Brazil risks missing rare earths boom without industrial reforms

Brazil sits atop one of the world’s greatest mineral resources, but risks watching the technological revolution now underway from the sidelines, serving merely as a supplier of raw materials. With the world’s second-largest mapped reserves of rare earths, estimated at 21 million tonnes, the country has enormous strategic potential amid the global race for critical minerals, driven by the energy transition and artificial intelligence. Researchers at Fundação Dom Cabral (FDC), however, warn of a structural gap between Brazil’s geological potential and the State’s actual ability to lead an industrial policy in this direction.

For the experts, their skepticism stems from Brazil’s longstanding inability to overcome systemic constraints in its business environment. “It is difficult because Brazil’s economic environment is not conducive to industrial development. We have labor and logistics bottlenecks. For investors with the capacity to put money into the sector, the most pragmatic approach is to come to Brazil to extract rare earths and take them elsewhere for processing, to Paraguay, for example, where there is sufficient energy, cheaper land and better tax conditions for manufacturing,” said FDC professor Paulo Vicente Alves, a former deputy secretary for planning in Rio de Janeiro state.

“It is unlikely that Brazil will get out of this predicament without a complete overhaul of its economy,” Alves added. “It would have to pursue a strategy similar to the one China adopted back in the 1980s, creating special economic zones where, as a rule, a different set of laws would apply, instead of Brazilian legislation, to encourage the industrial processing of rare earths within the country. I see no appetite whatsoever in the government for doing that.”

Despite their skepticism, FDC researchers dismiss the risk that the country’s substantial mineral reserves across several regions could trigger “Dutch disease,” a macroeconomic phenomenon in which a commodity export boom drives up the national currency and undermines the competitiveness of other industrial sectors.

“For Dutch disease to occur, the rare earths sector would have to account for a significant share of Brazil’s economy, siphoning resources away from other parts of it,” said Carlos Primo Braga, an associate professor at FDC and a former director of economic policy and debt at the World Bank. “In Brazil’s case, Dutch disease is much more closely associated with what happened with the pre-salt oil reserves and the expansion of the oil industry. Brazil is a vast country, and the rare earths sector does not have that kind of weight,” he added.

In the experts’ view, the immediate risk is not excessive currency appreciation caused by an influx of foreign exchange from rare earth exports, but rather a repeat of the extractive model in which Brazil mines raw ore, exports it and later imports finished products or pays royalties for technological services developed abroad, without building its own processing capacity.

“The most likely outcome is that we will end up repeating what happened with our iron ore reserves. We are exporters, but we do not add value. One of Brazil’s problems is its chronic inability to move up the value chain,” Alves said.

He points out that the main bottleneck for any industrial policy involving rare earths and critical minerals is not mining or the discovery of deposits, but high-purity processing—a capital-intensive activity requiring massive scale that is dominated by China, which controls about 85% of processing capacity. To overcome this entry barrier, countries seeking to establish themselves in the sector face high setup costs and must compete with Chinese assets that have already been fully depreciated.

“Once a competitor has achieved scale, entering the market as a second mover means overcoming a very difficult barrier to entry. Can we start small? That doesn’t work. You either come in at scale or you don’t come in at all,” Alves said.

In Brazil’s case, the challenge of developing processing capacity is compounded by a domestic business environment that FDC experts describe as “hostile” to manufacturing. They cite chronic logistics and infrastructure bottlenecks, structural shortcomings in the training of skilled workers, high energy costs, and “dramatic” tax complexity, which places Brazil among the lowest-ranked countries in the World Bank’s Doing Business index.

“The main issue in Brazil is that the business environment remains one of the most challenging in the world. In the latest edition of the Doing Business report, Brazil ranked 124th out of 190 economies. In the specific area of taxation, it ranked 184th. That gives you an idea of how difficult it is to produce and export in Brazil,” Braga said.

According to the professor, Brazil’s institutional rigidity stands in contrast to the track record of Asian countries that led industrialization drives in the last century. While South Korea tied subsidies and government protection to strict benchmarks for international market access and performance, Brazil’s industrial policy has historically focused on the domestic market, shielding companies from inefficiencies without requiring them to compete globally in return.

“Looking at the growth experience of Brazil and South Korea from 1950 to 1980, industrial expansion in both countries was very similar. But the difference is that Brazil’s industrial policy has historically been inward-looking, focused on exploiting the domestic market. In South Korea, there were subsidies and protection, but subject to a very simple rule: favored industries had to perform in international trade to keep receiving incentives,” Braga said.

The FDC professors consider it unrealistic, given the current stage of Brazil’s economy, to aim to develop the entire supply chain, from rare earth mining to the manufacture of semiconductors and robots. Instead, they suggest that a viable approach would be to specialize in strategic stages of mineral processing and industrial production. This could mean focusing on specific niches in assembly, components, or strategic support services, in partnership with Western powers seeking to diversify their suppliers beyond China.

Both experts emphasize that Brazil should pursue the creation of “islands of efficiency,” such as Export Processing Zones (EPZs), which function as industrial districts designated as free-trade areas for international commerce. Braga noted that Brazil already has successful examples, including the Ceará EPZ, within the Pecém Industrial and Port Complex (CIPP), as well as special tax regimes that have benefited Embraer.

“How is it possible for Embraer to be the world’s third-largest aircraft manufacturer in a country like Brazil? It has a lot to do with the special treatment the company receives. About 60% to 65% of the value added in its sophisticated aircraft comes from imported foreign components. When those products arrive in Brazil, they are cleared for delivery to the factories within 24 hours. From Embraer’s perspective, Brazil operates like Singapore. For most Brazilian companies, however, it operates with extreme bureaucracy,” Braga said.

The Fundação Dom Cabral researchers concluded that the window of opportunity created by global demand for rare earths will not remain open while Brazil waits for slow-moving reforms. “I wish I could say otherwise, but I think it will be very difficult for Brazil to ride this wave in the right way,” Alves said.

• By Rafael Vazquez— São Paulo
• Source Valor International
• https://valorinternational.globo.com/