The Brazilian government has told Vale (VALE), the country’s largest iron-ore producer (and either No. 1 or No. 2 in the world) that it has to do more to build up the Brazilian domestic steel industry rather than just selling iron ore to Chinese steelmakers.
Sounds like a page right out of China’s book of industrial policy. Designate strategic economic sectors, that manual reads, and then develop domestic champions in that sector.
Vale is now exporting record amounts of iron ore to China, the world’sbiggest steel producer. At the same time, Brazil’s budget minister Paulo Bernardo said, in the first six months of 2009 Brazilian imports of flat-rolled steel climbed 26% from the first half of 2008.
In the second quarter of 2009 68% of Vale’s iron ore shipments went to China.
“We cannot be one of the biggest ore producers and ship it all abroad and end up importing steel,” Bernardo said.
Did Vale push back? Did the company say, If we’re really good at producing iron ore–and the company is the world’s low cost producer–then that’s what we should do? Did Vale tell the Brazilian minister to go re-read Adam Smith?
No way. Vale instead pointed out that it has already invested about $1.35 billion with Germany’s ThyssenKrupp (Frankfurt: TKA.F) in the Cia. Siderurgica do Atlantico steel mill being built in Rio de Janeiro state.
That response might have something to do with this: Previ, the pension fund of Banco do Brasil, a state-owned bank, is the majority shareholder in Valepar, Vale’s controlling shareholder.Â
The mill will be the first integrated steel mill to be built in Brazil in 20 years.
Vale also has investments in three other steel mill projects in Brazil, the company noted. When the four are completed they will add 18.5 million metric tons to the country’s steelmaking capacity. That’s about a 50% increase.
Which certainly should give steel company CEOs around the world and steel company investors pause. Vale, the world’s low cost iron ore producer, is investing to enlarge the captive domestic steel sector. The decision seems driven by politics rather than by some analysis of potential return on capital from adding more steel-making capacity to a world awash in steel-making capacity.
 That can’t be good for profits in the steel industry as a whole. Or in the already hard-pressed Chinese steel industry.
Juris, here’s the most recent story I can find on why trading has been halted in Fortescue:
From BusinessDay (here’s the link to the full story http://www.businessday.com.au/business/fortescue-metals-in-trading-halt-20090813-ejxq.html )
Fortescue Metals in trading halt
Barry Fitzgerald
August 14, 2009 .
ANDREW Forrest’s Fortescue Metals is in a trading halt before an expected release on Monday on the completion of a ”commercial negotiation”.
The halt follows speculation earlier this week that China’s sovereign wealth fund, China Investment Corp, was poised to pump $1 billion into Fortescue through the issue of convertible bonds.
In response to the CIC speculation, Fortescue told the ASX on Wednesday that it had a ”clear expansion objective” of increasing production to an annual rate of 95 million tonnes of iron ore within a ”medium-term horizon of 2012”.
I’ve seen analyst estimates that Fortescue need about $3 billion to complete its expansion and get production up to levels needed to achieve economies of scale and drive down its costs.
viwi, politics aside (and why should Brazxil be denied the creation of a national style industry when China, India, Korea, and Thailand all have decided they have to have one), there is one big differnce to investors between oil and iron. Oil is in a long-term scarcity situation. Hard to see how Brazil’s political decision to become an oil exporter isn’t also financially justified. Steel is in a global capacity surplus situation. Hard to se what the ROI is for some of the mills being built in Brazil or elsewhere.
I am not even sure if Chinese steel companies are even profitable. Theres some very questionable accounting going on. There is a lot of capacity in the world when you put China and India together with the traditional steel making nations like US and Japan. With Brazil entering the fray, steel price will be driven down.
But I think it may be good for TC, because more steel capacity = more demand for molybdenum.
Jim,
I might be wrong, but X number of years ago the world was smiling at the Brazil’s decision to become an oil net exporter country. At that moment it was a pure political decision.
It seems there will be some news from FSUMF as soon as today: http://www.theaustralian.news.com.au/story/0,25197,25923873-12377,00.html
Jim,
What are your thoughts on how these developments will impact FSUMF?
Jim,
How do you think this mandate by the Brazil govt. will effect TC? Will this help drive up the price of moly?