Vale’s major challenges go beyond iron ore – by Jeb Blount ( – October 12, 2012)

Costs are soaring, new mines are running behind schedule and growth in China, Vale’s largest market, is slowing.

RIO DE JANEIRO (REUTERS) – Roger Agnelli, who was forced out as chief executive of Brazil’s Vale in May 2011, may have been lucky to leave the world’s second-largest mining company when he did.

Since Murilo Ferreira replaced him as CEO, a series of setbacks have raised questions about Vale’s ability to increase sales and profit and maintain its place as the world’s top producer of iron ore, the main ingredient in steel.

Costs are soaring, new mines are behind schedule and growth in China, Vale’s largest market, is slowing. The price of iron ore, responsible for nearly three-quarters of the Rio de Janeiro-based company’s sales, recently sank to three-year lows.

Making matters worse, Brazilian laws and government interference threaten to hobble Vale, the country’s biggest exporter. Vale shipped $42 billion of raw materials in 2011, 16 percent of exports from the world’s sixth-largest economy.

“What the government is doing to Vale won’t kill the proverbial golden goose, but it could make the goose sick,” said Mauricio Canedo, an economist specializing in industrial policy and commodities at the Getulio Vargas Foundation (FGV), a Rio de Janeiro economic research institute. “Vale’s future looks less promising now than it has for some time.”

Government influence has been most obvious in efforts to get Vale to build steel mills and invest in fertilizer production. while a new mining code threatens to triple royalties.

Agnelli and Ferreira declined to comment. Vale is well-positioned to weather a downturn and will announce a revised investment plan in December, the company said in an email.

At about 36.20 reais a share, Vale’s main stock trades at close to where it did when Ferreira took over, 36.80 reais. In a decade under Agnelli it rose nearly 12-fold.

Vale’s predicament stems from its 1997 privatization for $3.3 billion, which still rankles with many Brazilians, including members of President Dilma Rousseff’s Workers’ Party-led government.

For them, Vale’s success doesn’t ease the sting, even with Brazil getting more than ever in royalties and taxes from the company. Vale’s profit soared more than 17-fold to $22.9 billion in 2011 from $1.29 billion in 2001, bolstered by Chinese demand.

In Brazil, only oil giant Petrobras is bigger and more revered by nationalists. Petrobras has private investors, but the government has a majority of voting stock.


Still, Rousseff expects Vale to support government industrial policy even if Brazil only has an indirect minority stake in a holding company that controls Vale with partners Brazil’s Banco Bradesco and Japan’s Mitsui.

When Agnelli laid off 1,300 workers in 2008, Rousseff’s mentor and predecessor Luiz Inacio Lula da Silva demanded an explanation. Agnelli’s refusal to build a fleet of ships in new, untested, high-cost Brazilian shipyards annoyed Lula further.

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