Investors are piling into Brazilian port operators at prices three times as expensive as the broader market, counting on cargo backlogs and record shipping volumes to bolster profit.
The three companies that trade on the Sao Paulo stock exchange and operate Brazilian ports at least quadrupled in the two years through March. Exporters are facing shipping delays on rising demand for Brazil’s sugar, soybean and iron ore exports, while record imports augment revenue for ports.
LLX Logistica SA (LLXL3), owned by Eike Batista, is building a complex in Rio de Janeiro state that the billionaire says will be the world’s third-biggest port. Santos Brasil Participacoes SA (STBP3), operator of port Santos, Brazil’s biggest by value shipped, may triple capacity within seven years, according to fund manager Studio Investimentos in Rio. Triunfo Participacoes e Investimentos SA, which runs a port in the state of Santa Catarina, is seeking licenses to open a terminal in port Santos and has seen its stock rise to 8.69 reais yesterday from 1.35 two years ago.
“The demand is certainly there and shipping has huge growth potential,” said Andre Vainer, who helps manage 600 million reais ($376.2 million) as equity fund manager at Rio- based XP Investimentos. “For a port already operating, the earnings growth is very visible.”
Vainer added to holdings in Santos Brasil and sold all shares of LLX in February, according to data compiled by Bloomberg. The Acu port project, which is scheduled to begin operation in the second half of next year, has too much “execution risk,” he said. The difficulty in obtaining environmental licenses in Brazil could delay other port projects, helping Santos Brasil because it is already moving cargo, Vainer said.
Shipping volumes in Brazilian ports grew 14 percent in 2010 to 833.9 million tons, bolstered mostly by record exports of iron ore, according to the Agencia Nacional de Transportes Aquaviarios, Brazil’s water-transportation regulator. Imports surged 42 percent to $181.6 billion last year as the fastest economic growth in two decades fueled consumer demand. Exports rose 32 percent to $201.9 billion, the Trade Ministry said.
Brazil ranked 114 out of 183 countries for ease of trading across borders in the World Bank’s “Doing Business 2011” survey, falling 16 places from the previous year. Export shipping costs are 46 percent higher than they are across Latin America and the Caribbean, at $1,790 per container.
“If we don’t strongly invest in ports we will be facing a logistical blackout,” said Nelson Carvalhaes, owner of Porto de Santos Comercio, Exportacao e Importacao Ltda., the exclusive buyer and exporter of Brazilian coffee for Trieste, Italy-based Illycaffe SpA. “With the size of the agricultural harvest and commodity production we need huge investments.”
About 38 ships were waiting to load on April 1 at the Port of Paranagua, Brazil’s second-largest for shipping soybeans after Santos. That’s the worst backlog in four years for this time of the year, Lourenco Fregonese, a director at the port, said in a phone interview.
Warehouses are full of the oilseed and the port is granting permission for 1,000 trucks to unload each day, about half the demand, according to Fregonese.
Brazil is “very productive in the field but then when we want to ship the things out, 40 percent of this advantage is lost because of trucks that have to line up for 100 kilometers to unload,” Batista, 54, Brazil’s richest man, said in a March 14 interview at Bloomberg’s headquarters in New York.
The growing demand for commodities could be crimped by a global economic slowdown, while the share run-up for port operators gives little room for construction delays that would crimp earnings prospects, said Ed Kuczma, who helps oversee $30 billion at Van Eck Associates in New York.
Santos Brasil fetches 32.4 times earnings, while Triunfo has a price-to-earnings ratio of 37.3 percent. LLX is pre- operational so it has no earnings. The 69-member Bovespa index trades at an average 11.3 times profit.
“It’s a strong long-term story, but in the near term it’s a question of valuations,” said Kuczma, who holds no Brazilian port stocks in his emerging-markets fund. “The individual political and headline risk is high because of the environmental issues and the difficulty to get licenses.”
Brazil is boosting spending on infrastructure as it develops the biggest oil fields in the Americas since 1976 and prepares to host the 2014 soccer World Cup and 2016 Summer Olympics. Expenditures to improve airports, ports, highways and the power grid is set to rise to 160 billion reais by 2012 from 121 billion reais in 2009, according to the Association of Infrastructure and Industries.
“Investors like Eike Batista used great insight by moving in this sector because they knew the government takes a long time to act,” said Adriano Pires, head of the Brazilian Center for Infrastructure, a Rio-based consultancy. “The bottlenecks are so big and the demand is so pent-up that it will take a long time to see ports get competitive against each other.”
Batista’s logistics company, LLX, says Acu will have a shipping capacity of 350 million metric tons a year, 42 percent of last year’s total volume in Brazil. LLX is negotiating 70 possible agreements with companies seeking to do business at the port’s industrial complex, which Batista says will be more than twice the size of Manhattan.
“Once we have these investments anchored and the projects completed, a countless number of other companies that provide services will install themselves there,” said Otavio Lazcano, chief executive officer of LLX, in a telephone interview.
Connected to the Hinterland
“We are de-bottlenecking part of the economy,” Batista said in the March 14 interview. “It would be the world’s most holistically engineered industry port because you have the supply chain of pipeline, iron ore and railway connected to the hinterland. Korea Inc., China Inc., Germany Inc. can move in.”
The site, Batista said, will have a shipyard, steel plants, car factories and oil treatment facilities, while his own energy company, MPX Energia SA, will offer electricity.
Batista’s vision has yet to be realized. London-based miner Anglo American Plc (AAL)’s Minas-Rio project in the Acu complex is at least two years behind its original schedule because of delays in obtaining environmental and construction permits.
The project consists of an iron ore mine, a processing plant and a 326-mile (525-kilometer) slurry pipeline to transport the mineral from Minas Gerais state. The company plans to start shipping from Acu in 2013.
Licensing and finding financing are the biggest hurdles to opening new ports in Brazil, said Carlo Bottarelli, chief executive officer of Sao Paulo-based Triunfo Participacoes e Investimentos, an operator for toll-roads, ports and energy generation.
The company spent 500 million reais to build Navegantes port in the southern state of Santa Catarina, he said in a telephone interview. Shipping rose 40 percent last year to 580,000 containers, Bottarelli said.
“It’s the part of the business we’d like to grow the most but getting through the regulation for ports is a tough task,” said Bottarelli.
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