Vale, S.A’s Loss of Share in the Iron Ore Market May End Soon
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Brazilian mining giant Vale, S.A. (NYSE: VALE) has lost approximately 14% of its share of the seaborne market for iron ore since 2007, with most of that lost business going instead to the Australian operations of Rio Tinto Group, PLC (NYSE: RIO) and BHP Billiton, Ltd. & PLC (NYSE: BBL). VALE's loss of market share has been largely due to getting past significant regulatory and licensing requirements by the Brazilian government and obtaining the necessary approvals to expand its operations in that country. However, VALE is also taking steps to ensure increased demand for its iron ore in the Brazilian domestic market by expanding its presence in the steel industry.
VALE is the world's largest producer of iron ore, producing more than 300 million metric tons per year. However, it is estimated that the company lost almost $20 billion during the past ten years due to delays in getting a major expansion of an iron ore mining operation underway in Carajas State in the Amazon region of Brazil. VALE is also seeking to streamline operations in its currently operating Brucutu Mine in southeastern Brazil.
VALE's mammoth operation in Carajas State—known as its Serra Sul Project—will more than double the province's annual output of iron ore by providing VALE with almost 90 million metric tons per year in increased mining capacity. The Serra Sul Project has turned into a regulatory nightmare for the company because of very strict environmental requirements imposed on the project by both the Brazilian national government and that of Carajas State. Both of those governments have indicated that Serra Sul will not obtain approval until it is shown that its operation will have only minimal impact on the environment of the Amazon region. In order to meet these requirements, VALE is constructing the Serra Sul Project such that the high-grade iron ore will be moved throughout the operation by use of conveyor belts and not by the standard industry practice of using large open trucks. Furthermore, VALE had to agree to remove all waste material from the project to areas outside the Amazon rainforest region. While the permit process has already taken several years, the Brazilian government issued a permit to VALE in June of this year, which enables the company to complete further studies on the proposed plant and move closer to beginning actual construction. VALE's planning director Stephen Potter stated last week that while the company still must obtain almost 175 permits for the Serra Sul and Brucutu Mine projects to progress, VALE has approved an investment of almost $34 billion to fund those projects. However, Potter was unwilling to discuss a specific operational start date for the Serra Sul Project other than saying that progress is being made.
The Brucutu Mine is currently in operation, but is updating its facilities in order to comply with environmental requirements and expand capacity. VALE is installing automated mine drilling systems at Brucutu because they are much cleaner to operate, as well as much safer for employees. In yet another environmental project, VALE is also adding wind control fences at its iron ore pellet manufacturing plant in Espirito Santo State in order to minimize dust pollution in the region.
In order to increase revenue now and during the time, the company is waiting for the Serra Sul Project to come online, VALE is significantly expanding its investment in new steel manufacturing capacity in Brazil. Construction began in July on a new steel mill in northeastern Brazil that the company will operate as a joint venture with South Korean steel manufacturers POSCO (NYSE: PKX) and Dongkuk Steel Mill Company, Ltd. VALE has invested $5.1 billion in the joint venture. VALE is also working with ThyssenKrupp, A.G. to expand capacity of VALE's Companhia Siderurgica do Atlantico steel works, and has new steel mill projects in earlier stages of development in the Brazilian states of Espirito Santo and Para. VALE has stated that all of these new projects are expected to allow the company to obtain and maintain 50% to 60% of the domestic Brazilian steel market for at least the rest of this decade.
The Brazilian steel market is also very important to PKX, Dongkuk, and TKA. TKA's biggest markets outside of Europe are those of North and South America, while both Dongkuk and PKX have stated that they believe the Asian market for steel—particularly the Chinese market—will bottom out during the third quarter of 2012, thereby making the Brazilian market, as well as the markets of less traditional steel-producing countries, more important to the Korean companies' bottom lines.
I believe that investors must keep very close watch on VALE's Serra Sul Project as the project's success or failure will clearly have a profound impact, for better or worse, on the company's ability to maintain and expand its share of the worldwide iron ore market and, therefore, the value of the company. The questions are simply which way will the project go and how much time will it take to get there? It seems to me that VALE's expansion in making steel is a natural extension of its domestic business in Brazil, but that market's future is unknown, and whether such expansion will make up for losses due to delays—or worse—in Serra Sul is yet another, probably even bigger, unknown. Investors should therefore be careful when evaluating the risk of the Serra Sul Project and possible delays in its approval when trying to determine the value of VALE's stock in their holdings.
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