Vale’s vale of tears in Mozambique (MSN Money Canada – May 22, 2013)

Labor disruptions, flooding and infrastructure problems will mean a substantial reduction in coal exports.

Vale has announced a 30% reduction in its 2013 target for coal exports out of its Moatize mine in Mozambique. The target has been reduced from 4.9 million tonnes planned earlier to 3.4 million tonnes. The revision follows incidents of labor disruptions and heavy flooding, which rendered its railway line temporarily unusable. Infrastructural limitations in Mozambique continue to pose a challenge to Vale, hampering its ability to get the coal produced from pit to port.

The reduction in export volumes, combined with falling coking coal prices in the international market, will impact revenues negatively. However, since the coal division constitutes just 2% to 2.5% of the company’s total gross operating revenues, the overall impact is expected to be muted. On the other hand, the news exposes the fragility of Vale’s Mozambican business and the significant challenges it faces to diversify away from its iron ore business.

Infrastructure bottlenecks are the topmost concern of coal miners operating in Mozambique. Both the government and the private sector have been executing various projects to expand and build new railway lines and ports, but infrastructure will take time to reach satisfactory levels. In 2012, Vale had to cut down its initial export targets by half due to infrastructure issues.

The Sena Railway line is the sole link for coal mines located in the central Tete province to the Beira port, from where coal is exported to other countries. Production of coal has outstripped the carrying capacity of this line and it needs to be upgraded. The upgrade has been delayed for years now and is expected to complete next year. Once complete, the line will be able to carry 6.5 million tonnes of coal per year.

Vale was thus planning to upgrade its production and export levels to 4.9 million tonnes in 2013. Further capacity additions will be required in the future years because Vale plans to invest heavily to increase the Moatize mine’s annual production capacity to 11 million tonnes. It will expand capacity beyond this only after the completion of the Nacala railway and port project in northern Mozambique which will allow it to export greater quantities of coal.

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