Vale targets long-standing production development pledge

Calls for investment to stimulate local economic development lead Brazilian mining giant to look to China

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Brazil iron ore steel Vale China

Brazilian mining giant Vale has pledged to build a steel mill in Pará state in partnership with China Communications Construction Corporation (image: Skeeze/ Pixabay)

When Vale announced plans to build a steel mill in Pará state in May with China Communications Construction Company (CCCC), many saw it as an attempt by the Brazilian mining giant to improve its image after the Brumadinho dam collapse that killed 248 people.

The tragedy, it was thought, pushed the company to invest in good jobs and products with higher added value, rather than just exploiting natural resource wealth. The steel plant would be “the strategic pillar in creating a new pact with society and focusing on activities as a means of local economic development”, claimed the company, which was recently ordered to pay US$107 million in damages following the dam disaster.

Yet prior to this announcement there had been years of abandoned projects and promises.

“This production will be the first step toward a new agenda for adding value to iron ore in the state… in which we can encourage [participation by] other investors,” Pará governor Helder Barbalho told finance publication Valor Econômico.

Vale is one of the world’s largest mining companies and China consumes more iron ore and steel than any other country.

As major players, they have been under pressure to invest in projects in Brazil and throughout Latin America that extend beyond exploiting and exporting raw materials and add value locally, thereby contributing to economic development and a balanced trade relationship.

But with Brazil in recession, there are doubts as to whether this project will ever leave the drawing board.

68%

the production capacity that the country’s steel industry is currently operating at

According to data from the Brazil Steel Institute, the country is currently operating at 68% of its steel production capacity. Meanwhile, Chinese steel production continues to break records.

José Loureiro, president of the Brazilian Institute of Steel Distributors, is not optimistic.

“I don’t see the point in producing a product here that the Chinese already make, the cheapest in the world,” he said.

Faltering projects

Investment to build the steel mill is estimated at R$ 1.5 billion reais (US$375 million). The state government expects to break ground in 2021 and the factory, which targets output of 300,000 tonnes per year, to come online in 2023.

This is not the first such announcement. Another steel mill project was announced in 2016, partnering Vale with the Argentine Cevital Group, but the plan stalled. In 2009, the company announced a steel mill that never came to fruition.

For years, China has faced demands and announced plans to invest in sectors such as infrastructure and industry, and to go beyond importing raw materials. “We have the intention and the desire to increase our investments in infrastructure, green technologies, high technology, and tourism,” then Chinese minister of trade Chen Deming said in 2011.

Since then, the Chinese government has made repeated commitments to develop manufacturing in Brazil and the wider Latin America region.

A 2015 bilateral agreement promises to  “promote the investment and cooperation on production capacity of companies and financial institutions,” citing steel manufacturing specifically.

The Chinese Ministry of Foreign Affairs followed with a 2016 policy document on Latin America that reiterated the pledge, as it did with hemispheric bloc the Community of Latin American and Caribbean States (CELAC) last year.

$42.6billion

the amount of Chinese investment in US dollars that Brazil attracted between 2011 and 2018

Between 2011 and 2018, Brazil attracted US$42.6 billion in Chinse investment, most of which focused on commodities and energy, according to the Brazil-China Business Council (CEBC). Tulio Cariello, Research and Analysis coordinator at CEBC, said investment in industry is not comparable to other sectors.

“There is disproportionate value. An investment in industry will not have the same volume as an investment in the energy sector,” he said.

In the steel industry, Chinese company Baosteel made two attempts to enter the Brazilian market but each stalled for different reasons, according to Marcio Sette Fortes of Sao Paulo University business school Ibmec.

In 2006, a project in the northern state of Maranhão fell foul of the licensing process, while in Espírito Santo state, which borders Rio de Janeiro, plans were undermined by the 2008 global financial crisis.

Though the Brazilian market is sluggish, it remains attractive to Chinese investors, according to Fortes.

“For them, this could be a good chance to test the national market. I believe that if there are positive results, there could be more investments.”

History of violations

The Pará state government is impatient for Vale to bring positive news to its people. The company has been mining iron ore for over 30 years in Pará, which is home to its largest mining unit, S11D.

There have been reports of human rights violations near the site, along with negative environmental impacts.

In the region that surrounds S11D, Vale has criminally prosecuted critics of its activities. There are also investigations into whether the company illegally spied on activists.

Vale’s largest customer is China, which has increased consumption of iron ore produced by the company in Pará.

I want the talks to be expeditious…we have no time to lose

This increase was mainly the result of internal restrictions on mining to contain pollution in China, which forced Chinese companies to pursue higher quality raw materials, such as Vale’s ore from Pará.

Even though it has not been in Brazil for long, CCCC has also earned its share of criticism. The company is involved in building a port in São Luís, Maranhão, a way station for Vale’s exports to international markets via the company’s private port.

The project has been criticised for the displacement of a community from its ancestral territory.

According to Exame magazine, CCCC is evaluating a total of 26 projects in Brazil and is prioritising “ports, railways, urban development, and industry”.

Meanwhile, the Pará government remains hopeful that this latest in a long line of announcements will attract other investments along the steel value chain.

“The government of Pará is determined to support [this project’s] feasibility, I want the talks to be expeditious,” governor Barbalho said two weeks ago in a meeting with the president of CCCC.

“We have no time to lose.”