Brazil Mining Report Q1 2010

Brazil’s robust mining industry is showing signs of recovery from the economic downturn and should exhibit growth in 2009. As demand grows within the global steel industry, Brazil’s vast iron ore resources are becoming more attractive to domestic and foreign investment. China in particular is keen to secure stable supplies to cope with the country’s demand for metals. In November 2009, China’s Wuhan Iron and Steel Company announced it would be investing in Brazilian miner MMX. MMX has an annual production level of 10.8mn tonnes of ore but is confident that this can increase this to150mn with strategic investment. In the same month, Nacional Minerios SA also revealed investment plans of US$1.3bn to construct two iron ore pellet plants in Congonhas. The two plants will assist the company in reaching its goal of 40mn tonnes of iron ore sales, up from the current level of 16mn tonnes. Analysts believe that global demand for iron ore will rise to 1.4bn tonnes by 2015 from approximately 886mn tonnes in 2009.

Despite positive signs of recovery, there are concerns within the sector that plans to reform the mining code could hamper Brazil’s competitiveness compared to other countries. Reuters reported in November 2009 that the proposed amendments could include an increase in royalties paid on minerals. Mines and energy minister Edison Lobao was reported as saying that Brazil needed a new regulatory framework for the mining sector as the current legislation was ‘obsolete’. Aside from the speculative increase in royalties, the government’s reluctance to consult with the private mining sector is causing concern for companies and investors. Whilst the government argues that amendments to the code will benefit the state as well as mining companies, there is a fear that Brazilian mining firms will be unable to remain competitive in the international market. A number of countries including Africa and the Democratic Republic of Congo are becoming more attractive to investors. China’s demand for resources is also stimulating competition as the country increases its investment in securing stable supplies of materials overseas.

As the mining sector looks set to boom, there are also concerns that the infrastructure for transport and energy in the country may not be able to keep up with the advancements in mineral production. In October 2009, Vice-president of Brazil’s National Industry Confederation Jose Mascarenhas stated that whilst container traffic could double by 2013, the country’s ports and waterways would not be able to withstand the added strain in their current state. A four-hour blackout in the country in November 2009 further called into question Brazil’s ability to successfully support future demands from the growing sector.

Iron ore giant Vale continues to face criticism from the government about not doing enough to help the domestic economy. There is increasing pressure for the company to make investments within Brazil to stimulate recovery from the challenging financial climate. In October 2009, Reuters reported that President Luiz Inacio Lula da Silva may want a change of management within the company, including the removal of Chief Executive Roger Agnelli. In addition to idling plants and redundancies, the company has been criticised for not placing emphasis on developing steel products within the country but rather focusing on exporting raw materials. Some analysts believe that the criticism may be fuelled by political ambition, with the upcoming 2010 presidential race. Whether or not Vale is influenced by the governmental pressure, the company has announced a series of investments which should go some way to assuage the critics. In December 2009 Vale announced that there would be a significant investment with the construction of a steel mill in the north east state of Ceara. Production is expected to begin in 2013 with an output capacity of 3mn tonnes per year being achieved. This production level could be doubled with an additional construction phase to develop the plant. The initial construction phase is expected to cost US$4bn and create 15,000 jobs.

Global Overview we examine the phenomenon of increased Chinese activity in the global mining sector and what this means for the industry.

Industry Forecast Calls to introduce tax cuts for mining companies have been rebuffed by the authorities, and in November reports from Reuters indicated that a hike on royalties looked likely. Despite a contraction in real terms in 2008, we forecast that the Brazilian mining sector will return to a marginal growth in 2009. By 2014, the market should be expanding by around 5.6% a year in real terms and will reach a value of US$41.1bn, an increase of around 66%, compared with 2008.