A Look at Brazil's Commodities Exports2015-06-24
Due to better governance practices and a commodity boom, Brazil’s economy has enjoyed incredible growth over the past 20 years. The country is now the largest economy in Latin America and the seventh or eighth largest economy in the world depending upon the metric used.
On the other hand, while Brazil’s GDP per capita has improved, it still ranks at a relatively low 101st in the world – meaning that it is a large economy, but not an especially wealthy one yet (at least not uniformly so). Though 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 to the larger global economy (rankings as of 2014).
Mining is still a significant industry in Brazil, accounting for nearly 1.1% of GDP and approximately 1% of employment. Nearly 23% of the country’s exports consist of various minerals and metals, and Brazil is a leading producer of many key industrial commodities (data as of 2013).
Iron ore is the most significant of Brazil’s commodities. 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 in that year. In 2012, iron ore alone accounted for more than 13% of Brazil’s export value (with the biggest buyer being 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 (9th in the world as of 2010) [see also A Deeper Look At Australia’s Commodity Industry].
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 in 2010 Brazil produced 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 its well-developed mining sector could have room to expand its production of this precious metal.
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. It is the third-largest producer of bauxite in the world, behind Australia and China, and holds more than 10% of the world’s reserves (data as of 2014). Brazil is also the sixth-largest producer of aluminum in the world as of 2012.
Brazil is increasingly becoming a player on the global energy scene, with recent discoveries of massive oil and gas reserves off its coast. While these reserves could well make Brazil a major oil producer on a global scale, the country’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 [see also 5 Of The Biggest Oil Finds In History].
In terms of oil, Brazil is already the eleventh-largest producer in the world at approximately 2.7 million barrels per day. The country is also the world’s seventh-largest consumer of oil; it therefore has a net deficit of about 300,000 barrels per day. Nevertheless, oil exports do make up more than 8% of Brazil’s total (data as of 2013).
Brazil is not much of a player in coal, at least not on the production/export side. The nation did produce almost 7 million tons of coal in 2012 (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. It is presently the world’s second-largest biofuels producer, producing close to 15.8 million metric tons of oil equivalent in 2013 (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. As of 2014, approximately 16% of the Brazilian workforce was engaged in the agriculture industry, and about 32% of the country’s 2011 export earnings came from agricultural exports [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
Brazil is the world’s leading producer of sugarcane, soybeans, coffee, sisal, chicken meat, and oranges, and a major producer of other commodities such as papayas, tobacco, beef, pineapple, cashews, corn, and palm. In terms of exports, Brazil is the world’s largest exporter of sugar, producing about 20% of the world’s annual supply, and 50% more than India (data as of 2013).
In dollar terms, soybeans account for 7% of Brazil’s total exports, sugar/sugarcane contributes more than 6%, soybeans add 5%, and poultry and coffee contribute almost 3% each (data as of 2013).
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 ( ERJ)), but other sectors, such as 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 in 2012) and potash for its agricultural sector. In 2014, Brazil was the world’s third-largest importer of wheat and the ninth-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 produced nearly 80% of the country’s iron ore in 2013, Vale (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 (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 Brazil Mid Cap ETF (BRAZ), Brazil Small Cap Index Fund (EWZS), Brazil Infrastructure Index (BRXX), and the Brazil Index Fund (EWZ). Investors can also consider significant names like Cosan (CZZ) in ethanol, Gerdau (GGB) in steel, and Brasil Foods (BRFS) and Adecoagro (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 is 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: No positions at time of writing.