Prices Rise In Brazil As Country Develops Steadily

Includes: EWZ, GFA, PBR, VALE
by: Mary Daniel

Brazil's Energy Minister Edison Lobao reportedly stated recently that the country needs to raise fuel prices, although a formal decision has yet to be made. In June the state-run fuel company Petrobas (NYSE: PBR) raised prices for diesel and gasoline. In July it raised prices for diesel again. These raises were in an effort to fund its $237 billion investment plan that runs through 2016. Higher costs of imported fuel and the weakness in Brazil's currency led to Petrobas' first quarterly loss in 13 years for the second quarter. Analysts were expecting a profit as opposed to the $667 billion loss. Domestic output fell 2.4% year over year as Petrobas conducted maintenance work and closed some wells. The price increases are expected to bring Petrobas back into profitability.

But it is not just Petrobas. Brazilian consumer prices rose in July and companies such as Vale (NYSE: VALE) and Gafisa (NYSE: GFA) have been leading the charge alongside Petrobas. July's inflation reversed a trend of declining inflation that's taken place since September. Vale has also had some problems recently. The current global economic outlook has reduced prices for iron ore and nickel, causing the company to continuously review its investment plans for 2012. Vale is currently the world's largest iron ore producer and exporter. Currently China counts for around one-third of Vale's sales. Brazil's recent healthy inflation rates will only help the miner draw higher revenues and provide a more consistent cash flow.

The homebuilder Gafisa already appears to be in the middle of a turnaround. In the past year Gafisa was down 72.89%. However, with the company's performance under new management both net income and revenue rose significantly in the first quarter. Also, with inflation continuing at a steady pace and infrastructure on the rise, Brazil's housing market is already a success. The Brazilian government has lowered rates and is forcing banks to offer more loans, making credit more available and affordable. All the while Gafisa itself continues to improve. Sales velocity increased from 10% to 16% over the last three months and the company's cash increased by 8%.

The decisions being made by the Brazilian government only appear to be helping Brazilian companies. Raising fuel prices will offset import prices for Brazil. The steady rise in inflation will assist Vale in returning profit from its overseas customers. Low interest rates are helping Gafisa turn their company around. Brazil has been making great strides recently on cleaning up the favelas, or slums, in their largest cities. They are weeding out the criminals and bringing infrastructure into new areas. It would appear they are aiming to assist Brazilian businesses as well. Still considered an emerging market, Brazil is developing at a steady rate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.