The Hindu Business Line : Acquisition of strategic resources abroad — Why Latin America is the obvious destination

If the Indian economy powers on towards fastest growth in the next 50 years, as predicted by some analysts, the huge spurt in consumption will push demand for raw materials to a level that can hardly be met through domestic resources. Instead of merely importing, Indian companies are being encouraged to invest abroad, so that stable, long-term supplies are assured. The obvious region of focus is Latin America. And, for several reasons, the best time is now, says R. Viswanathan.

ACCORDING to the BRIC report of Goldman Sachs, "India has the potential to show the fastest growth over the next 50 years. Growth could be higher than five per cent over the next 30 years and close to five per cent as late as 2050". High growth means consumption of more raw materials and resources, and India will need to supplement domestic resources through sourcing from abroad. In this context, the Ministry of External Affairs, as part of economic diplomacy, encourages Indian companies to invest in foreign resource bases.

One of the obvious regions of focus is Latin America, which is blessed with abundant natural and mineral resources. Indian companies should consider investment in oil-fields, mines, forests and land. This will not only assure stable long-term supplies but will also help avoid upward fluctuation in prices.

The priority among the raw materials needed by India is petroleum. Venezuela, Ecuador, Colombia, Argentina, Trinidad and Tobago and Cuba offer opportunities for acquisition of oil-fields. Bolivia, Trinidad and Tobago and Venezuela have large reserves of gas, which should be of interest to GAIL and other companies.

With the increase in demand for copper, India's imports from Chile jumped from $100 million in 2000 to $400 million in 2004. Indian companies should venture into copper mining in Chile, Peru and Bolivia. Latin American production is almost half the global output, and Chile is the world's largest producer.

Bauxite can be sourced from Brazil, Jamaica, Venezuela, Suriname and Guyana, which have large deposits. Latin American production accounts for one quarter of the world output.

Iron ore can be sourced from Venezuela, Brazil, Chile and Peru. Brazil is the largest producer, accounting for 22 per cent of global production. Venezuela, with proven reserves of over four billion tonnes, is easier for Indian companies to enter.

Venezuelan public sector undertakings are looking for partners for mining of gold and diamonds, among other minerals. India should make use of this opening.

There are opportunities for entering silver mining in Mexico (the largest producer in the world), Peru (the second largest), Chile, Bolivia and Argentina. Nickel is available from Cuba. Other minerals that can be sourced from the region include tin, lead, zinc, vanadium and bismuth.

India's imports of wood in 2003-04 were worth over $700 million and will increase. Indian companies are already importing wood from Colombia and Panama. Countries such as Chile, Argentina and Brazil offer land for commercial forestry. Indian companies can invest in this and bring back wood and paper pulp. At present, India's imports of pulp are over $1 billion per year. Brazil is the most competitive in wood and pulp production in the world. One hectare in Brazil produces 50 cubic metres of wood a year compared to 5 cubic metres in Scandinavia. The cost of production of a tonne of pulp is $120 in Brazil, while it is $400 in Scandinavia.

Agricultural land is available in Argentina, Chile and Uruguay. The cost of land in Argentina is about $1,000 per hectare, and land is available in large parcels of 1000 hectares.

These farms can be used for raising crops and cattle and soya oil, leather and wool can be brought back to India; these are now anyway imported from South America. India imported $485 million of soya oil from Argentina in 2004.

American and European companies and individuals own large farms and ranches, some of them over one hundred thousand hectares.

Indian entrepreneurs can tap the abundant availability of inexpensive oil and gas in Venezuela, Bolivia, Ecuador and Trinidad and Tobago, and inexpensive hydroelectric power in Venezuela, Brazil and Paraguay, to set up energy-intensive industries such as production of aluminium and steel in those countries and import the products into India.

China, which is in a similar situation to India, with much greater demand for raw materials, has acquired considerable assets in Latin America and is continuing to do so, systematically and aggressively. The Chinese President announced in November 2004 that $100 billion would be invested in the next 10 years in Latin America. Chinese imports from Latin America went up from $3 billion in 1999 to $22 billion in 2004.

It is encouraging to see that some Indian corporates, such as ONGC Videsh Ltd, Reliance, and the Essar and Jindal groups, have taken the lead in exploring the opportunities for acquisition of resources in Latin America. Others should follow.

The Exim Bank of India supports the acquisition of assets abroad with loans, equity participation, guarantees and advisory services. It has supported 122 foreign ventures by 100 Indian companies in 43 countries.

Three factors make the present moment opportune for the entry of Indian companies into the Latin America. At this time, the Latam countries are seeking foreign investment in the mining and other sectors for modernisation, increase in production and generation of employment. Not much investment has taken place in the last two decades because of the crises.

Second, companies from a developing country such as India would be more welcome than the multinational corporations which evoke memories of exploitation and political meddling. The Latin American governments are, therefore, consciously trying to diversify the sources of investment as well as markets for their commodities.

Third, the cost of assets in countries that have undergone devaluation of their currencies in recent years, such as Brazil, Venezuela and Argentina, are almost half what they were before the devaluation. It is, therefore, a good time to buy assets before the currencies strengthen.

(The author is with the Ministry of External Affairs. The views are personal. Feedback may be sent to rv@rviswanathan.com)

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