ECR December 2012

ECONOMIC &COMMERCIAL REPORT

Number 02 | December 2012Embassy of India

Brasília

Brazilian Iron Ore Industry: True as Steel?

2 | Economic and commErcial rEport

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Index

Editorial Board

Economic and Commercial Report

Number 01November 2012

Published by Embassy of India

BrasíliaSHIS QL 08 conjunto 08

casa 01 - Lago Sul Brasília-DF

Editor:Raj Srivastava

Texts:Yatin Patel

Layout:Hadassah Levyski

04 Brazilian Economy

07 Investment

09 Industry Watch

12 Focus Story: Brazilian Iron Ore Industry: True as Steel?


According to data released in a study by

the WTO, OECD and the UN on 31st

October, Brazil is the nation that opened

the largest number of anti-dumping cases at this

international organization. Analysts affirm that

this practice is “elitist” in that it “protects” specific

sectors by protection against international

competition. The prices that Brazilian consumers

are obliged to pay for pharmaceutical products,

autos, cell phones and electronic products are

absurd compared to average international prices.

Of the 54 cases filed at the WTO between

May and September 2011, Brazil had 7,

Australia 14 and India 8. Between May and

September 2012, of the 77 cases filed, Brazil

had 27, Canada 9, China 7 and Australia 7.

Brazil – leader in WTO anti-dumping complaints

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According to data compiled by the

Economist Intelligence Unit that

compiled average growth of industrial

sector as a percentage of GDP in 2011 and

2012, Brazil had the worst performance of

all 26 emerging markets surveyed: •+1.0%.

Estonia led with 10.0%, followed by China

(9.1%), Latvia (8.4%) and Turkey (6.9%).

Brazil – worst IP among 26 emerging markets


Increasing profit remittances and foreign

travel by Brazilians drove up the current

ac¬count deficit in October to US$5.4

billion, the highest ever for the month.

Despite the increase, however, the deficit

was easily covered by the month’s foreign direct

investment which totaled US$7.7 billion, also

a record. The deficit for the year now totals

US$39.5 billion and FDI stands at US$55.3 billion.

With the dollar stabilizing in the range of

R$2.03 in October, Brazilians again increased their

international travel, producing a tourism deficit of

US$1.5 billion, the highest ever for the month.

This left the deficit for the year at US$12.8 billion.

Although profit remittances have been in

decline this year, in October they jumped by

51% to US$2.35 billion. Central Bank analysts

attributed this to indications that the economy

was beginning to improve in the fourth quarter.

Record Current Account Deficit for October

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Brazil in October posted a trade

surplus of US$1.662 billion

on exports of US$21.766

billion and imports of US$20.104 billion.

The month’s exports fell 6% on a daily

average from September and were down 10.6%

versus October 2011. Imports declined 0.5% from

September and 7.6% year-on-year. The month’s

surplus was 29.5% below that of Octo¬ber 2011.

For the year, Brazil’s trade surplus now totals

US$17.386 billion on exports of US$202.362

billion and imports of US$184.976 billion. Exports

for the year have fallen 5.5% versus the same

period last year while imports are down 1.9% on a

daily average. The surplus through October was

31.6% below that of the first ten months of 2011.

October Registers Trade Surplus of US$1.6 Billion

Brazil on Nov. 5 opened a new debate

before the World Trade Organization

on the right of countries to protect

their currencies from extreme fluctuations.

Government officials have taken the

position that Brazil is engaged in a currency

war because of economic stimulus measures

adopted by the United States and other

nations which have increased international

liquidity and appreciated the real as well

as other emerg¬ing nation currencies.

Brazil’s ambassador to the WTO Roberto

Azevedo presented a document outlining

Brazil’s argument. The government is seeking

WTO approval of measures that could be

adopted by Brazil and other countries to protect

their economies from the impact of over¬valued

currencies, such as measures to restrict imports.

Brazil Defends Actions To Protect Economy from Overvalued Currency

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The transatlantic exchange group

NYSE Euronext on Nov. 5

announced plans to launch a new

Brazilian stock exchange in partnership with

Brazil’s Americas Trading Group (ATG).

The exchange would be based in Rio

de Janeiro, starting operations by the end of

2013 or the start of 2014. The investment was

estimated at US$100 million and executives

from the two groups said they expect the new

exchange to be responsible for between 10%

and 15% of daily local trading in Brazilian shares.

At present, Brazil’s BM&FBovespa has

a monopoly on stock trading in the country.

New Stock Exchange Planned for Brazil

Brazil’s Copersucar and the US company

Eco-Energy announced on Nov. 5 that they

are linking their ethanol operations to create

the largest biofuel marketer in the world.

The two firms together control 12% of

the global market for ethanol, with a combined

supply capacity

of 2.6 billion

gallons (10 billion

liters) of biofuel

per year, the

partners said in a press release.

Brazil makes ethanol from sugar, while

US producers use corn as raw material.

The two companies agreed on a

joint investment in Eco-Energy “to build

and expand their integrated biofuel

platform,” according to the press release.

Copersucar, which calls itself “the

largest Brazilian sugar and ethanol

trader integrated to production,” will

have a controlling stake in the venture.

The company has annual sales of US$7.5

billion, compared

with US$3 billion

for Eco-Energy.

“With this

p a r t n e r s h i p ,

Copersucar becomes a truly global company

in the biofuel market, expanding the scale of its

operations to the two main ethanol markets in

the world, which are the US and Brazil, both in

production and consumption volume,” said the

company’s chairman Luis Roberto Pogetti.

Copersucar Buys American Ethanol Company

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Reportedly, Zurich-based UBS AG,

Switzerland’s largest lender, has

obtained a license to operate as a

bank in Brazil – more than two years after filing

its request. This decision would allow UBS to

conduct proprietary trading in Brazil plus make

Real-denominated loans, raise money in Brazilian

markets, and underwrite stocks and local bonds.

Also, the Central Bank approved the acquisition

of the Brazilian brokerage Kink Investments by

UBS; this deal had been reached in April 2010.

UBS decided to re-establish a Brazilian unit

after selling Banco Pactual SA for US$2.9 billion to

billionaire André Esteves and his partners in 2009

– who then created Banco BTG Pactual SA.

UBS receives license to operate in Brazil


Automotive production capacity in Brazil

is expected to outpace demand until

2016, a trend that will pinch margins on

small cars - the country’s largest vehicle segment

- a Ford Motor Co top executive said on Nov. 14.

“Excess capacity is going to put

more pressure on pricing and margins,

particularly in the B segment, or small car

segment, which is the largest segment in

Brazil,” Mark Fields, Ford’s head of the

Americas, said during an investor conference.

This year, Brazil’s auto sales are expected

to be around 3.8 million cars. But capacity is

more than 20% higher at 4.7 million vehicles.

The gap between demand and installed capacity

is expected to grow every year until 2016.

From 2008 to 2011, the top four

automakers in Brazil, including Fiat SpA and

Ford, have lost market share despite a nearly

30% jump in sales. Meanwhile, companies like

Renault and Hyundai Motor Co have gained.

Newer entrants have started building

factories in Brazil in response to steep tax

incentives and high penalties for imported

vehicles. Last month, Kia Motors Corp, hurt by a

tax hike on foreign-made cars of 30 percentage

points, said it would study building a factory in Brazil

“While the industry volumes are

growing in Brazil, which is fantastic, capacity

is growing at a faster rate,” Fields said.

Auto Production Capacity Outpacing Demand

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Wuhan Iron and Steel Group, China’s

fourth-largest steel producer, announced

it has abandoned plans to build a US$5

billion steel mill in Brazil after negotiations

on infrastructure investment failed.

The company’s head, Deng Qilin, said

Wuhan’s Brazilian partners had not provided

the necessary conditions for Wuhan Iron

and Steel, also known as Wugang, to invest.

“Railways, port terminals -- they

haven’t built anything. The market also

isn’t there, so now we have stopped

the talks and for the moment we aren’t

thinking about it,” he told reporters.

The Brazilian partner, LLX Logistica

SA , said that talks on the 5-million metric

ton-per-year (5.5 million tons) steel project

at the port of Açu were now “dormant” and

that the two sides had not met for months.

This follows the earlier decision this

year by ThyssenKrupp to sell its majority

stake in Brazil’s CSA steel com¬pany.

ThyssenKrupp has not yet found a buyer.

Meanwhile, mining company Vale is

proceeding with the construc¬tion of a

US$4.5 billion steel mill in the northeastern

state of Ceará. Its partners are the

Korean firms Dongkuk and Posco.

China’s Wuhan Abandons

Brazilian Steel Project


The price of iron ore - the main steelmaking

ingredient - in the Chinese spot market

<.IO62-CNI=SI> has fallen by about a

third in the last few months. In September, 2012

at less than $90 a tonne, it was trading at its

lowest levels in three years. Pitching for Brazilian

Iron Ore mining industry in this time may sound

like whistling in the dark. But whistle stop tour of

Brazil´s Iron ore industry will not be out of place.

In 2011, Brazilian iron ore output reached

395 million mt/y and production has increased

every year for a decade. Iron ore mines

traditionally are very large operations, requiring

considerable capital and political clout to

put into operation. It is no surprise that Vale,

listed but largely controlled by the government

dominates the nation’s iron ore landscape.

Vale enjoys prime position in Brazil; it owns

exploration rights in perpetuity, sits on much of

the most prospective land and historically held

a national monopoly. In 2010 Vale produced

81.7% of Brazil’s iron ore, but while its rivals

only produce a fraction of what the national

champion mines, they are still significant

producers in global terms. Usiminas, Brazil’s

largest steel maker, was estimated to have

mined 7 million mt in 2011 of iron ore. The

nation’s second largest steel maker, CSN, has

pursued a more vertically integrated strategy

and produced 26 million mt of iron ore in 2011.

MMX, the iron ore group established and

controlled by Brazil’s richest man, Eike Batista,

mined 13 million mt in 2011 and international

players Arcelor Mittal and Anglo American added

another 5 million mt/y each to national output.

New Dogs but Old Tricks

While the biggies dominate the production,

a handful of minnows are active in the Brazilian

iron ore space and their ranks are swelling.

Iron ore exploration work used to be focused

on finding the next “el dorado,” with smaller

deposits passed over. Rising iron ore prices,

improvements in beneficiation technologies and

innovative business models, including truck

to port, have encouraged small companies to

start taking a fresh look at smaller deposits.

Brazilian Iron Ore Industry: True as Steel?


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ASX-listed Centaurus Metals is developing

a low-grade project in northern Minas Gerais.

Despite the grades and the relatively small size

of the resource, the project can turn a good profit,

explains managing director Darren Gordon. “We

completed the pre-feasibility study last year

so we have relatively current costs at present.

We arrived at a capital cost of about $132

million with an NPV of just under $300 million.

Jambreiro will produce 2 million mt/y of 66% iron

ore with an operating cost of just under $20/mt.”

As export capacity is constrained in Brazil

and building new railway capacity is not an option

for most smaller mines, Jambreiro is being built

to service the domestic market, which means

lower sales prices but also lower transport costs,

capital expenditure, and a simpler project from a

development and permitting perspective (railways

are subject to long and complex environmental

permitting processes just like mines).

Bemisa Group is unusual in being a

Brazilian-managed company backed by local

private equity. The company has an extensive

portfolio of properties in eight states covering

a range of mineral types. Their most advanced

project is Planalto Piauí, located in the northern

state of Piauí. Their reserve of iron ore deposit

is 880 million tons (measured, indicated and

inferred). ``Exploration began in 2008 and

this year we entered the engineering phase.

We are working hard to start production in the

second half of 2015. The final product will be a

premium pellet feed fine with more than 70%

Fe content, low level of contaminants and direct

reduction quality,” said Augusto Lopes, CEO. In

a project of this scale, logistics and infrastructure

are keys and Lopes argues that they are very

favorable. “We have already secured allocation

on the new Transnordestina railway, which

will pass around 6 km from the main ore body

and will connect the project with the two major

Brazilian ports of Suape (PE) and Pecém

(CE). A 500 kv power transmission line passes

just 10 km from the future processing plant. In

relation to water supply, the National Water

Agency (ANA) has granted Bemisa a license

to pump 15 million cubic meters of water per

year, enough to satisfy our needs,” said Lopes.

There may be light at the end

of tunnel but it is a long

tunnel

One of the biggest problems in Brazil is its

logistics and infrastructure. A company that has

done a lot to change this is Vale, which has been

investing in these areas for more than 20 years.

With about $320 billion in assets, BNDES is one of the

world's largest investment banks and the main source

of corporate credit in Brazil


However, most Brazilian companies realized only

recently the existence of this problem, since they

are now facing complex challenges in executing

potential projects due to this logistical bottleneck.

The Brazilian railway system does not reach all

the strategic resources. Beside this, bottlenecks

prevail at Brazilian ports both in terms of the

gross tonnage that they can handle and in terms

of the size of vessels that they can accommodate.

With China’s slowing economy and

the festering European sovereign debt

crisis, big mining companies such as

Brazil’s Vale SA and Australia’s BHP Billiton

Ltd and Rio Tinto Ltd are considering

delaying or canceling major mining projects.

With about $320 billion in assets, BNDES

is one of the world’s largest investment banks

and the main source of corporate credit in Brazil.

BNDES lending for steel projects fell 80 percent

to 195 million reais in the January-August

period, compared with the same period a year

ago. This just makes the situation worst for the

industry which is facing prolonged rough patch.

Hope is a good breakfast but

bad supper

Guilherme Cardoso, chief of BNDES’s basic

industry department and Vale’s iron ore chief, Jose

Carlos Martins are optimistic about coming time.

The high quality of Brazilian iron ore

compared to Australian, Chinese and Indian

competitors means Brazilian mines are likely to

be among the last to lose business if demand

plummets, said Cardoso and Landim, who spoke

to Reuters at bank headquarters in Rio de Janeiro.

This means steelmakers, especially in

China, the world’s largest iron ore market, will

likely opt for Brazilian ore on both price and

quality over ore from elsewhere, they said.”Not

only does Brazilian ore have a higher iron content

than most competitors, it has lower impurities,”

Cardoso said, adding that new projects in

Brazil are to a degree protected “because

most producers in the world have higher

costs.”Vale’s investments in ships, including

the giant Valemax carriers, have reduced

transport costs, Landim and Cardoso said.

But logistics and transportation remain

the biggest problem for Brazilian producers as

Australia enjoys benefit of better infrastructure

and proximity to China. Without solving the

Gordian knot of better infrastructure and credit

availability, Brazilian iron ore industry can not

expect itself to bring the sunny days back.

“The high quality of Brazilian iron ore compared

to Australian, Chinese and Indian competitors means

Brazilian mines are likely to be among the last to lose

business if demand plummets”(Cardoso and Landim)

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ECR December 2012

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