BrazilEU’s deforestation free law to hit leather profits of Brazilian slaughterhouses
Brazilian slaughterhouses will be affected by a law passed by the European Parliament in December of 2022 that aims to ban the import of leather linked to deforestation.
With Brazil the world’s largest exporter of beef, slaughterhouses are a key economic segment of the country’s economy. While the sale of beef is the main source of revenue for slaughterhouses, the sale of leather (a byproduct along gelatin) is also important for their profitability.
However, leather profitability for the sector is now coming under pressure, following the EU’s decision to pave the way for strict new regulation that forces companies to demonstrate due diligence showing their supply chains do not contribute to the destruction of forests like the Amazon.
According to a study from NINT, a Brazilian consultancy firm that is part of ERM, the new EU law will impact the margins of slaughterhouses, with the hit to profitability potentially in the double-digits.
The most vulnerable slaughterhouses are players operating with low margins, highly active in leather production, and a high exposure to the European market. Smaller slaughterhouses and tanneries that lack proper traceability of cattle will also be seriously affected.
“The new deforestation-free product regulation is likely to make many slaughterhouses in Brazil unprofitable and increase the risk of stranded assets in the sector,” stated the report’s authors on the back of quantitative scenario-modeling.
Slaughterhouses located in the states of Amazonas, Tocantins, Goiás, and Maranhão are more linked to the European market and are therefore more likely to be affected by the new regulation. These states represent 15% of the recent expansion of slaughterhouses in Brazil over the last ten years, which partly highlights the impetus for the new EU regulation in attempting to tackle deforestation in the region.
More downstream in the value chain, the report found that restrictions on leather exports are less likely to impact the bottom line of large meatpacking companies, such as JBS and Minerva.
With the European Union the second largest importer of Brazilian leather (around 22% of leather exports), NINT contends the impact will be felt across the sector. However, the researchers note that the sector is already exploring diversification strategies, meaning that leather products that will no longer accepted in the EU are shifted to other markets with looser environmental laws, such as China.
In response to Europe’s move, Brazil’s Foreign Ministry has expressed concern, in particular about the fact that unfavorable trade restrictions could be imposed unilaterally under the guise of environmental protection.
Deforestation concerns
Cattle production is undoubtedly fueling deforestation in Brazil, with 75% of cleared areas in the Amazon destined for cattle. A study from MapBiomas showed that of all deforested area in Brazil, 90% is used as pasture. Brazil has the largest cattle herd in the world, with around half of all production ending up as leather for furniture, vehicle upholstery, or clothing.
The EU’s list of commodities in scope for the EU deforestation-free products regulation spans cattle, wood, palm oil, soy, cocoa, and coffee (and their derivatives).
As a result, a number of sectors across dozens of countries will be impacted by the new law. Colombia and Indonesia, both of which export large amounts of land-intensive goods linked to deforestation (such as palm oil, coffee, and cocoa) have similarly to Brazil voiced their concern about the impact of the regulation.
