Brazil and the Profitless Recovery
03/03/2010 1:45 pm EST
Want to know why this is going to be a profitless recovery? And not just in the United States, either.
Then look at the IPO (initial public offering) planned by OSX Estaleiros, a startup shipbuilding company. The March 19 offering aims to raise $5.6 billion. (For more on the profitless global recovery, see this related post.)
This is an industry with global overcapacity. Shipyards in Korea, Japan, China, and Germany have all been forced out of business. How can this company possibly hope to float such a huge offering? Why would investors even think of putting money into such a company?
Because despite the overcapacity in the industry globally, OSX Estaleiros is pretty much guaranteed to start with a big book of business thanks to the Brazilian government.
Vale (NYSE: VALE), the huge Brazilian iron ore exporter, is under intense pressure to place orders for ore-carrying ships with Brazilian shipyards. One tiny problem: No existing Brazilian shipyard is currently capable of building what are the largest bulk carriers in the world.
Investors also clearly expect—with reason—that the government will throw shipbuilding business to domestic shipyards as the country’s state-controlled oil industry develops what promises to be huge new deepwater oil fields. The government has already been putting pressure on deepwater rig companies to build new rigs in Brazilian yards if they want a piece of the action in developing these fields.
So Brazilian and global investment banks have all lined up to sell the OSX Estaleiros IPO: Credit Suisse (NYSE: CS), Itau Unibanco (NYSE: ITUB), Banco Bradesco (NYSE: BBD), and Morgan Stanley (NYSE: MS). And I don’t think there’s any real doubt that the offering won’t raise the projected $5.6 billion. (Which will, by the way, make it the largest IPO in the world since Banco Santander raised $8 billion in October in an offering for its Brazilian subsidiary.)
But adding more capital to an industry that is already overbuilt because it found it all too easy to raise capital from governments that wanted to create a national shipbuilding industry will just make it even tougher to make money in shipbuilding unless you’ve got government-guaranteed contracts.
With more companies globally competing for work, the recovery in shipbuilding will see more ships built, but with lower profits. And governments anxious to protect these national industries—and jobs—will keep pumping money into them, rather than letting them go bust as quickly as they would without such subsidies.
Change the names and you can say the same thing about cars, solar cells, steel, and lots of other industries that have been targeted for investment by governments around the world.
It’s clear after the recent crisis that the capital markets don’t need any encouragement to misallocate capital. But they’re getting it anyway.
Full disclosure: I own shares of Banco Itau and Vale in my personal portfolio.