Flip-Flops-On-The-Ground Research

“Brazil is blessed with enormous reserves of the metals and minerals essential to modern manufacturing… Coal may be the only substance vital to industrial production that is in short supply.”

~ Larry Rohter, Brazil on the Rise: The Story of a Country Transformed

As I write, I’m in Florianopolis, the capital of the state of Santa Catarina, in southern Brazil. “Floripa,” as it is known, is on the landward side of an island, where it can shelter ships from the brunt of the Atlantic Ocean’s powers. Our guide tells us that Portuguese colonists settled here in the 17th century, looking for gold.

They didn’t find gold, but Floripa has become a favorite spot for wealthy Brazilians. We are staying at a resort on Jurere Beach, which is one of 42 beaches on this 200-square-mile island. Jurere is the best one, apparently, having won a number of awards. Jurere is where the rich stay when they come, and we saw some monster houses that looked like beached cruise ships — one even had a helipad.

This is the southernmost part of our four-city tour through Brazil. We came to Floripa to look at a new project by a group called Txai (pronounced “chai,” like the tea). It is a spectacular piece of property. This project will be open to individuals to buy bungalows, lofts and more.

In the video below, Barb Perriello and I do some boots-on-the-ground investing — or, in this case, flip-flops on the ground — as we check out the views on our way to the beach:

But our topic today is fertilizer. In Sao Paulo last week, I gave a short presentation to a group of readers about a few attractive Brazilian investment themes. I talked about the expanding middle class, which is driving the need for new housing. I talked about Brazil’s dominant position in the global meat trade. I also talked about the case for hard coking coal (also known as met coal)…and about fertilizer.

Brazil, like most emerging markets, needs much more fertilizer than it produces for itself.

Fertilizer demand is also soaring throughout all the large emerging markets. Companhia Vale Do Rio Doce, “Vale,” (NYSE: RIO) is a large Brazilian company that offers a glimpse into Brazilian demand for both coal and fertilizer.

Last Friday, Vale announced that it planned to sell its fertilizer assets in an IPO in the first half of 2011. (Vale will likely retain a stake in the company, but how much is not clear yet.) Vale Fertilizantes, which is the name of the new fertilizer company, will hold all of Vale’s fertilizer assets. Vale is doing this to create value for Vale shareholders by drawing more attention to these things, which are the second biggest revenue generator for Vale, after its more famous iron ore mines.

Vale Fertilizantes has many of Brazil’s best fertilizer assets, which is key because Brazil also imports most of its fertilizer needs. Take a look at this chart:

You can see that Brazil depends on the rest of the world for its fertilizer needs, which keep its mighty agricultural production humming. In particular, note the lack of domestic potash, with 93% of Brazil’s needs coming from outside of the country.

Vale has some good assets outside of Brazil, too. It has, for example, the Bayovar mine in Peru (a joint venture with Mosaic), which is one of the largest phosphate deposits in South America. It also has potash projects in Saskatchewan and Argentina (though I’m not sure how good its deposit is in Argentina. I have my doubts).

In any event, I’m fascinated by the IPO and will keep you posted. Investors may soon have another choice in potash producers. Vale is looking to boost its production of potash tenfold by 2017, which would put it behind only PotashCorp and Mosaic.

In a bigger-picture sense, both of these commodities fit under a broader theory that you will do well to invest in the commodities that the big emerging markets are short of. China, India and Brazil import both hard coking coal and potash — and it looks likely they will import a lot more over the next decade.


Chris Mayer,
for The Daily Reckoning

The Daily Reckoning