Oil will surpass iron ore as Brazil's second-largest export product in 2018, predicts AEB.

SAO PAULO (Reuters) - Brazilian oil exports are expected to rank second among the highest-value products in Brazilian shipments in 2018, driven by a sharp increase in prices, according to a forecast released Tuesday by the Brazilian Foreign Trade Association (AEB).

Revenue from Brazilian oil exports, second only to soybeans—which will occupy the top position for the fourth consecutive year—is expected to total around US$21 billion in 2018, as pre-salt production grows with new players beyond Petrobras.

Meanwhile, foreign exchange earnings generated from soybeans in 2018 were estimated at $28,3 billion.

The forecasts represent a sharp increase compared to the figures released by AEB at the end of last year, when the association expected shipments equivalent to $22,8 billion of soybeans and $16,5 billion of oil, respectively, for 2018.

Iron ore, which has been Brazil's second-largest export product in recent years, is expected to lose its position to oil, despite anticipated growth in extraction by Vale, the world's largest producer of the raw material for steel.

Iron ore shipments were projected at $19,2 billion for the year, virtually unchanged from 2017, but down from the previously forecast $20,4 billion.

Soybean and oil prices, in turn, have risen since AEB released its preliminary estimates for 2018, with issues related to a drought in Argentina, which decimated the neighboring country's harvest, not to mention that Brazil's harvest surprised and reached a record high — the country is the world's largest exporter of the oilseed.

More recently, prices in Brazil have been supported by a trade war between the US and China, which has also boosted shipments of the Brazilian product.

In the case of oil, an agreement to reduce production by major global producers boosted prices.

“In 2018, the concentration on the three main export products will grow even further, with soybeans, oil and iron ore reaching a record 30,5 percent, consolidating the high dependence on commodities in exports and the trade surplus…”, said AEB, in a statement released by its president José Augusto de Castro.

With the rise in soybean and oil figures, the association also revised its forecast for total Brazilian exports to $224,44 billion, versus $218,96 billion in the forecast at the end of last year.

Thus, AEB estimated a surplus of $56,31 billion, compared to $50,34 billion in the projection at the end of last year.

With the increase in the trade balance estimate, AEB now sees a smaller drop in the surplus compared to last year, of almost 16 percent, versus a 23 percent reduction projected at the end of last year.

According to AEB, the strong concentration of exports in commodities reinforces, with figures, "the imperative need for structural reforms to reduce the 'Brazil Cost' and generate competitiveness in manufactured exports."

"For the fifth consecutive year, Brazilian exports of manufactured goods will remain stagnant at levels below those of 2007, especially after the Argentine crisis that began at the end of the first half of the year," he said.

Among the ten main products exported by Brazil, nine are commodities and only one (automobiles) is manufactured.