Editor's note: This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
As I mentioned in
of this series, the economic growth story of Brazil starts with energy and minerals -- more specifically with
. Any discussion of this former Portuguese colony is incomplete without acknowledging these titans of industry.
Brazil is blessed with an abundance of natural resources, ranging from oil to iron ore, and understands one important fact -- the world needs more energy and basic materials.
Am I stating the obvious? Yes, of course, but I am constantly amazed at how many companies don't share this same understanding of supply and demand (Exhibit A is ExxonMobil, in my opinion).
More important, these Brazilian conglomerates have become world-class institutions with the management foresight and financial savvy to monetize their resource bounty.
China Watch: Brazil's One Way In (Video)
One way to get in on the action with China is to play Brazilian companies with Chinese connections. Patrick Schultz reveals how we can play one emerging market to play another.
To watch the video, click the player below:
var config = new Array(); config<BRACKET>"videoId"</BRACKET> = 1612702007; config<BRACKET>"playerTag"</BRACKET> = "TSCM Embedded Video Player"; config<BRACKET>"autoStart"</BRACKET> = false; config<BRACKET>"preloadBackColor"</BRACKET> = "#FFFFFF"; config<BRACKET>"useOverlayMenu"</BRACKET> = "false"; config<BRACKET>"width"</BRACKET> = 265; config<BRACKET>"height"</BRACKET> = 255; config<BRACKET>"playerId"</BRACKET> = 1243645856; createExperience(config, 8);
Plus, don't miss China Watch Mail Bag: Best Brazil Bets.
Vale is the foundation of the Brazilian mining and mineral commodity complex, and its upside story is basic and uncomplicated. It is the world's largest producer of iron ore and second-largest producer of nickel, with the largest nickel reserves in the world.
The company is expanding its coal production as well, aiming to double to 16 million tons over the next five years. Demand for iron ore and everything that Vale produces continues to surge. Without a doubt, China is primarily responsible for the demand, but I believe that expanding global growth will drive demand from other emerging markets (think Africa and East Europe) and domestically in Brazil.
As for the energy sector, if you want to get me excited, just say the word "Petrobras," sing the words "Tupi oil field," and I will be in investor heaven. But please forget about
and don't bore me with
. These corporate sloths don't deserve the light of day until they can actually grow their reserves and production.
To me, Petrobras is now the global energy leader and "energy market tell." Is it just me, or does it seem like Petrobras announces a new energy discovery every couple of weeks?
On the other hand, while companies like ExxonMobil have been recording record profits, I don't believe they're as well positioned for the future as is Petrobras. As an example, XOM has spent more money in the past year on buying back stock than prospecting for more oil (as defined by capital expenditures).
In our energy-starved world, this troubling fact speaks volumes; I want companies growing production and growing reserves. Petrobras is by far the most aggressive energy conglomerate in the world. According to
, the company has locked up leases for 80% of the ultra-deepwater drilling rigs in its attempt to become a dominant exporter of crude over the next decade. And with oil trading in the $130s, so far, Petrobras has been dead right.
Finally, I must describe what really stood out to me -- the typical and average Brazilian gas station. The country has demonstrated on a large scale that it is possible to build a build a top-notch energy distribution infrastructure with many types of fuel and still prosper.
After the 1970s oil crisis, the Brazilian government adopted a policy to stop their dependence on foreign energy. In a single generation, government-initiated policy ended domestic dependence on imported oil, as it instituted programs mandating the adoption of a multifaceted energy distribution system.
In my recent time in Brazil, I badgered friends and most taxi drivers about the type of fuel they were using to power their cars. There are four major choices for fuel -- natural gas, ethanol (sugarcane-based, not our illogical corn-based), gasoline and diesel.
More important, all these types of fuels were readily accessible. The infrastructure is exactly the same as our gas stations here, except that they have a variety of fuels to choose from. At minimum, most cars have at least two options for fueling their driving (most taxis used three -- natural gas, ethanol and gasoline).
It was quite amazing -- pull into a gas station and fill up on natural gas, ethanol, gasoline or diesel. I don't understand why we can't do the same here; natural gas is cheap, clean and abundant in our country. It just takes a little bit of forward thinking by our leaders.
, I will explain what I view as the next growth catalyst to the Brazil story. I think most of Wall Street is missing the angle on this budding nation, and there is still enormous upside and opportunity.
This was originally published on
on June 25, 2008. For more information about subscribing to
please click here.
Patrick Schultz is a research associate at TheStreet.com. He has previously obtained securities licenses under the NASD's Series 7, Series 24, Series 52 and Series 63 exams and has worked in the financial markets on various trading desks in addition to trading for his own account. Schultz holds a bachelor's degree in applied economics from Cornell University.