Commodity Imports
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 SA (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 SA (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, Petroleo Brasileiro Petrobras SA (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 [see also Top 5 Global Oil Stocks by Market Cap].
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 Global X Funds (NYSEARCA:BRAZ), iShares MSCI Brazil Small Cap Index (NYSEARCA:EWZS), Brazil Infrastructure Index Fund (NYSEARCA:BRXX), and the iShares MSCI Brazil Index (NYSEARCA:EWZ). Investors can also consider significant names like Cosan Limited (NYSE:CZZ) in ethanol, Gerdau SA (NYSE:GGB) in steel, and BRF Brasil Foods SA (NYSE:BRFS) and Adecoagro SA (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.
This article was originally written by Stephen D. Simpson, and posted on CommodityHQ.
