Investing in Brazil

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This article describes a geographic region that covers various exchanges, currencies, indices and stocks. View articles referencing this region.

 

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Michael Luddy

Philip Rosenstein

Brazil is the largest economic power in Latin America and the 10th largest country in the world by GDP .^[1] Over the last decade Brazil's agribusiness and domestic production has increased 47% and 32.3%,^[2] respectively, and the economy as a whole grew 5.4% in 2007.^[3] Record prices in the country's key commodities such as orange juice and soybeans, in addition to direct foreign investment upwards of $37B in 2007^[4] have been key drivers of the Brazilian economy. Bovespa, the exchange in Sao Paulo, has grown almost 300% between January 2004 and Jan 2008.^[5] The number of new IPO's in the first half of 2007 outnumbered all of the new IPO's in 2006.^[6] About 70% of the money raised for new IPO's came from foreign investment.^[7]

Brazil is the world's largest exporter of ethanol and the largest producer of sugar cane.^[8] However, new oil discoveries could launch Brazil into the world oil stage as well. Its Tupi field discovery is the largest since 2000 - Petrobras, Brazil's leading oil exploration and production company, said the field could produce 5-8 billion barrels of oil.^[9] Another discovery, known as the Carioca-Sugar Loaf, could be as large as 33 billion barrels according to Brazil's National Petroleum Agency. That would be the 3rd largest discovery in history and, combined with the Tupi field, would launch Brazil to the 8th position in world oil production.^[10]

Brazil's agricultural, mining, manufacturing and service sectors are among the largest and most developed in Latin America. Brazil does however, have serious social issues, with violence common in the major cities. With 31% of the population below the poverty line and the Gini index number (used to describe the distribution of income) at around 56.7 there are still many issues that need to be resolved before Brazil can become a completely stable economy.

Major Brazilian Companies

Energy lol smart lil jay -Petrobras (PBR) is the primary oil exploration and production company, the biggest Latin American Company and eleventh of the 10th largest companies by market capitalization in 2008.

-CPFL Energia S.A. (CPL) is one of the major utility companies.

-Companhia de Gas de Sao Paulo (CGAS5-BR), a.k.a. Comgas, is the largest natural gas distributor in the country.

-Centrais Eletricas Brasileiras SA (CAIGY), a.k.a. Eletrobras, owns the country's three nuclear power plants.

Industrial

-Cia Vale do Rio Doce (RIO) is the 2nd largest mining company in the world.

-Gerdau S.A. (GGB) is the largest steel producer in the country.

-Companhia Siderurgica Nacional S.A. (SID) is a steel producer.

Banking

-Banco Bradesco Sa (BBD) is the third largest bank by assets

-Banco Itau Holding Financeira SA (Holding Co) (ITU) recently became the largest bank in Brazil after a merger with Unibanco Brasileiros S.A. (UBB)

-Unibanco Brasileiros S.A. (UBB) recently merged with Banco Itau Holding Financeira SA (Holding Co) (ITU)

-Banco do Brasil (BBAS3.SA-BR) is the second largest bank by assets

Telecommunications

-Tele Norte Leste Participacoes S.A. (TNE), a.k.a Oi, is the largest fixed line telephone company in Brazil.

-Brasil Telecom Participacoes S.A. (BTM)

-Tele Norte Celular Participacoes S.A. (TCN)

-Telecomunicacoes de Sao Paulo S.A. (TSP)

Retail

-Companhia Brasileira de Distribuicao (CBD)

-Globex Utilidades S.A (GLOB3.SA-BR)

Aircrafts

-TAM S.A. (TAM) is Brazil's largest airline.

-Gol Linhas Aereas Inteligentes S.A. (GOL) is the second largest airline.

-Embraer-Empresa Brasileira de Aeronautica (ERJ) makes civilian and military aircraft.

Foreign Companies Invested in Brazil

-FIAT S.p.A. (FIA) accounts for 24.8% of Brazil's automobile industry and 10.5% of its sales comes from Brazil, Argentina, Uruguay, and Paraguay.

-L'oreal (LRLCY) generated 30% of its revenues from emerging markets, a significant portion of which is attributable to Brazil. Emerging market growth also made up 60% of the company's revenue growth in 2007. Other cosmetics companies like Unilever NV (UN) and Avon Products (AVP) are also major players in the Brazilian market.

-BG Group (BRG) owns 60% of Comgas, Brazil's largest gas utility.

-Arcelor Mittal (MT) acquired a 70% share of Manchester Tubos e Perfilados S.A. and has a 50% partnership with Gonvarri Brasil.^[11]

- Ocean Wilson (LON:OCN) is a Bermuda based investment Company and through its subsidiary, Wilson Sons (Wilson Sons BDR) (SAO:WSON11), operates maritime services in Brazil. Wilson Sons is the largest provider of towage services in Brazil, the third largest container terminal operator in Brazil and operates a range of other growing maritime and inland logistics services.

Exchange Traded Funds

• IShares MSCI Brazil Index Fund (EWZ)

• iShares MSCI Brazil (IBZL-LN)

Trends and Forces

Commodities are Driving the Economy

Brazil’s economy is being driven by record prices in some of its key commodities.

Orange Juice

• Between Jan 2005 and June 2007, orange juice prices rose about 40%.^[12]
• Cutrale is Brazil’s largest orange juice producer and is responsible for 1 in 4 glasses of orange juice in the world. Cutrale accounts for 40% of Brazil’s orange juice processing.^[13]

Soybeans

• Brazil is the world’s largest exporter of soybeans^[14]
• The price of soybeans has about doubled since the start of 2007.^[15]
• Bunge (BG) is the primary supplier of fertilizer for Brazil.^[16]

Sugar Cane

• Brazil accounts for 25% of the world’s raw cane and refined sugar exports. Brazil produces about 150% more than India, the second largest producer in the world.^[17]
• Brazil’s ethanol production does not come from corn, but rather from sugar cane. Brazil is the second largest producer of ethanol in the world.^[18]
• Cosan Limited (CZZ) is the largest sugar company in Brazil and one of the largest ethanol companies in the world.

New Discoveries Could Make Brazil a World Oil Power

In 2007, Brazil produced about 12 billion barrels of oil, which is about 1% of world production.^[19] However, the discovery of Brazil’s Tupi field is the largest in the world since 2000.^[20] Petrobras, the company that discovered the field, expects it to produce between 5 and 8 billion barrels of oil. ^[21] While the Tupi field is large, reports of a discovery from Brazil’s National Petroleum Agency (ANP) could potentially blow the Tupi field out of the water. The discovery, known as the Carioca-Sugar Loaf, could be as large as 33 billion barrels according to ANP. That would be the 3rd largest discovery in history and, combined with the Tupi field, would launch Brazil to the 8th position in world oil production.^[22]

Brazil is the largest exporter of ethanol^[23] and, with discoveries like the Tupi field, could become a major exporter of oil. However, Brazil itself is largely energy independent and gets 80% of its electricity from hydroelectric power^[24] while importing only 9% of the oil it consumes.^[25] In addition, Eletrobras, a Brazilian energy company, has two nuclear energy plants and plans to add a third by the end of 2008. Combined, the three plants will have a capacity of 5000 megawatts or about 8% of Brazil's electricity consumption in 2007.

Brazil is the Largest Exporter of Ethanol

Brazil supplied 42% of the world’s ethanol that was used for fuel in 2006. Brazil’s ethanol is derived from the country’s vast sugar cane supply and, in addition, ethanol from sugar cane produces 8.2x the amount of energy it takes to make (corn produces 1.5x).^[26] Demand for ethanol exports comes primarily from the US and the EU which together made up over 50% of Brazilian ethanol exports in 2007. Internally, Brazil’s ethanol demand has surged due to government mandates that require ethanol to be used as fuel for its cars. In 2007, 71% of cars manufactured in Brazil used ethanol in either an all ethanol or flex fuel (blend of ethanol and gasoline) design.^[27] In fact, going forward about 90% of new cars in Brazil will run on a flex fuel engine.^[28] This dependency on ethanol rather than oil, has buffered the automobile industry in Brazil from the rising world oil prices. The primary automobile manufacturers in Brazil are Fiat, Volkswagen, GM, and Ford.

The Perfect Cosmetics Market

Brazil has become the 4th largest cosmetics market in the world, but unlike countries like the US and Japan, Brazil has had double digit growth every year since 2002.^[29] The primary reason for Brazil’s budding cosmetics market is its ideal demographics, at least in the eyes of a cosmetics company. There are more women than men in Brazil and, on top of that, Brazil’s population is getting older. In Rio de Janeiro, for every 100 women there are only 86.4 men.^[30] Brazil’s birthrate has dropped to about 2, which is just below replacement, and, at the same time, life expectancy has increased from 68.9 to 72.4 in the last decade.^[31] Research by L'Oreal has shown that the largest consumers of cosmetics are 1) women, of course, and 2) people between the ages of 40 and 70, in particular the 55-59 age group.^[32] Cosmetics in maturing major markets like the US and Western Europe have been declining or flat over the past few years. As a result, Brazil’s ideal demographic has attracted major cosmetics companies from abroad and has developed a few at home – Natura Cosmeticos, O Boticario, and Agua de Cheiro being the largest.^[33] In 2007, 60% of L’Oreal’s revenue growth came from emerging markets, which includes Brazil.^[34]

References

1. ↑ Wikipedia:Economy of Brazil
2. ↑ Wikipedia:Economy of Brazil
3. ↑ The Economist, An Economic Superpower and now Oil too
4. ↑ Resource-rich Brazil has plenty to offers investors
5. ↑ Bovespa on Yahoo Finance
6. ↑ The View from Cloud Nine
7. ↑ The View from Cloud Nine
8. ↑ Wikipedia:Economy of Brazil
9. ↑ The Economist, More Bounty
10. ↑ The Economist, More Bounty
11. ↑ ArcelorMittal Reinforces Its Steel Service Center Network in Brazil
12. ↑ Orange Juice Futures
13. ↑ How Brazil Became the Saudi Arabia of Orange Juice
14. ↑ Wikipedia:Economy of Brazil.
15. ↑ CBOT Soybean Prices
16. ↑ The Brazilian Sugar Companies
17. ↑ Wikipedia:Economy of Brazil.
18. ↑ Wikipedia:Economy of Brazil.
19. ↑ The Economist, More Bounty
20. ↑ The Economist, More Bounty
21. ↑ The Economist, More Bounty
22. ↑ The Economist, More Bounty
23. ↑ Wikipedia:Economy of Brazil
24. ↑ Resource-rich Brazil has plenty to offer investors
25. ↑ Wikipedia:Economy of Brazil
26. ↑ The Economist, Lean, Green, and Not Mean
27. ↑ Wikipedia:Ethanol Fuel in Brazil
28. ↑ Brazil Automakers Raise Sales Forecast for 2008
29. ↑ Brazilian Cosmetic Market Booming
30. ↑ The Granny from Ipanema
31. ↑ The Granny from Ipanema
32. ↑ Oppenheim Research, Reinitiating Coverage, pg.27
33. ↑ Best Face Forward: Brazil's Homegrown Cosmetics Companies
34. ↑ Oppenheim Research, Reinitiating Coverage, pg.3