[Roger Agnelli] Brazil and Vale, At a Crossroads – by Stuart Burns (Metal Miner-March 29, 2011)

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Stuart Burns

We have written on several aspects of business and the metals markets in Brazil recently; the latest just last week about Gerdau Steel raising billions in a share sale with the probable intent of bidding for one or more of its major domestic competitors. Generally that is taken as a positive sign; although to invest in new facilities for organic growth rather than acquisition would be better, at least buying competitors is a vote of confidence in the economy’s future.

So what should we make of the spat developing between the government of new president Dilma Rousseff and Vale, reported in an FT blog article? Apparently, Vale’s high-profile chief executive Roger Agnelli’s contract is coming up for renewal in May and the government is making every effort to prevent his re-appointment. Although Vale was privatized in 1997, the firm is Brazil’s largest exporter and along with Petrobras, the national oil company, a major source of foreign exchange and tax revenue. Vale tripled profits last year to $17 billion on the back of some $47 billion in revenues according to an FT article this week.

At the heart of the issue is the government’s desire to channel much of the investment and revenues internally to Brazil’s benefit, rather than as the free market has suggested is the most efficient for the firm. The government wants Vale to invest more domestically in developing the steel industry and less on mining iron ore to export to China. Brazil suffers a serious balance of trade deficit with China, part of which is made up of flat rolled steel imports supported by a strong real, making imports more competitive than domestic production. The government is also livid that Vale invested in a fleet of bulk ore carriers to be built in China and South Korea rather than being built in Brazil. Needless to say, the government would also like to get its hands on more of that $17 billion in profits for the state coffers.

In any normal company the shareholders would be expected to resist the replacement of a highly successful CEO and by default the rest of the seven executive directors who have said they would not tolerate a forced change. But in the case of Vale, most of the shareholders are state enterprises.

For the rest of this commentary, please go to the Metal Miner website: http://agmetalminer.com/2011/03/29/brazil-and-vale-at-a-crossroads-2/

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