by Stephen D. Simpson
Due to better governance practices and a commodity boom, Brazil's economy has enjoyed incredible growth over the past 20 years. Brazil is now the largest economy in Latin America and the sixth or seventh largest economy depending upon the metric used. On the other hand, while Brazil's GDP per capita has improved, it still ranks at a relatively low 64th in the world - meaning that it is a large economy, but not an especially wealthy one yet (at least not uniformly so). While Brazil has made a concerted effort to build up its manufacturing sector (and reduce the risk of being trapped as a commodity-driven economy), minerals, energy and agriculture are still very significant to the Brazilian economy, as well as the larger global economy.
Mining is still a significant industry within Brazil, as it accounts for nearly 4% of GDP and about 6% of employment. Nearly 20% of the country's exports consist of various minerals and metals, and Brazil is a leading producer of many key industrial commodities.
Iron ore is the most significant commodity with Brazil. The country produced over 370 million tons of iron ore in 2010, making it the third-largest producer in the world (after China and Australia). Iron ore alone is more than 15% of Brazil's export value (with about half of it going to China), and most of it is mined in the three states of Minas Gerais, Maranhao and Para. While Brazil is best known for its iron ore exports, it's also a large and increasingly significant producer of steel (currently #10 in the world).
While iron's importance to the global steel trade is well known (as is Brazil's importance in the iron trade), much less well-known is niobium. Niobium is used in a variety of steel and nickel alloys, particularly those that need to resist considerable heat and mechanical stress. Niobium doesn't leap off the page in terms of dollar contributions to Brazil's exports, but Brazil currently produces more than 90% of the world's supply.
In terms of export value, gold comes next after iron ore for Brazil. The country isn't a major gold producer (55 tons in 2011 was good for 13th place in the world), though the fact that its reserves are the 7th-largest in the world suggests production could still increase from current levels.
Brazil also produces a significant amount of other industrial metals and minerals. Although Brazil is not a top-10 producer of copper, it does find a place among the country's top mineral exports. Brazil is the third-largest producer of bauxite in the world (and holds more than 10% of the world's reserves) behind Australia and China, and is the sixth-largest producer of aluminum.
Brazil is increasingly becoming a player on the global energy scene, with recent discoveries of massive oil and gas reserves off Brazil's coast. While these reserves could well make Brazil a major oil producer on a global scale, Brazil's status in biofuels (especially ethanol) has a much longer history and adds a few unique elements to Brazil's status in the global energy market.
In terms of oil, Brazil is already the ninth-largest producer in the world at about 2.7 million barrels per day (and #13 with 2.1 million barrels per day of crude production). Brazil is also the world's sixth-largest consumer of oil, so the country actually had a net deficit of about 100,000 barrels per day in 2011. Nevertheless, oil exports do make up more than 8% of Brazil's total.
Brazil is not much of a player in coal, at least not on the production/export side. Brazil does produce more than 6 million tons of coal (primarily from mines in Rio Grande do Sul and Santa Catarina), but must import a significant percentage of its needs. Brazil is also not presently a large player in natural gas, either as a producer or consumer. With those offshore discoveries significantly boosting reserves, though, this could change, provided that other countries build the necessary LNG infrastructure to allow for easier importation of natural gas.
Unlike most countries, ethanol features prominently in Brazil's energy outlook. With a climate that is very nearly perfect for sugarcane, Brazil has been among the most aggressive countries in mandating and promoting ethanol use as a light vehicle fuel. Brazil is presently the world's second-largest biofuels producer, producing close to 6 million gallons in 2011 (largely ethanol). Due in part to strong internal demand, but also import restrictions in countries like the U.S., Brazil exports less than 10% of the ethanol it produces.
Brazil is also a major player in global agricultural production. About 20% of the Brazilian workforce is engaged in agriculture, and more than a quarter of the country's export earnings come from agricultural exports.
Brazil is the world's leading producer of sugarcane, pineapples, cashews, coffee, sisal and oranges, and a major producer of other commodities like papayas, tobacco, beef, soybeans, corn, chicken and palm. In terms of exports, Brazil is the world's largest exporter of sugar. Brazil produces about 20% of the world's annual supply, and 50% more than India. Brazil is also the world's leading exporter of chicken and coffee, and the second-largest exporter of soybeans behind the United States.
In dollar terms, sugar/sugarcane contributes more than 6% to Brazil's export totals, with soybeans contributing 5%, and poultry and coffee contributing almost 3% each.
As is common for economies heavily dependent upon commodity exports, Brazil's imports are weighted towards products like machinery, electrical equipment and computers. Brazil has made a concerted effort to build up industries like aircraft assembly (Embraer (NYSE:ERJ)), but other sectors like electronics and heavy machinery have been slow to develop in comparison to the efforts of countries like China.
In terms of commodity imports, Brazil is a significant importer of coal (nearly 20 million tons of met coal for its steel and iron industry) and potash for its agricultural sector. Brazil also is the world's third-largest importer of wheat and the seventh-largest importer of rubber. On balance, though, Brazil generates substantial surpluses in the mineral and agricultural trade.
Stocks/Funds To Play Brazil's Strengths
Given the importance of iron ore to Brazil's economy, and the fact that it produces nearly 80% of the country's iron ore, Vale (NYSE:VALE) is a logical stock to consider for playing Brazil's commodity economy. For similar reasons, including its sizable claims to those offshore oil and gas discoveries, Petrobras (NYSE:PBR) is also well worth a look. Investors should note, though, that there is considerably more involvement from the Brazilian government in these companies' businesses than investors may want - the Brazilian government has in the past forced through management changes, new tariffs and taxes, and other policy mandates to arrive at socially/politically desirable goals.
Beyond these two preeminent Brazilian commodity companies, there are numerous other worthwhile options as well. ETFdb lists at least 15 ETFs with weightings of 50% or more to Brazil, including the Brazil Mid Cap ETF (NYSEARCA:BRAZ), Brazil Small Cap Index Fund (NYSEARCA:EWZS), Brazil Infrastructure Index (NYSEARCA:BRXX), and the Brazil Index Fund (NYSEARCA:EWZ). Investors can also consider significant names like Cosan (NYSE:CZZ) in ethanol, Gerdau (NYSE:GGB) in steel, and Brasil Foods (NYSE:BRFS) and Adecoagro (NYSE:AGRO) in agriculture.
Trends/Developments To Watch
Despite the efforts of the Brazilian government to develop its manufacturing and service sectors, it is likely that the commodity-driven segments of its economy will continue to be significant contributors for some time to come. While arguments about the future demand for iron ore in countries like China are certainly relevant to Brazil's outlook, it seems harder to imagine that demand for foodstuffs are going to decline significantly.
Investors should keep an eye on political developments within the country. The government has used its influence in the past to redirect Vale's overseas exploration activities, and likewise continues to impact Petrobras through various laws, rules and taxes pertaining to oil exploration, refining and retailing. While these moves do not seem to have impaired the long-term growth of either company, this level of involvement (or interference, as some would call it) will concern some investors.
Disclosure: Author owns share of Brasil Foods (BRFS).