Analysis: Brazil's Vale's challenges go beyond iron ore

Thu Oct 11, 2012 5:42pm EDT
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By Jeb Blount

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.   Continued...

An overview of Ferro Carajas mine, the world's largest iron ore mine, operated by Brazil's Companhia Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State, May 29, 2012. REUTERS/Lunae Parracho