China's Interest in Latin American Commodities Continues

by Tony D'Altorio

China's Interest in Latin American Commodities Continues

by Tony D'Altorio, Investment U Research

Wednesday, May 18, 2011

Latin America used to be known for its economic and political instability.

But it fought off the global financial crisis with relative ease. Poverty is now falling, the middle classes are growing rapidly and asset markets are bubbling.

And it has the spectacular expansion of commodity demand to thank for all of this.

Over the past decade, emerging regions like Asia have shown a near insatiable demand for everything from copper and iron ore to soybeans and sugar. And it just so happens that Latin America has rich resources of all those and more...

China's Investments in Latin America Run the Gamut

Much of the interest in Latin American commodities comes from China, of course. The two have made numerous mutually beneficial deals in the last decade, especially between China and Brazil.

In 1999, Latin America and China exchanged a mere $8 billion in goods. But in 2009, the United Nations showed that figure grew 16 times to $130 billion, while bilateral trade with the United States rose a mere half.

That growing interest produced an explosion of Chinese investment in the region.

For years, China promised billions of dollars for Latin American infrastructure projects, in order to better access the commodities it wanted so badly. Now, those funds are finally beginning to flow.

  • In 2009, according to the Brazil-China Chamber of Trade and Industry, China invested just $386 million into Brazil.
  • But in 2010, that number climbed to an estimated $19 billion.

Investments ran the gamut from banking to car manufacturing. But 85 percent of it pertained to commodities.

Meanwhile, Chinese oil companies invested a total of $15 billion in Latin America. And industry executives say more is to come.

That prospect seems very likely, considering the recent pace of change in the region.

Changing Economies: Brazil Trumps Mexico

Since the financial crisis, developed economies can't seem to shake sluggish growth and high debt. But not so much for emerging markets...

Inter-American Development Bank (IADB) says that they now account for three-quarters of global economic growth. Their rising middle classes are spending left and right on homes, cars and good food.

Naturally, they need more commodities to support that increased demand. But those needs aren't benefiting every country in Latin America equally.

Take its two largest economies, Brazil and Mexico. They paint stark contrasts of the effects of this change:

  • In 2006, before the financial crisis began, nine percent of Brazil's exports went to Russia, India and China.
  • Three years later, it sent 17 percent their way and Brazil's economy boomed in response.

Mexico, however, has much closer economic ties to the United States. BRIC nations account for just three percent of its exports, and it deals much more in manufactured goods than commodities.

China therefore is more of an economic competitor to Mexico than a compliment. And because of that, the Central American country is growing at half Brazil's speed.

In other words: As a place to park some cash, Brazil easily trumps Mexico.

Good investing,

Tony D'Altorio

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