Higher utilization rates result in higher profitability because more production is achieved with the existing asset base (e.g. plant and equipment). The opposite is true for low utilization rates, which may result in high fixed costs squeezing the profit margins and may be problematic if the assets were purchased with debt under the assumption of increased cash flows from higher production to service the debt. A very high utilization rate, though, is not ideal either; rates above 90-95% may imply that the businesses are not investing enough and will not be able to keep up with growth and forgo revenue in the process; it may also imply that the businesses do not see additional upside given limited growth potential.
The Brazilian Institute of Economy (IBRE1) gathers the utilization rates as part of its monthly survey on industry confidence. The graph above shows how the utilization rate has continued to climb above its five-year average for over a year now. While there have been a couple of hiccups along the way, there seems to be a clear uptrend on utilization rates, which is a positive for the economy.
Utilization rates can be used as co-incident indicators to gauge the current strength of the industrial sector in Brazil. The positive trend is one more datapoint to confirm the strength of the recovery in Brazil. This is relevant for investors in iShares MSCI Brazil Index (EWZ) or other small cap versions, as those by iShares (EWZS) and Market Vectors (BRF). Other ETFs with large Brazil exposures include iShares Latin America 40 Index Fund (ILF) and SPDR S&P Emerging Latin America ETF (GML).
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