Brazilian, Canadian companies may benefit from Castro move
Published on Thursday, February 21, 2008
By Hugo Miller
GENEVA, Switzerland (Bloomberg): Fidel Castro's gradual departure from
Cuban politics may help Petroleo Brasileiro SA, Sol Melia SA and
Sherritt International Corp. widen their advantage over US competitors
forced to await a more definitive change in the island nation's government.
Castro's decision to hand power to his brother Raul may accelerate
foreign investment in oil, gas, mining and tourism, said John Kirk, a
professor at Dalhousie University in Halifax, Nova Scotia.
Petrobras, Spanish hotel operator Sol Melia and Canadian nickel-miner
Sherritt already operate in the country. The US bans companies from
dealing with Cuba, and Deputy Secretary of State John Negroponte said
yesterday the US doesn't plan to end its trade embargo "anytime soon."
"The early bird gets the worm," said Jacobo Blanquer, who helps manage
the equivalent of $880 million at Nordkapp Inversiones SV in Madrid,
including Sol Melia. "Sol Melia will be one of the companies that will
Raul Castro, 76, has opened the economy to more investment since he took
over as interim leader from his ailing brother in 2006, said Kirk, who
has written several books on Cuba.
"Foreign investment is being invited in, depending on the sectoral needs
of the Cuban economy," he said.
Raul Castro has made the economy his priority, telling Cuba's
legislature he is "tired of excuses," according to a 2007 report from
the Lexington Institute in Arlington, Virginia.
He settled the state's debts to farmers and tripled prices paid to milk
and beef producers. He ended abusive pricing at Cuba's airports, where
high landing fees and refueling charges were making Cuban tourism less
attractive, according to the report.
Fidel Castro's resignation lifted shares of companies tied to Cuba. Sol
Melia, the world's biggest resort operator, rose 65 cents, or 6.6
percent in Madrid yesterday and was little changed today at 10.40 euros.
Toronto-based Sherritt, also little changed today, rose 6.2 percent
yesterday on the Toronto Stock Exchange. Rio de Janeiro-based Petrobras
rose for a second day, adding 1.8 percent on the New York Stock Exchange.
The Herzfeld Caribbean Basin Fund, which aims to profit from the
resumption of US trade with Cuba, rose 3.5 percent after surging 17
percent yesterday, the biggest gain in its 13- year history.
The decision by Castro, 81, is "a clear step towards the possibility of
the US resuming trade with Cuba," said Thomas J. Herzfeld, head of the
Its largest holdings include Jacksonville, Florida-based holding company
Florida East Coast Industries Inc. and cruise lines Royal Caribbean
Cruises Ltd. and Carnival Corp.
More than half of Cuba's foreign investment comes from Europe, primarily
Spain, and almost a fifth is from Canada, according to 2005 Cuban
government figures. Foreign direct investment, which includes Cuban
investment abroad, probably rose to $630 million last year, from $200
million in 2004, according to the Economist Intelligence Unit.
US companies eager to deal with Cuba will need a shift in US policy,
said Kirby Jones, a Washington-based consultant to companies seeking to
do business in Cuba.
Until the embargo is lifted, "you're not going to see McDonald's or the
European version of Kentucky Fried Chicken," said Jones.
The tourism market for companies such as Sol Melia may soar if the US
trade embargo is dropped, as American visitors and former Cuba residents
flock to the island.
"Every cruise line has thought about Cuba"' said Tim Gallagher,
vice-president of public affairs for Miami-based Carnival, the world's
largest cruise operator. "It is one of the most beautiful islands in the
Caribbean and has a number of deep water ports."
Hotel operators Marriott International Inc. and Hyatt Corp. may also try
to compete with established companies led by Sol Melia, which controls
at least a quarter of the island's hotel rooms. A spokeswoman for Palma
de Majorca, Spain-based Sol Melia who wouldn't give her name declined to
Oil, gas and mining companies also see potential in Cuba. A 2005 report
by the US Geological Survey estimated the North Cuba Basin may hold as
much as 4.6 billion barrels of oil, rivaling Ecuador's current proven
reserves, the fourth biggest in Latin America.
Petrobras, Brazil's state-controlled oil company, said today it will go
ahead with studies for offshore oil exploration and the construction of
a lubricant plant with Cuba's state- owned oil company. Castro's
resignation won't alter plans, Petrobras Chief Executive Officer Jose
Sergio Gabrielli said.
Repsol YPF SA, Spain's largest oil company, is drilling for oil offshore
and Toronto-based Sherritt began oil exploration in the country in 1992.
US airlines may have to play catch-up with Canadian and Latin American
carriers that fly to the Caribbean nation. Air traffic to Cuba may grow
20 percent by 2011 to more than 2.6 million passengers a year, according
to the International Air Transport Association. Air Canada, Air Transat
and other Canadian carriers fly about 600,000 people to Cuba each year.
Lifting the trade embargo also would release pent-up demand for Cuban
cigars, helping Madrid-based Altadis, a unit of Imperial Tobacco Group
Plc, Lehman Brothers analyst David Hayes said in a note yesterday.
Altadis in 2000 bought 50 percent of Corporacion Habanos, a distributor
of premium Cohiba and Montecristo cigars.
Imperial Tobacco spokesman Simon Evans declined to comment.
Sherritt, which began mining for nickel in Cuba in 1994, is spending
$408 million in a 50-50 joint venture with government- owned General
Nickel Co. SA.
"The transition away from Fidel Castro running things day- to-day began
20 months ago," said Sherritt spokesman Michael Minnes.