Archives for December 2011

Brazil Oil Boom Part 2

RoadsAll the new oil reserves are located alongside the existing oil fields in the eastern coast of Brazil. The Brazilian state owned oil company, Petrobras is expected to invest more than $200 billion for deep sea oil exploration by the end of 2015. The company is considering the option of selling shares consistently to the government and trading for its current funding.

The industrial investments in Brazil are growing day by day, and more than 60% of it is in oil sector thus increasing the requirement of skilled labor which happens to be short in supply creating a labor blackout. With the planned investment, Petrobras believes that it can become larger than shell petroleum within a period of 10 years. Brazil does not permit any private players to operate in the petroleum sector, though there are many players focusing on manufacture of drilling equipments required for deep sea drilling.

If the current estimate holds good then Brazil will be the fifth largest oil exporter in the world by the end of next decade contributing to about 10 percent of the total oil production in the world and will be the major supplier to the United States.

Brazil Oil Boom Part 1

petroleumWith the huge deposits of oil deposits found in Brazil, it is also set to become a part of the oil boom which had earlier led to the rise of Gulf States. The new estimates have put the oil deposits to be as much as 50,000 million barrels, which is 2.5 times more than the previous estimates of 20,000 million barrels. This new find is being considered as a bubble in the Brazilian economy.

The discovery of vast oil reserves is going to play a major role in the growth of Brazil as a super power in the coming decade. Currently it is the largest country in South America, a part of BRIC nations. Brazil has been a net exporter of goods with trade surplus on year to year basis. The presence of huge oil deposit in Brazil will also reduce the dependency of the United States on Gulf countries as it seeks to source oil from South and North American countries.

The costs of exploration for oil in Brazil will be more compared to the other places like the North sea and Gulf of Mexico as the depth of the reserves is around 7000 km below the sea level, which is deeper than any other place.

A Peek at World’s Highest Spending to GDP Ratios

moneyToday, the world is in the midst of an apparently unending sovereign debt crisis with many nations either unwilling or incapable of controlling government spending.

When government spending in particular shoots out of control, the local currency, the investment climate, cross border trade – all take severe beating, threatening global stability. That’s why, from an international investors point of view it is important for us to know the barometers that will show us whether the country is a safe destination for investment or not.

One of the ways that investors might employ is to track these expenditures on a global basis is government spending expressed as a percentage of GDP.

Here’s the world’s top spending to GDP ratios.

Data from Heritage Foundation shows that Zimbabwe is the most extravagant spender under this criterion, with government expenditures amounting 98% of GDP in Zimbabwe in the latest year that data was available. This spending includes consumption and transfer payments, including the direct government spending.

 It will be not a surprise to find that Cuba is second on the list due to that county’s reputation as one of the few remaining communist states. Cuba’s government spending stood at 78% GDP, a level that has been quite stable over the last decade.

While Cuba has made some efforts at reform through allowing limited private ownership of businesses, Cuba fundamentally has a state run economy and employs more than 80% of the labor force in public sector jobs.

European Countries
Although Europe is at the focal point of the sovereign debt crisis, with Portugal, Italy, Greece and Spain often mentioned as having the maximum debt problems, these four countries, surprisingly aren’t even the biggest spenders on that continent. The biggest spenders in Europe are: Denmark, France and Sweden, where government spending levels are at about 52% of GDP.

All three countries have witnessed this percentage increase since 2005, as government spending on fiscal stimulus and social protection were intensified to help control the effects of the recession.

But Denmark, Sweden, France is different case

Although Denmark, France and Sweden are at the forefront of the list, this does not essentially mean that investors should avoid putting money to work here, as all three countries keep  AAA sovereign debt ratings from Standard and Poor’s and the other major ratings agencies. This is because, unlike Greece, these countries are higher on efficiency index, with better management of macro-economy.

United States
Although the United States has gone through the downgrade of its sovereign debt rating, government spending as a percentage of GDP is in the middle of the highest spenders list. According to the data released by the White House, the total government expenditures as percentage of GDP amounted to 35% in fiscal 2010.

Highly Attractive Brazilian Oil blocks: Now Shell is About to Invest $ 1.6 Billion

BrazilAccording to industry sources and seniors members of Royal Dutch Shell, the company will invest more than $1.6bn in the second phase exploration of a key Brazilian oil block and also contemplates to compete in the country’s next auction of oil and gas concessions. The surge in oil exploration investments only goes on to emphasize how attractive the Brazilian oil blocks have become, globally.

Already Brazil’s second biggest oil producer after the state-run energy giant Petrobras, Shell has had strong results in the Campos Basin, part of Brazil’s pre-salt oil fields that lie deep under the Atlantic ocean and a thick layer of salt.

Production in the basin has been 30pc higher than anticipated, convincing Shell to make considerable further investment in the hope of seeing similarly extraordinary results.

Andre Araujo, president of Shell Brazil, says that the phase -2 development of the BC-10 block in the Campos Basin – in which Shell has a 50 percent stake and is believed to hold 400m barrels of recoverable oil – will kick off next year.

Meanwhile, Shell’s director of exploration and production for the Americas, Mr. Ordum, said the company would explore further opportunities, aimed at expanding in Brazil because it now appears a more attractive investment prospect than many other oil-producing nations.

He also believes that the opportunities that Shell finds here are of the highest quality in global terms, both from the regulatory point of view and geological environment.

Besides, the energy giant also believes that  due to external environment —which is highly favorable  in Brazil— the country will remain hot destination of investments  even if there is  recovery of production in countries such as Iraq and Libya, in the future. Furthermore the pre-salt has areas of the best quality.

Mr Odum also hints that Shell is likely to compete when Brazil’s National Petroleum Agency auctions new exploration blocks off the country’s north-east coast in 2012; he however says that a final decision would be taken after details of the auction are published.

Threat Looms over the Brazilian Steel Industry

petroleumAccording to a new report released by Fitch Ratings last week, Brazilian steel demand is anticipated to stay strong due to a lively construction sector, increased infrastructure and investment spending. Nevertheless, the study warns that a worsening operating environment in Brazil along with a long-term deterioration in steel demand fundamentals could lead to rating downgrades within the country’s steel sector.

On the other hand, the study by Fitch ratings indicate that Russian steel companies could undergo further rating upgrades following improved long-term operating fundamentals, stronger liquidity, and improvement in corporate governance. The bottom line according to Fitch ratings is that Brazil’s steel industry is face increasing threat from Russia in the mid to long term.

This was on the cards. The changes in operating conditions and fundamentals between Brazil and Russia since 2009 have resulted in a situation whereby steel company credit ratings can be the same which was not the case before.

For instance,  Jay Djemal, Director at Fitch explains that until recently, Brazilian steel producers were amongst the most profitable in the world but these dynamics started  to change unfavorably as the Brazilian real appreciated immensely  in value against the U.S. dollar, rising inflation soared  operating costs, and raw material prices increased considerably.

Earlier, Fitch says Brazilian steel companies used to get tremendous benefit from a highly profitable domestic operating environment with amongst the best production cost positions in the world. This scenario reversed  as the Brazilian real appreciated by 40% against the U.S. dollar since 2008 with the steel companies facing tough competition from  cheaper imports competition and uncompetitive export positions. Meanwhile the study also points out that Inflationary cost pressures and rising energy and input costs have further eroded profit margins of major steel producers in the country.

Even though the Russian steel companies face the same challenges as their Brazilian counterparts with an appreciating rouble to the U.S. dollar and mounting raw material input costs; however, these challenges are to a lesser degree in Russia than Brazil owing to the rouble not appreciating as greatly as the real against the U.S. dollar. Besides, higher levels of vertical integration into iron ore and coal for Russian steel companies as a whole, and the fact that Russia has cheap and abundant energy supplies also make the country more competitive than Brazil.

But now it will be interesting how the Central Bankers in Brazil react to deprecating Real. Will it intervene heavily (as it already did last week) or allow the Real to stay weaker against the U.S. dollar.

As the Real has plunged by some 17% against the U.S. dollar in previous four week, analysts expect that this will help Brazilian manufactures to compete strongly with international competitors. But this will depend upon how long the Real stays weaker against the U.S. dollar.

The Sudden U-Turn for the Brazilian Real: How Much More Will it Plunge?

Housing BubbleLast Thursday, Brazil’s central bank suddenly acted to halt the currency’s slide, stressing growing concern among officials that the global financial crisis is damaging Brazil’s economy and could cause a potentially destructive shoot in inflation.

The bank’s decision to sell 2.75 billion dollars in currency swaps — a move that pushed up the Real — marked an unexpected shift in strategy for a government that has complained for the past year about a “currency war” that left the Real highly overvalued compared to its neighbors.

Nonetheless the Real’s enormous and sudden depreciation, which has pushed it down 17% against the US dollar this month to levels not seen in two years, was in fact too much for the central bank to bear.

President Dilma Rousseff, speaking while on a trip in New York, explained that while Brazil’s economy is well-equipped to face the global crisis; but added that the government was ready to take additional measures to avert further abrupt moves in the currency.

She said although things are going to stabilize, the government is ready to take more measures, if necessary. Brazil is in many ways become a casualty of the crisis, which is centered in Europe and the United States. The crisis has punished currencies in quite a few emerging markets as investors seek safe haven.

Officials on the other hand are concerned about the impact of the falling Real on inflation, which is already well over the government’s target range. A weaker Real may cause the prices of imported goods to climb, even though the depressive effects of the global crisis should also keep a cap on inflation.

This was a sudden change in fortune for a currency that just four weeks ago was trading approximately the 1.55 per dollar mark and had Finance Minister Guido Mantega threatening further measures to keep the currency from strengthening.

It is expected that the depreciation of the Real may end up helping manufacturers, who have mainly missed out on Brazil’s economic boom in recent years as a result of the overvalued currency.

Still, economists warn that the suddenness of the Real’s fall could harm Brazil by punishing companies that have borrowed in dollars and by upsetting the financial variables underpinning Latin America’s largest economy.

BRICS Support to Faltering Euro-zone: Finally, Some Ray of Hope

TradingWhile until last week, members from BRICS group looked reluctant (apart from Brazil) to play a significant role in current euro zone crisis, it now appears that BRICS might well rescue struggling economies.

In the latest G20 meeting in Washington which ended last week, members of BRICS group said that they are considering providing funds through the International Monetary Fund or other financial institutions to help get growth in developed countries back on track.  The BRICS countries in joint statement reiterated that they want some decisive action, a permanent solution in euro-zone; nonetheless, the group did not offer any immediate and specific financial support.

In a communiqué, the group also expressed that their intentions to work in a synchronized way among themselves (BRICS countries) in order to support the euro zone and aiding the global economy. Nevertheless, the statement also made clear that the group needs a wider range of discussion, possibly with G-7 [Group of Seven] G-20 [Group of 20] or [during] other occasions.

For more than a week, policy makers were speculating about what the BRICS countries could do to help Europe stem its sovereign debt crisis.

BRICS is considered as an important funding source because of large amount of dollar reserves.
With more than $4 trillion of ideal cash reserves, mainly owned by China, there has been talk of the BRICS economies investing in euro zone sovereign bonds.

Meanwhile, China after initial hesitance has shown intent in the euro zone rescue mission. Chinese officials say Beijing will carry on giving marginal support to Europe through its continuing investments there and efforts to diversify its holdings in foreign currency reserves. At present, almost a third of China’s foreign currency reserves are in euros.

Back in 2008, the group of 20 biggest industrialized and developing economies worked in coordinated manner to ease the global financial crisis.  Now, BRICS leaders say they are looking for a similar effort to materialize in the coming weeks.

Besides, pledging financial support, the communiqué has also stressed that looking at current trends where BRICS has become major economic muscle; the world (especially the U.S and Europe) should allow these countries to have bigger say in global matters. Also, the statement voiced concern over the slow pace of quota and governance reforms that the IMF approved last year.

According to the International Monetary Fund estimations, Brazil, Russia, India, China and South Africa will jointly amount for 60 percent of the world’s global economic growth by 2014.