Brazil and Vale, At a Crossroads

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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. BNDES a government run development bank, and Banco do Brasil, the country’s biggest state-run bank, will be easier to persuade; Bradesco, a listed bank, will be harder to strong arm, but the finance minister Guido Mantega held a meeting last week with just that in mind.

The outcome will say a lot about Brazil and where it is going. Does it honestly hold to the principals of a free market, or is it slipping into socialism? As the article quotes a party close to the board: “This is an attack on the institution, whoever they hire next will have to abide by the government’s rules and no other professional executive wants to be a part of that. We really are at a turning point, and this is a very dangerous situation, not only for the company, but for the whole country. Are we going to go down the path of the free market or the path of Venezuela?

–Stuart Burns

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