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Cablegate: The Brazilian Mining Sector: Opportunites and Obstacles

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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

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