China's Slowdown Will Impinge On Brazil
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While investors are cheering Greece’s bond swap agreement after more than 60% of the bondholders finally caved, I am looking at economies of scale that do matter, China! Why are we so concentrated on a country that has a gross population of Los Angeles County with a total GDP of $306 billion, when we should be paying more attention to the red dragon falling into a hibernation mode? When short term bearish investors pounced on behemoths such as CNOOC Ltd. (NYSE: CEO), China Mobile Ltd. (NYSE: CHL), and PetroChina Co. Ltd. (NYSE: PTR) upon Chinese premier’s announcement of slower growth, my eyes were glued on Latin America, primarily Brazil.
Take a look at how the above stocks got hammered few days ago following the pessimism that ensued our debt owners. Wen Jiabao lowered China’s growth expectations to 7.5%, which was the first time that the interest rate has been lowered below 8% since year 2004. Instead of shorting the aforementioned multinational names for quick gains, bearish investors can hold puts on China’s biggest iron ore exporter, Brazil. Here are some names that will be either directly affected or will face challenges ahead due to softer demand and pricing power.
Second largest mining company in the world Vale (NYSE: VALE), could be negatively affected as it produces nearly 60% of Brazil’s iron ore and has China as its major consumer. This $118 billion giant pays a hefty dividend of 7.68%, produces nickel, copper, coal, and potash. The company is raking in a lot of its revenue from China by exporting nickel and manganese. Vale’s presence in the country has been felt since 1973 with commercial offices in Shanghai, nickel refineries, research laboratories and 25% investments in a steelmaking complex and a coal exploration company. It also exports pellet feed or otherwise known as “iron powder” from its Brazil’s facilities to Yueyufeng steelmaking complex.
With China consisting 31% of Vale’s total revenues and its last consecutive quarter misses is definitely not a sign of optimism. Trading near its 52 week lows, the stock has been priced by the market relatively cheap with a single digit trailing P/E of 5.7. I’m neutral on the company as I see the stock could already be deeply discounted.
Petroleo Brasileiro (NYSE: PBR) should continue showing resilience and growth as it is located in a more favorable sector, energy. Company is engaged in research, extraction, refining, processing and transportation of oil and natural gas. This $106 billion multinational pays a nice dividend of 4.39% and has been also trading with a single digit PE of 8. With PBR’s expectations to increase crude exports from this year’s 2.1 m.b.d. to 3.9 m.b.d by 2015, it is interesting to see how much of that will China demand? Per CEO Jose Gabrielli, company is currently exporting 200,000 – 220,000 barrels per day equally to China and U.S. Despite’s China’s slowdown, Gabrielli is optimistic in doubling its crude oil export size to China from 400,000 – 450,000 barrels per day in the next 3 years with global fuel consumption expectations of 4-5% a year. This is a bit high in contrast to my oil projection analysis of 2-3% global growth and 7.5% Chinese growth, but I’ll take it. In any case, due to a stronger balance sheet and China’s growing appetite for transportation fuel, I am bullish on PBR and believe it’s a much safer bet than Vale.
Motley Fool newsletter services recommend China Mobile and Petroleo Brasileiro S.A. (ADR). The Motley Fool owns shares of China Mobile. edgarambart30 has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.