It’s Brazil Versus China As the Iron Man Protects Its Pricing Power

By Joshua Schneyer

Joshua Schneyer reports on the territorial ambitions of mining giant Vale as it seeks to combat the growing clout of the People’s Republic in the steel market

Steel makers might not see Vale as a natural ally. The Rio de Janeiro company is, after all, the world’s leading supplier of iron ore, and just under two weeks ago it forced steel producers in Japan, Korea and Germany to eat a 65 per cent price hike. Worse, the increase comes as Vale is considering a bid for Switzerland’s Xstrata, the world’s number six mining company. Such a combination would give the Brazilians even greater pricing power vis–vis steel makers.

But Roger Agnelli, Vale’s chief executive, would say his merger plans are in the best interests of players across the industry, providing a counterweight to China’s growing clout in global markets for iron ore and steel. Western industrialists should “wake up” to China’s strength, he says.

The way he sees it, everyone in the consolidating mining industry is either predator or prey. The 48-year-old Agnelli expects Vale to be one of the winners and aims to make it the world’s top mining group.

He’s got within striking range. Since Agnelli took over in 2001, Vale has bought more than a dozen mining and metals companies in Brazil and abroad, and now spans six continents. Under Agnelli, shareholders have seen Amazonian returns of 64 per cent a year.

Central to his ambitions is owning Xstrata. The Swiss company is a major player in copper, nickel and coal, with operations in 18 countries including Brazil and the US. Vale won’t discuss the bid publicly, but industry sources say the company is close to lining up some $50bn (25bn) in loans to help cover the cash portion of its offer, which could total more than $90bn.

The Chinese, though, appear to have other plans. China has already shown it will write big cheques to gain control of resources, and at the start of last month the state-run Aluminium Corp teamed up with Pittsburgh-based Alcoa to buy 9 per cent of the London-listed Rio Tinto), the world’s number three mining company, for $14bn.

Rio Tinto, meanwhile, is the target of a $147bn hostile takeover bid from rival mining giant BHP Billiton.

Although Aluminium Corp hasn’t disclosed its motives for the purchase, China would be a clear loser if BHP succeeded (the combined company would have far greater pricing power), so many expect the Chinese to use their new inside position to try to scuttle that deal. Some analysts speculate that China may go after a chunk of Xstrata to keep it out of Vale’s hands, for similar reasons.

Of course, both partners in this strange tango need each other. Since 2002, Vale has quintupled its ore shipments to China – to 100 million tons in 2007. This year, Chinese steel makers are expected to consume almost half the world’s iron-ore output, including 40 per cent of Vale’s exports. After Japanese and Korean producers agreed to the price hike – the sixth straight year of increases from Vale – the Chinese will probably have to follow suit.

The heart of Vale’s operations is a vast complex in the central Amazon known as Carajas. The company has three mines in the area, where workers sometimes catch glimpses of big jungle cats, and the eerie groan of howler monkeys is seldom far off. Day and night, a fleet of 100 trucks as big as houses climb in and out of pits carved 1,500 feet deep into the rainforest. They move a million tons of rusty earth every day, unloading huge chunks into “jaw-crushers”, which process the rock into iron ore.

Vale believes its biggest customer – China, more than 13,000 miles away – is too distant. Rising freight costs for the 45-day journey around Africa’s southern tip are becoming a bigger disadvantage for the Brazilians than for rivals in Australia. So Agnelli is seeking to sell more ore to the US, just a one-week sail, or Europe, two weeks away.

“China is our main market but it’s not our natural market,” says Tito Martins, a top deputy to Agnelli.

Better yet, Vale wants big clients to set up shop in Brazil. Some heavyweights have already signed up to do just that. The Luxembourg- based ArcelorMittal, Germany’s Thyssen-Krupp and Korea’s Dong-kuk are all planning steel works in Brazil and expect to buy Vale’s ore.

Even Shanghai’s Baosteel can’t resist the pull of Brazil’s plentiful resources. The company, China’s biggest steel maker, is building a $5bn plant in Vitoria.

Despite Vale’s growing profile, some Brazilians worry that its global push will weaken the management of its domestic operations. “Vale should tend its own backyard, which is Brazil,” says Novarck de Oliveira, a Vale union leader. Martins counters that the best way to ensure the company’s future – and its leading role in Brazil – is to keep growing any way it can.

(c) 2008 Independent on Sunday, The. Provided by ProQuest Information and Learning. All rights Reserved.