The Brazilian Mining Sector: Opportunites and Obstacles

UNCLAS RIO DE JANEIRO 000010 SENSITIVE SIPDIS STATE PLEASE PASS TO USGS AGURMENDI STATE PLEASE PASS TO TREASURY MKACZMAREK STATE PLEASE PASS TO COMMERCE LFUSSELL EEB/ESC/IEC WHA/EPSC E.O. 12958: N/A TAGS: EMIN ECON EIND EINV PGOV EXIM SENV CH BR SUBJECT: The Brazilian Mining Sector: Opportunites and Obstacles REF: RIO DE JANEIRO 452 SUMMARY ¶1. (SBU) Brazil is one of the leading producers of minerals in the world, and minerals accounted for 53 percent of the Brazilian trade balance in 2008. Iron ore - the key feedstock for steel - accounts for 60 percent of mineral production value in the country, and output is expected to nearly double over the next five years. Brazilian mineral production and Chinese demand for steel and other alloys are inextricably linked, and analysts predict Chinese industrialization and urbanization will continue to spur minerals investment and production here for years to come. The Brazilian Geological Service believes there will still be substantial mineral deposit discoveries in Brazil and is undertaking a project to geologically map the entire country. However, dramatic changes to the current mining law may be coming that many leading Brazilian industry insiders fear will negatively impact competition and investment in the mining sector. Furthermore, some mining companies complain that stringent environmental licenses, lack of infrastructure, and high royalty requirements are obstacles to market entry and prevent them from maximizing production. End Summary. SNAPSHOT ¶2. (U) Brazil is one of the leading producers of minerals in the world, and minerals accounted for 53 percent of the Brazilian trade balance in 2008. Brazil markets 80 mineral commodity products, valued at 28 billion USD in 2008, five times greater than in 2000. Of this number, approximately 78 percent are metals, 20 percent nonmetallic, and 2 percent are coal, diamonds, and/or gems. Brazil is the world's largest producer of key steel and aluminum feed stocks, such as high-content iron ore and niobium, and the second largest producer of bauxite and manganese, also key materials in steel production. HIGH PRODUCTION GROWTH RATES, IRON ORE LEADING ¶3. (U) Iron ore - the key feedstock for steel - accounts for 60 percent of mineral production value in the country, and is expected to nearly double over the next five years. In 2008, Brazil produced 390 million metric tons (Mt) of iron ore (with 265 Mt of 
iron content),up from 212 Mt of iron ore (146 Mt of iron content) in 2000. The Brazilian Institute for Mining (IBRAM),an association that represents 182 mining companies in Brazil, forecasts 2009 production to be 350 Mt of iron ore, about 10 percent less than in 2008, due to the global economic downturn. Over the next five years, however, IBRAM estimates tremendous production growth, with output reaching 670 Mt by 2014 based on 30 billion USD in current iron ore investment projects. The association also predicts total minerals investment between 2008 and 2013 to exceed 100 billion USD, with high production growth rates projected in nickel, used for stainless steel, and copper, a mineral with extensive applications in energy and infrastructure. (Note: Brazil is a major exporter of nickel, bauxite, tantalum, manganese, and imports coal, potassium, copper, and zinc. End Note.) THE CHINA CONNECTION ¶4. (U) Brazilian mineral production and Chinese demand for steel and other alloys are inextricably linked. Mining giant Vale S.A. (CVRD),privatized in 1997, produces over 70 percent of all Brazilian iron ore production - including in pelletized form - and exports over one-third of its total output to China. According to Vale sales executives, the company's exports of iron ore, nickel, and manganese to China increased from 15 Mt in 2000 to 130 Mt in ¶2009. Citing unparalleled Chinese economic growth rates and a steady urbanization of China's 800 million rural residents, IBRAM's Economic Data Manager Antonio Lannes told Econoff that even with China's 600 Mt of annual domestic iron ore production, China still required 400 Mt of imports per year to meet demand. He said such high Chinese demand spanned all metallic minerals. ¶5. (SBU) China also serves as a financer, supplier, and competitor for Vale. Earlier this year, Vale signed a contract with a Chinese shipbuilder for the delivery of 12 iron ore carriers, each which can carry 400,000 Mt of iron ore, the largest such capacity of any ship. The company financed the purchase through the Chinese Export-Import Bank (Note: During an October 5 meeting with Charge d'Affairs, Vale's Corporate Finance Director Guilherme Cavalcanti said he wanted to buy more equipment from U.S. suppliers using U.S. Ex-Im Bank financing, but noted that MARAD obligations, which mandate the use of U.S. shipping lines to transport the products, made such deals cost-prohibitive. Vale's discussion with Ex-Im Bank is ongoing. End Note.) Chinese firms are also competing with Vale for mineral rights, especially for coal, in Africa. "They are going everywhere, even Afghanistan, Sudan, Myanmar," Christian Perlingiere from Vale said. "Lower profit is not an issue to them." BRAZILIAN GEOLOGICAL SERVICE PREDICTS MORE BIG DISCOVERIES ¶6. (U) The Brazilian Geological Service (CPRM) believes there are still substantial mineral deposits to be discovered in Brazil. With only one-third of the country's territory mapped, CPRM is managing a program involving 300 geologists to map the entire country's geologic formations. CPRM's Maria Glicia da Nobrega said the chances were "high" of finding first class poly- metallic deposits, such as the massive Carajas deposit, especially in the Amazon region. (Note: The world's largest iron ore mine, Carajas in Para state, holds an estimated 1.5 billion iron ore reserves and turns out about 100 Mt per year. Vale expects its output to rise to 130 Mt of iron ore per year by 2012. The deposit also holds high amounts of manganese, copper, nickel, and gold. End Note. ) Nobrega also complained that mineral exploration accounted for only four percent of total mineral investment, stating this number should be much higher considering the potential for new discoveries. SECTORAL CHALLENGES ¶7. (SBU) Even with abundant reserves and increasing demand, international companies and industry associations highlight notable obstacles, such as environmental licenses, that affect the sector. According to Luciano Ramos, Chief Operations Officer for London Mining, the long and uncertain process of obtaining environmental licenses was one of the reasons his company sold off its Brazilian operations. "In Brazil, it takes years to get a license, and even then, you might not get it at all," he said. "In Chile, it only takes months." The current environmental licensing system is divided into three steps: A preliminary license required during the planning stage, an installation license prior to any construction, and an operational license required before beginning mining or processing operations. While the time total time may vary, IBRAM's Lannes said the industry average was three years. Vale Business Development Manager Jessica Carvalho complained that difficulties in obtaining environmental licenses threatened the company's 11 billion USD "Carajas Southern Hill" project. The operation, slated to be the largest greenfield investment in the history of iron ore mining, would increase Vale's iron ore production by 90 million tons per year. ¶8. (SBU) Mining companies also face high tax and royalty rates on production. London Mining's Ramos referenced an Ernst and Young study that demonstrated iron ore was taxed at 19.60 percent in Brazil, including all royalties and taxes, compared to 15.40 percent in Australia. In potassium, the tax reached 41.60 percent, compared to only 18.24 percent in Canada. Vale's Corporate Finance Director Cavalcanti also complained about high taxes, explaining his company was the largest taxpayer in the world, compared to other mining companies. ¶9. (SBU) Lack of infrastructure also constitutes a significant challenge, especially for small-to-medium sized mining companies. According to Zuileica Castilhos of the Brazilian government's Center for Mineral Technology (CETEM),for example, relatively smaller companies simply cannot compete in iron-ore production, not only because of the large economies-of-scale involved, but also due to a lack of highways and independent rail systems. In the case of London Mining, for example, with no other viable transport options, the price offered by Vale for access to its railway was prohibitively high for the company to justify exercising its mineral rights in Minas Gerais State. And, while some companies explore alternate logistical routes, other obstructions often arise. For example, UK-based mining group Anglo-American has run into considerable delays constructing a 350 mile pipeline to carry iron ore slurry, i.e. iron ore concentrate mixed with water into a liquid form, due to staunch opposition from local landowners. MORE GOVERNMENT CONTROL ON THE WAY? ¶10. (SBU) The Brazilian government has proposed a regulatory framework for minerals to replace the existing code, in order to provide more sovereign control over mineral resources (reftel). Similar to the regulatory framework for the Pre-salt oil and gas reserves in spirit, the proposal aims to alter the current concession model, create new government bodies to administer deposits, and increase government royalties on production. Speculation even exists that the Government might require all foreign companies to include Brazilian joint ventures, under certain circumstances. While some report this new minerals framework to be a priority for the Government, industry is concerned the Government is not taking sufficient time or steps to allow for debate of the proposal. THE STATE AND VALE ¶11. (SBU) President Lula's public statements aimed at Vale also suggest more government involvement in the development of Brazil's mineral resources. For example, earlier this year President Lula called on Vale to create more jobs by opening steel mills and purchasing Brazilian-manufactured iron ore carriers, instead of Chinese-made ones. Vale, however, has no plans to go into the steel business, beyond its minority share in a dedicated steel manufacturer's mill, due to concern of turning customers into competitors. "We have been pressured to build steel by the government, "Vale's Calvalcanti stated, "but they seem appeased that we invested over a billion dollars in a steel mill." According to researchers at the Brazilian government's Center for Mineral Technology, President Lula also "demanded" that Vale produce more potassium chloride - a key feedstock for fertilizer production, and projected for depletion by 2020. (Note: This center is also undertaking research to create an alternate fertilizer feedstock from salts, such as magnesium. End Note). HEARNE