What the Brazilian election might mean for commodity prices?

Brazil’s presidential election is heading for its second-round run-off on Sunday with the result too close to call. The latest polls show incumbent president Dilma Rousseff on 49% and the pro-business opposition party led by Aécio Neves on 51% but betting markets give Rousseff a 60% chance of winning. Given Brazil is a major supplier of commodities ranging from soybeans, iron ore, sugar and coffee what will the result mean for prices?

Overall the main impact on commodity prices will be felt through the country’s currency, the real. The unexpectedly strong performance of the pro-business party in the first election run-off at the start of October resulted in the currency soaring by almost 4% against the dollar, improving the value, in dollar terms of Brazil’s commodity exports. However, since then a narrowing in the polls has meant that the currency has lost all those gains and more.

Sugar is seen as the commodity most likely to be influenced by the outcome of the election. The Brazilian government introduced a cap on gasoline prices around 10%-20% below world levels in a bid to control inflation, but which has also squeezed ethanol margins for the country’s sugar cane mills. To recap, sucrose extracted from sugar cane can be manufactured into either raw sugar or ethanol. In Brazil, typically 48% goes into making ethanol and 52% goes into producing raw sugar, which is then processed into refined sugar.

According to sugar and ethanol cooperative Copersucar, ethanol demand in Brazil could increase by 8 billion litres to over 30 billion litres a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices. Although the extent of any increase is by no means certain, a senior government official suggested  in August that gasoline prices could be raised by 6% following the election.

Given a win by Rousseff appears to be largely factored into both currency and commodity markets, a win by the incumbent is likely to have only a minimal impact on the nations key commodity prices. A win by Neves however would be bullish. The main factor affecting the price of Brazil’s commodities, agricultural ones in particular lie elsewhere – namely drought.

Ironically it could be the drought that was the opposition party’s undoing. São Paulo state, home to a quarter of Brazil’s voters and controlled by the party refused to introduce water rationing when the water crisis first became apparent. Now 70 cities in the state are estimated to have suffered regular shortages with the two main rivers in São Paulo city now full up with rubbish and raw sewage.

Related article: No sugar high in sight

Non-ferrous metal exploration slashed

Miners are slashing the amount they spend on exploration setting the stage for the next phase of the super-cycle according to data from SNL. The group estimates that the global budget for nonferrous metals exploration at $11.36 billion in 2014, down 25% from 2013 (the nonferrous exploration category refers to precious and base metals, diamonds, uranium and some industrial minerals but excludes iron ore, aluminium and coal).


In the case of a mining investment for example it is not spot commodity prices that incentivise new production, but the commodity prices assumed in feasibility studies, debt and equity raising’s. These long-run commodity price assumptions tend to lag spot prices. This suggests that exploration spending is likely to fall even further, even if non-ferrous metal prices rebound in the short term. Given the typical time horizon of a major mine can be as long as 20-30 years, with high initial capital outlay and traditionally slow capital return, the planning process of these firms has been designed to be very risk averse.

Once the economic case warrants a mine being brought into production it then typically takes around 7-10 years to take the discovery of a new deposit through to production. However, as the iron ore industry shows the economic and commodity price conditions may be very different when the mine is finally brought into production.

Geopolitical risk has not gone away

Amid the 27% drop in oil prices over the past four months its worth remembering that the security situation across many oil producers has shown little sign of fundamentally improved. Since 2011 Libya has seen the major loss of output and it was the unanticipated return of Libyan exports over the summer that may have been the initial catalyst for the recent downward movement in oil prices.

We have been here before though. Libyan oil production almost returned to normal in early 2012 only for the oil markets fears to swing to Iran, Sudan and Syria. Come mid 2013 though and Libyan oil production rapidly went into reverse. Where will the oil markets attention swing to next?


Libya remains the obvious choice. According to ANZ “…production has increased in an environment where the overall security situation has deteriorated, seemingly placing them at risk for a sudden reversal in export volumes that could help lessen the burden on the other big producers to turn off the spigots…For now, though, oil has been spared from the rising unrest…How long they can maintain this advantage, however, is very much in question.”

Libya is struggling with two competing governments vying for control. Oil traders are concerned about the uncertainty over who is in charge of Libya’s vast oil reserves after a self-styled rival government (who effectively controls parts of western and central Libya) appointed its own oil minister and took over the official website of state firm National Oil Corp (NOC). Although though the oil industry appears secure for now, the expansion of jihadist groups affiliated to al Qaeda or the ISIL may also pose a threat to the Libyan population and its oil infrasturcture.

Nigeria’s oil surge was primarily attributed to a decline in crude theft and force majeures by companies operating in the volatile Niger Delta. As national elections set for February 2015 approach the oil region will likely become more difficult to control. Again from ANZ “The Nigerian military, underfunded and overextended by the virulent Boko Haram insurgency in the north, will be hard pressed to deal with any uptick in election related unrest and criminal activities in the oil region…In our view, the recent gains in output could quickly become a casualty of Nigeria’s looming game of thrones.”

Related article: Oil supply outages are becoming more common and difficult to predict

In Iraq output from the Kurdish controlled region is currently around 300 thousand barrels per day and are expected to reach 500 thousand barrels per day by the end of the year despite the battle against ISIL taking place nearby and threatened legal action by the government in Baghdad. Meanwhile oil exports from the southern fields which continue to produce without interruption rose to 2.5 million barrels per day. Although the threat to oil output from ISIL appears to have lessened following US airstrikes the threat of disruption by other groups to Iraq’s oil infrastructure by other militant groups remains.

Negotiations over Iran’s nuclear program are ongoing with a current deadline of 24th November. Iran’s fiscal break even oil price is thought to be the highest of the OPEC producers and its unclear whether the recent price fall will bring an agreement closer or push it further away. US involvement in Syria against ISIL has so far been supported by Iran. However, if it is seen to be extended to target Assad himself then Iran may start to pull back from negotiations. Even if something is agreed by the deadline it could be several months before oil exports are resumed.

Elsewhere, instability in Yemen continues to affect oil production and exports. In the past week tribesmen shutdown Yemen’s main oil export pipeline carrying 70 thousand barrels per day. Yemen’s oil and gas pipelines have been repeatedly sabotaged since mass protests against the government created a power vacuum in 2011, causing fuel shortages and slashing export earnings for the country.

The country’s domestic oil production is of little concern in the whole scheme of things though. More so is the risk of disruption to busy oil and gas export routes by al Qaeda militants – Yemen shares a long border with the world’s top oil exporter Saudi Arabia and flanks busy shipping lanes.

In Sudan, responsible for almost a third of a million barrels per day of production outages during 2012 and into 2013, the civil war continues apace. Only last month fighting erupted near several oil fields in Upper Nile state, the largest of which is Palouge. The state is responsible for around 80% of South Sudan’s oil production.

Of course unplanned outages due to geopolitical factors could happen elsewhere. However, of those countries identified as having extreme risk of conflict and political violence almost all the oil producers are already accounted for. For the time being geopolitical oil risk is likely to be continue to focus on all of the above.