Discover Latin America’s fastest-growing major economy

Peru remains relatively unknown to most Australian exporters but all that will change when the Peru-Australia Free Trade Agreement (PAFTA) enters into force. Overnight, the cost of exporting Australian goods and services will drop as Peru eliminates tariffs on 93.5% of tariff lines, rising to 99% in five years.

All tariffs will be eliminated for Australian beef (within five years), dairy, wheat, rice, sheep meat, nuts, wine, pharmaceuticals, medical devices and machinery.

This means Peru will become a strong prospect for Australian exporters seeking to diversify their customer base and manage exposure to Asian markets. It also allows Australian degrees to be recognised by Peru, giving peace of mind to returning alumni.

The agreement creates opportunities for Australian companies in areas where Australia has real expertise and a strong international reputation for quality, such as mining equipment, technology and services (METS), food, education, agtech, transport solutions, and services and equipment for major sporting events.

Premium food on the menu

Anyone who has visited Peru will know it has one of the most exciting culinary scenes in the world. Two of the world’s top ten restaurants are in Lima, and the country has become a fixture of global food tourism thanks to the work of renowned chefs such as Virgilio Martinez and Pia Leon of Central, Mitsuharu Tsumara of Maido, and Gaston Acurio of Astrid y Gaston.

With four million foreign tourists visiting the country each year – a number expected to grow by 8% in 2018 – and 70% of visitors nominating gastronomy as their principal reason for visiting, Peru has a discerning consumer base that places a high value on quality food and beverage.

Beyond food service, there is strong interest in premium food at the retail level. Peru’s middle class numbers 13.4 million, defined as those earning between US$10–$50 per day. The middle class has grown by over 36% in less than a decade, supporting a 9% increase in food consumption per annum in recent years.

While 70% of food retail sales occur in cornerstores and markets, and 30% at supermarkets, this is set to change, with Peru ranked in the top 10 retail growth markets by research firm A.T. Kearney. As networks of shopping centres and associated supermarkets and food courts expand across Lima and in regional centres, supermarket (and fast food) sales are forecast to expand.

Three major supermarket groups account for 90% of supermarket sales – Cencosud, which owns Wong and Metro; Supermercados Peruanos, which owns Plaza Vea and Vivanda; and Saga Falabella, which operates Tottus supermarkets. Austrade has relationships with the import buyers at each of these supermarket chains. All have expressed interest in either Australian foods, beef and/or wine. Their customers are increasingly looking for healthier, “greener” foods and more convenience items. Previously, only those who could afford to travel could access these kinds of foods.

Food consumers are set to become more informed too, with the Peruvian Government expected to introduce a traffic light-style food labelling system, similar to Chile and Ecuador, indicating high sugar, fat and salt content.

Demand for dairy

Australian food producers should also look to areas where local demand is exceeding supply – in particular, dairy. Thanks to PAFTA, Australian producers will soon have the opportunity to enter the Peruvian market with tariff-free quota access for 7,000 tonnes of dairy into Peru (growing to 10,000 tonnes in 10 years). Sanitary import protocols for dairy are already in place with Peru’s biosecurity agency, SENASA.

The major producer of milk and dairy products in Peru is Grupo Gloria, which has about 75% of the market and is a major regional player, exporting to more than 40 countries. Other producers include local company Laive and Nestlé.

Peru’s demand for dairy products outstrips supply and the industry faces some significant logistical challenges due to Peru’s rugged geography. Local milk also tends to be high in bacteria and the poor cold chain logistics mean evaporated milk is the most commonly consumed dairy product in Peru.

Given supply constraints, manufacturers import milk powder and combine it with local fresh milk to produce evaporated milk, UHT milk, flavoured milk, yoghurt, butter and cheese. There is now greater scrutiny of dairy retail products since 2017 legislation designed to guarantee the quality of all dairy products and highlight their nutritional value. This regulation [1] establishes the minimum requirements that milk and each dairy product must contain, both for domestic and imported production, from packaging, transport to point-of-sale. This is expected to push up unit prices significantly and create opportunities for final product importers to satisfy the demand.

In terms of finished products, there are very few local cheeses produced on a commercial scale. Many cheeses are imported from Europe (France, Italy, Spain and the Netherlands), the US and New Zealand (Mainland brand). Consumption of cheese is expected to increase at a value CAGR of 4% at constant 2017 prices to reach A$400 million in 2022.

Good news for grain exporters

While Peru’s terrain lends itself to the production of Andean grains such as quinoa, traditional grains such as oats, wheat and rice, in which Australia excels, are not so widely produced. Oats are widely consumed for breakfast across the country and Peruvians are the highest per head consumers of rice in Latin America. They’re also keen consumers of bread, with sales of baked goods in 2017 estimated at $2.1 billion, up 1% compared to 2016. Peru also has the largest consumption of panettone per capita outside of Italy, eaten both at Christmas and on the independence day at the end of July, in addition to being given as gifts throughout the year.

A taste for beef

There is also an opportunity for Australian meat producers to enter the Peruvian market given its reliance on imports, especially at the high-quality end of the market. Beef imports have been growing steadily to 2017, at just under US$23 million (CIF), up from US$11.5 million in 2009, according to Peruvian import data.

The US Free Trade Agreement has already driven an expansion in imports of premium beef, which rose from US$6.79 million in 2015 to US$7.8 million in 2017. PAFTA grants Australian beef exporters the most immediate competitive benefit.

Austrade has received preliminary expressions of interest from two of the country’s leading supermarket chains in purchasing beef. Several members of Peru’s national association of refrigerated goods (ASIPAR), whose members account for around 70% of beef imports, have also expressed interest.

A desire to learn

Education remains a key growth sector. There were 1,712 Peruvian students in Australia during 2017 and collaboration is ongoing across a range of institutions. Industry-related training, especially in mining, and the burgeoning demand for locally delivered English language training, offer opportunities for Australian providers willing to consider offshore and online delivery. A new Centre of Best Practice in Mining and Resources (modelled on examples from South Australia, Queensland, Canada and Chile) was recently established.

Agtech on the agenda

Peru is a major horticultural exporter, particularly of asparagus, avocado, grapes, and citrus, traditionally to the US and Europe and more recently, to parts of Asia. Exports are currently valued at US$6 billion, and forecast to reach US$10 billion by 2021.

As Peru seeks to expand production and move up the value chain to meet the expectations of sophisticated consumers in export markets, it will need strong traceability systems, as well as minimise pesticide and herbicide usage, reduce water consumption, increase yield and use data to better manage production. Australia is already supplying ovine and bovine genetic material to Peru to increase the quality of the national herd, and pasture seeds and fertilizers to improve production.

Getting ready for the Pan American Games

Lima will host the Pan American Games in 2019, the fourth largest sporting event in the world. Approximately 15 Australian firms have been actively soliciting contracts, with several more Australian consultants working under the British Government to Government arrangement with the Peruvians to supply services and build the capacity of the local Organising Committee (COPAL). The President of COPAL and his Chief Advisor visited the Gold Coast in April to observe the operations of the Commonwealth Games.

Interest in transport solutions

Several developments in transport over the past year have expanded Australia’s interests in the sector in Peru. IFM Investors purchased the interests of OHL Concesiones, specifically the Red Vial IV toll road that is part of the Panamericana Highway. Yojee, an Australian technology company using artificial intelligence (AI) and blockchain technology for regional freight networks, concluded a deal with Peruvian logistics firm Scharff, while Reynolds Soil Technologies (dust reduction solutions) won a contract with Lima’s Jorge Chavez Airport. Heavy haul transport solutions and rail safety technologies have good prospects in Peru due to the need to transport mineral exports to ports, and get tourists to major sites. Offroad accessories are also in demand due to Peru’s challenging terrain. Australian brands ARB and Old Man Emu, among others, have a presence in the market.

Mining gets a boost

Established trading relationships also receive a boost from PAFTA. Peru’s mining sector knows and respects Australia’s mining expertise. Australian METS products are seen as the benchmark in terms of innovation, safety, performance, lifespan and quality. When PAFTA comes into force, providing duty-free access for Australian mining machinery, equipment and parts, it will help make premium-quality Australian products an even more accessible and cost-effective proposition.

Australian Export Award winner, Hedweld Group, is a great example. Hedweld has been exporting mining and earthmoving products to Peru for the past six years. Peru is the largest importer of Hedweld’s Trilift products globally, and when PAFTA comes into force, Hedweld’s costs will be reduced, as will those of its Peruvian customers. Groundprobe, which was recently taken over by Orica, is another great example. With the PAFTA signing, both companies aim to expand their business in Peru even further.

Hofmann Engineering is opening a A$12 million new workshop in the southern Peruvian city of Arequipa in coming months, while Deswik, a supplier of mine visualization and scenario planning tools, opened an office in Lima in August 2018 following its participation at PeruMin in 2017.

As global metals and minerals prices expand, investment is flowing and new mine construction and expansions of existing mines are signalling opportunities for Australian METS, including projects such as Marcobre’s Mina Justa project and Anglo American’s Quellaveco. Key areas of demand relate to automation, underground, skills, mine closure, water in mining, and social licence.

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