chile. The most notorious case came when Chile suspended operations at its Huachipato steel plant — the largest in the country — for a whole month, citing an inability to compete with Chinese production, whose cost stands 40 percent below Chile’s. 

• The plant only resumed activities last week, after Chile’s Anti-Price Distortion Commission advised imposing 25-34 percent temporary tariffs on China’s steel imports. It happened weeks after the entity found “enough evidence” to describe the practice as “dumping.” 

• The Chilean firm praised the decision, saying it “will allow competition on an equal footing,” while hoping provisional tariffs will evolve “into definitive measures.”

Brazil. The continent’s largest economy has been dealing with a similar conflict, as Brazil’s Foreign Trade Chamber imposed a year-long 25 percent tariff on 11 steel products last week, citing an existential threat for local producers. 

Mexico. The government in Mexico has also been tightening restrictions on multiple imports. Last year, it imposed tariffs of 5 to 25 percent on products from countries that hold no trade agreement with it, as is the case with China. 

U.S. pressure. Despite this, U.S. businesses complained that Chinese steel and aluminum were still making it to Mexico en masse, only to be repackaged and triangulated into the U.S. to dodge its tariffs.

• Mexico has now raised tariffs to almost 80 percent for specific steel imports in order to “combat unfair trade,” while also adding traceability requirements “so there’s no issue with people thinking that Mexico is acting as a ‘pit stop’ for steel,” Mexican Economy Minister Raquel Buenrostro explained.

By the numbers. Official stats show that Latin America and the Caribbean imported a record high of over 10 million tons of Chinese steel in 2023. Compared to the meager 85,000 tons brought in two decades ago, steel imports to the region have jumped by a stunning 11,000 percent.

• Part of this equation is due to China’s skyrocketing steel production throughout the 21st century, which coincided with Latin America’s commodity export boom.

• The Chinese share of the global steel market went from 15 to 54 percent in this period, according to the Latin American Steel Association (Alacero), which says in recent reports that “imports continue to threaten” Latin America’s steel producers.

What next. Speaking to The Brazilian Report, economics professor Hugo Garbe of the Mackenzie Presbyterian University in São Paulo argues that Latin America “must adopt multifaceted strategies” to face the dilemma of “free trade interests v. industrial protection measures.”

• Mr. Garbe calls for investment in “innovation and technology” to reduce costs, but also in “product differentiation” that can create “market niches less vulnerable to the current price competition.”

Higher-for-longer interests in the U.S. threaten regional startups

The early months of 2024 were promising for Latin American entrepreneurs. A number of million-dollar investments added up quickly in the first few months, taking total funding for startups 25 percent higher on a yearly basis as more venture capital firms laid eyes on the region.

• Now, stubborn inflation and prospects of slower-than-anticipated rate cuts from the U.S. Federal Reserve threaten to rain on their parade, adding to dimming prospects of a sustained recovery after almost two years of little capital availability.

By the numbers. Investment in regional tech firms jumped to USD 1.4 billion in the first quarter, up from USD 1.1 billion in the year-ago period. While still short of the staggering USD 3.6 billion recorded in 2022, a stronger-than-expected pace of inflows raised hopes among tech firms that the worst might be behind.

• Nearly half of that funding went to Brazilian startups, adding up to USD 0.7 billion in the three-month period, around 40 percent higher than USD 0.5 billion a year ago, according to data put together by Sling Hub in collaboration with Brazilian bank Itaú. 

• Most VC investments in Latin America are typically geared towards financial technology firms. This trend was evident in the largest deals, all of which involved fintech companies such as Brazil’s Conta Simples, Argentina’s Pomelo, and Colombia’s Bold and Addi.

Higher for longer. But global investors have been caught off guard in recent weeks, amid concerns that inflation will not go down as fast as expected, leading to fears of a more hawkish stance from the U.S. Federal Reserve, keeping interest rates higher for longer.

• The U.S. monetary policy outlook is sending ripples south of the border, shattering optimism for more low-rate environments. Brazil and Chile indicated that they may reach the bottom of their rate cuts sooner, while countries which have not yet cut rates aggressively, such as Colombia or Mexico, are opting not to rush into the easing cycle. 

Why it matters. The region historically grappled with low capital infusion into its startups. However, this stance from global venture capital shifted abruptly following the pandemic’s onset, as investors saw an opportunity to further digital banking services across its countries.

• From an annual investment of approximately USD 5 billion in the years prior, total funding to Latin American startups soared to a record USD 16.7 billion in 2021, a significant influx that propelled companies throughout the region to pursue ambitious growth strategies and regional expansion initiatives.

Fed halt. The surge in interest rates in the United States in 2022 abruptly halted the VC investment frenzy, which has since reverted to pre-Covid levels. Total equity funding plummeted to just USD 3.4 billion last year, dipping even below 2019 levels.

Yes, but. While a return to the 2021 bonanza is highly unlikely, and the dimmer monetary outlook could cast a shadow on the recovery, experts argue there is still a bright future for Latin American tech firms.

• Digital banks such as Nubank continue to thrive, including a USD 100 million investment in Mexico this year. Additionally, Mercado Libre, often referred to as the Amazon of Latin America, has announced plans to hire 18,000 new workers.

Empty dams lead to energy crises in Ecuador and Colombia

As if its nightmarish crime troubles weren’t enough of a headache, Ecuador is now also dealing with an energy crisis, with President Daniel Noboa’s administration resorting to scheduled outages to deal with the consequences of a drought that is also hitting neighboring Colombia.

Dam if you do. The two countries have been affected by droughts that compromised hydroelectric availability, leading to power cuts in Quito and multiple rationing methods in Bogotá.  

• Colombia sources 72 percent of its electricity from hydroelectric dams, while that figure reaches 80 percent in Ecuador, as both countries take advantage of a mountainous geography traversed by multiple rivers.

• This has significant benefits when it comes to reducing CO2 emissions, but can also pose instability risks when prolonged droughts occur. 

Why it matters. Like many other countries in the Andes, Colombia and Ecuador are periodically impacted by the El Niño/La Niña weather oscillation cycles, whose consequences on rainfall patterns have affected locals for thousands of years, but intensified lately due to the effects of climate change.

Ecuador. Authorities in Ecuador said “several unprecedented situations” disturbed the energy sector in the last months, citing a long-lasting drought, high temperatures, and lack of infrastructure maintenance inherited from previous administrations, among other factors. 

• Water levels in Ecuador’s largest hydroelectric plant, Coca Codo Sinclair, were 40 percent below its historic average, while other important reservoirs were fully empty, the government reported.

Politics. The crisis came at a terrible time for President Noboa, only days before a key referendum that might end up defining his presidency.

• Mr. Noboa was forced to declare an emergency in the sector, replacing Energy Minister Andrea Arrobo and imposing scheduled power cuts in multiple provinces, sometimes for more than 12 hours — although these were suspended on the day of the vote, in which he ultimately came out victorious.  

• In what could be seen as another populist move to stir up voters, Mr. Noboa also blamed the crisis on unidentified “saboteurs and traitors to the country,” whom he accused of trying to disrupt his tough-on-crime referendum.

Colombia. The government of Gustavo Petro in Colombia was also affected, as rain-dependent reservoirs reached historically low levels and caused Bogotá’s first water rationing crisis in 40 years.

• Authorities responded by firing up its gas and oil thermal power plants to maximum capacity, while also imposing fines on users who exceeded their typical consumption levels and offering discounts to those who cut them. 

Disconnect. But Colombia also decided to cut its usual electricity exports to Ecuador, compounding Mr. Noboa’s problems as his country usually sources between 6 and 10 percent of its demand from its neighbor, which opted to prioritize the crisis at home.

What next. Luckily, relief seems to be on its way, as Colombia has seen some rainfall over the past few days, with President Petro expressing optimism about restarting energy exports to Ecuador very shortly.

Quick catch up 

Uruguay’s 88-year-old leftist former President José Mujica has been diagnosed with esophageal cancer. Due to his fragile health, he might not resort to chemotherapy.

With the ban on right-winger María Corina Machado, Venezuela’s opposition platform will support former diplomat Edmundo González Urrutia in the July 28 elections.

 Mexican presidential contenders met for a second debate, with analysts differing on the winner. Claudia Sheinbaum remains the clear favorite for the June 2 vote.

 China’s Cosco Shipping could sue Peru in international courts if an agreement for exclusivity rights in the Chancay mega-port is not reached in the next six months.

An abridged version of Javier Milei’s market reform bill passed the House in Argentina, with the Senate still pending. 

Chile declared three days of mourning after a group of three police officers were found dead and burnt inside a patrol car in the country’s conflict-ridden Southern region. 

Colombian officials publicly apologized to indigenous groups for multiple massacres that took place during the Amazon rubber boom in the late 19th century.

President Luis Arce admitted that Bolivia has run out of natural gas reserves, which generate most of the country’s revenue.

Frustration is growing in Cuba as the country’s ATMs are running out of cash, leading to long queues and protests near banks in Havana. 

The Organization of American States (OAS) agreed to oversee the election of judges in Guatemala, as President Bernardo Arévalo complains about entrenched corruption in courts.

In a discreet, behind-closed-doors ceremony in the capital, Haiti’s transition council swore in Economy Minister Michel Patrick Boisvert as Haiti’s new interim prime minister. 

Nicaraguan leader Daniel Ortega described his counterparts Daniel Noboa of Ecuador and Javier Milei of Argentina as “Nazi-fascists,” saying both are controlled by “U.S. imperialists.” 

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