Chris Mayer

Stefan Zweig pegged it right after all. In the late 1930s, the Austrian playwright and writer sought relief from war-torn Europe and settled in Brazil. He loved it. In 1941, he moved there and wrote his book Brazil: Land of the Future. Brazil, he thought, “was destined to become one of the most important factors in the development of our world.”

Brazil impressed Zweig with its enormous size — it is bigger than the continental U.S. — and impressive landscapes. He also saw what many saw before him. “Here lies immeasurable wealth of soil that has never been plowed or cultivated,” he wrote, “and beneath it are ores, minerals and natural resources that have not in the least been used up nor even extensively explored.”

And so it remains today. As I say, Zweig was not the first to find charm in these sunny lands. A long line of travelers and adventurers have said much the same thing. But it took a long time to get going, so much so that it became a joke: “Brazil, the land of the future and always will be.”

Still, natural resource booms did help settle and build Brazil, as Zweig observes. Booms in lumber, sugar and cotton settled the north and created Bahia, Recife, Olinda, Pernambuco and Ceará. Gold settled Minas Gerais. Coffee raised São Paulo. Rubber gave life to Manaus and Belem. And on and on…

Today, though, Brazil seems to be putting it all together and the old joke has gone stale. Brazil is the leading exporter of a long list of agricultural commodities. Then there are the big oil discoveries off its coastline. And there is the ample soil and water, as I’ve written about before. Brazil’s net debt is at a level that in the words of the Financial Times, “makes much of the developed world green with envy.”

Meanwhile, unemployment is low. The economy is growing 8–10% a year. Poverty from 2004–08 fell by half. Meanwhile, a growing middle class continues to make its presence felt — retail sales rose 30% in March alone. “There’s nowhere else in the world that’s had the dramatic change in the middle class like Brazil, not even China,” says one analyst quoted in The Wall Street Journal recently. “You’ve got an unfathomable amount of money there.”

So what are the investment opportunities in Brazil today? I’ll have a better handle on things in the coming months as I spend some time down there. But I have some initial thoughts to share here.

For a long time, Brazil was not a place to trust with one’s money. But the rules these days are friendlier for investors. Yes, the laws are still complicated and taxes are still high. Labor laws are still outdated and often inflexible. Overall, Brazil is still not a great place to do business. It ranks 129 out of the 183 nations tracked by the World Bank. Yet it still has come a long way. As one partner at a leading international law firm put it, “For the first time in the history of Brazil, we have an excellent environment for investment.”

There are plenty of places to look for those investments. Where are the needs most critical? In a word: infrastructure.

Sewage facilities are inadequate. The FT opines that here the “need for investment is perhaps greater than any other sector.” While some 80% of Brazilians have access to clean water, less than half have access to a sewage system. And Brazil treats less than a third of its wastewater.

Roads are notoriously bad. Only 10% or so are even paved. As a result, freight costs eat up a third of the value of what’s shipped. Sometimes, the freight never arrives. Recently, a McDonald’s had to go a day without serving french fries because the supply truck never made it in. The roads affect most everyone since the roads handle some 68% of Brazil’s transport needs.

The ports and rail links also feel the strain of a booming economy. Brazil’s biggest port, at Santos near São Paulo, handles only a 10th of the traffic of big Asian ports like Hong Kong.

Brazil Needs Lots of Steel

Another way to see these claims of weak infrastructure is to look at Brazilian steel use, which is very low. Brazilians consume only about 100 kilograms of steel per person. That number has barely moved since 1980! The Chinese consumed 30 kilogram of steel in 1980 and now consume 300 kilograms per person. European countries often top 500 kilograms. South Koreans use 1,200 kilograms per person! So there is a lot of room for steel consumption to grow in Brazil.

Lakshmi Mittal, the CEO of the world’s largest steel company, summed it up well. “The level of consumption is well below the country’s potential. It also indicates a lack of infrastructure investment in the last two decades.”

Some of this is in the process of being fixed. Brazil has a huge port in the works near Rio, called Acu Super Port. It is a mammoth project — nearly two miles long, it will hold 10 deep-water berths. Brazil also has plans for more roads, a high-speed rail line between São Paulo and Rio and more.

The best way to invest in rising Brazilian steel use is through native companies. That’s because the Brazilians are among the lowest-cost producers of steel in the world. Brazil sits on some of the lowest-cost and highest-grade iron ore and coking coal deposits in the world. Power costs are low thanks to hydropower, which provides four-fifths of Brazil’s electricity. And the relative isolation of the Brazilian market from other big steel producers gives the home team a big advantage in freight costs.

The only tricky thing is the Brazilian real, a currency that has been strong of late and raises the cost of Brazilian steel. (We are a far cry from 1990, when Brazilian inflation peaked at 2,950%!) Finally, and somewhat ridiculously, Brazil still has import duties on steel.

Another fact that bodes well for steel use: Energy consumption is also remarkably low. Brazil consumes about 1.2 tonnes of oil equivalent per capita per year. That’s less than half what Portugal and Poland use. And they are among the poorer members of the EU. The U.S. uses 7.8 tonnes. Building a new and needed energy infrastructure for Brazil’s expanding economy will consume a lot of steel.

Steel is just one idea, but there are many other sectors to invest in in the country. From a big-picture standpoint, it’s hard not to like Brazil. As Zweig wrote, “In its geology, this gigantic empire lacks hardly any kind of ore, stone or plant.” Finally, it looks like Brazil is taking advantage of its space. (Things would end badly for Zweig, though. Even Brazil couldn’t beat back the demons. He committed suicide in Brazil in 1942.)

Chris Mayer
Whiskey & Gunpowder

August 11, 2010

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents. 

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  • Mike Egan

    “Energy consumption is also remarkably low. Brazil consumes about 1.2 tonnes of oil equivalent per capita per year. That’s less than half what Portugal and Poland use. And they are among the poorer members of the EU. The U.S. uses 7.8 tonnes. Building a new and needed energy infrastructure for Brazil’s expanding economy will consume a lot of steel.” Brazil and steel – interesting scenario for the global commodities market. This blog is great!

    Mike Egan
    Trading Futures

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