The Rising Influence of Rising Affluence

[DewDiligence]

Lula Tells VALE to Invest More in Brazil—and VALE Listens

[Unlike Petrobras, which is controlled by the federal government of Brazil, VALE is controlled is a consortium of private investors. Nevertheless, President Lula can make life miserable for VALE (or any other Brazilian company) if they stray too far from Lula’s political inclinations. In this case, however, Lula’s apparent victory is mostly cosmetic. VALE will dutifully increase investment in Brazil during 2010 relative to 2009, but the level of investment will remain below what it was in 2008, before VALE cut the supply from its mines to meet the lowered global demand.

VALE’s share price has more than tripled from its low in Nov 2008.]

http://www.reuters.com/article/marketsNews/idAFN1939870320091019

›Mon Oct 19, 2009 7:12pm EDT
By Marcelo Texeira

SAO PAULO, Oct 19 (Reuters) - Brazilian mining giant Vale on Monday announced billions of dollars in new investments, buckling to months of government pressure that may foreshadow a growing state influence in the country's private sector.

Vale, the world's largest iron ore producer, upped its 2010 investments by more nearly 30 percent after a torrent of criticism by President Luiz Inacio Lula da Silva that it was not doing enough for economic development.

Chief Executive Roger Agnelli announced the $12.9 billion 2010 budget after a meeting with Lula that followed rumors Lula was seeking to force Agnelli's ouster and reports of a possible iron export tax that would spur Vale to spend more at home.

"It's the largest investment in Brazil ever carried out by a private company," Agnelli told reporters.

The new investment plan could help ease the crescendo of tensions between government and Vale management. But it may not end the criticism, as it offers no discernible new outlays in the steel industry -- one of Lula's principal complaints.

Asked if he had been pressured to increase domestic investments, Agnelli responded, "The president has his role, he really has to stimulate, I do the same with my employees."

Lula has suggested he wants to use Vale to spur economic growth in Brazil in much the same way as his government has used state-run oil company Petrobras to stimulate local business by boosting its purchases of Brazilian-made goods.

The 2010 plan, is up 29.3 percent from the $10 billion invested in the twelve months ending this June though still less the $14 billion it earmarked for this year before the financial crisis forced cuts.

Steel projects will only get 3 percent of that compared to 30 percent for iron, the company's principal revenue driver.

EASING TENSIONS

Vale began attracting criticism late last year when it laid off some 1,200 Brazilian workers and idled capacity as the financial crisis cut into global metals demand and halted a five-year commodities boom.

Lula has complained Vale is relying too much on exports of raw materials and charged this does not generate enough jobs in Brazil despite providing foreign exchange.

Vale has sought to attract steel investment to Brazil by becoming a minority shareholder in domestic joint ventures with steelmakers, but does not want to be a major steel producer because this would leave it competing with its own clients.

Its stake in steel operations has grown in recent months as steelmakers, faced with slack demand, have struggled to finance major new projects.

Vale's announcement on Monday comes on the heels of last week's pledge of $5.6 billion in new investments by 2015 to expand iron output in Minas Gerais state.

Iron prices have since March recovered along with equities markets on hopes that massive stimulus packages by governments around the world will spur construction and building industries.

The company's shares settled 3.11 percent higher on the Sao Paulo stock exchange, considerably higher than the 1.57 percent rise of the Bovespa index, buoyed by recovery hopes that helped lift Brazil's principal steelmakers as well.

A former state-owned company privatized in the 1990s, Vale is run by a partnership between Brazilian Bank Bradesco (BBD), Japanese trading house Mitsui and a consortium of Brazilian state-controlled pension funds.‹