Brazilian iron ore producers establish a local presence

06 August 2012

The current industrialisation effort in the Middle East has encouraged Brazilian producers to set up facilities in the region to cater to the expanding demand for iron ore

Key fact

The world’s largest producer of iron ore is Brazilian firm Companhia Vale do Rio Doce

Source: MEED

The Middle East’s ongoing industrialisation effort has created a raft of new opportunities for Brazilian exporters of raw materials, beefing up trade volumes and prompting canny investment choices that has seen Gulf money directed to Belem and Brazilian projects in Sohar.

The region is the third main destination for Brazilian exports of mined products, second only to Asia and the EU, says Rubens Gama, director of the Department of Trade Promotion and Investment at Brazil’s Ministry of External Relations. “The value of Brazilian exports of these products grew from $1.13bn in 2008 to $2.46bn in 2011. There is great potential for growth of these exports to the Middle East,” he says.

Arab market

The Brazilian export basket to the Middle East is still geared towards commodities, with sugar and iron ore being the most prominently traded goods. However, the Arab world is growing in importance as an export market for Brazilian producers.

“For Brazil, expanding trade with the Gulf region is part of its strategy to diversify export destinations”

Rubens Gama, Department of Trade Promotion and Investment

The region outranks Latin America and Africa combined in exporting ore to Brazil. Leading the charge is the world’s largest producer of iron ore, Brazilian resources giant Companhia Vale do Rio Doce (Vale), which has invested heavily in establishing a presence in the Gulf. In 2011, it opened a production and distribution centre for iron pellets in Sohar Industrial Port located in Oman, which was an investment worth $1.36bn.

The Middle East export push fits a broader agenda for Brazil, says Gama. “For Brazil, expanding trade with the Gulf region is part of its strategy to diversify export destinations so that our external sector is not dependent only on a limited number of trading partners, as it used to be in the 1980s and 1990s. This strategy has had excellent results in recent years and was a major factor in ensuring Brazil was one of the countries least affected by the financial crisis in 2008 and 2009.”

Brazilian exports to the Arab world grew by 4 per cent in February year-on-year, reaching $970.5m, compared with $930.1m in 2011. Iron ore sales for the first two months of 2012 reached a healthy $334.5m.

Vale’s sales figures to the region show the Middle East’s growing importance to Brazil’s mining sector. They grew 9.2 per cent in 2011 to $1.37bn, although the Middle East’s share of the company’s total global sales revenues is still small at just over 2 per cent.

The first pelletising unit came on stream in April 2011. The Middle East bought 6.9 million tonnes of ore and pellets from Vale in 2011. This is likely to rise substantially as a result of the commissioning of Vale’s Sohar pelleting plant. The fourth quarter of 2011 saw iron ore shipments of 2.5 million tonnes from Sohar, representing a 66.6 per cent increase on the same quarter in 2010.

Vale’s Oman plant will provide a platform for penetration of the surrounding region. The Sohar facility, which employs 1,200 people, has a maximum production capacity of 9 million tonnes a year (t/y) of direct-reduction pellets from two pelletiser units, each with nominal production capacity of 4.5 million t/y. The pelletising plant and distribution centre, which enables large amounts of raw iron ore to be stored on a just-in-time basis, will serve as a hub for meeting growing demand for iron ore products in the Middle East, North Africa and Asia, including India.

The iron ore supplies will come straight from Brazil to Sohar port. Vale will distribute the blended ore and pellets to customers across the region, with the distribution centre boasting a capacity to handle up to 40 million t/y.

Establishing presence

To maximise the distribution centre’s capacity, Vale entered into a partnership with Sohar Industrial Port Company to build a 1.4-kilometre deepwater terminal. The terminal is able to receive very large ore carriers, which are ships that are able to carry up to 400,000 tonnes of iron ore from Brazil to the coast of Oman.

Vale has signed an agreement with Oman Shipping Company to build four chartered ships that will operate exclusively for the company. They are due to be delivered this year, raising the efficiency of Vale’s logistics system.

“If you compare Brazil’s trade with the Arab world in the 10 years to 2011, it increased more than four-fold”

Michel Alaby, Arab Brazilian Chamber of Commerce

The company plans to double the pelletising plan’s production capacity to 18 million t/y by 2018. This fits the broader strategy of targeting the fastest-growing markets from locations within those markets, with similar plants being built in Malaysia and the Philippines. Vale also has production facilities in China.

“Vale is building a new stage of its relationship with the Arab world, but not only the Arab world, as it is also exporting heavily to countries such as China, Malaysia. Indonesia and Thailand,” says Michel Alaby, chief executive officer of the Arab Brazilian Chamber of Commerce. “Today, Brazil is the top global producer of ore pellets.”

Vale’s decision to establish iron ore pelletising facilities in Oman in order to target the wider Middle East market may prove timely, given the gloomy prognosis for Chinese iron ore demand. China’s steel growth rates have flattened in the past few months. Beijing is the world’s largest consumer of raw materials, but the Chinese government’s own growth target of 7.5 per cent for 2012 represents a sharp downturn from the 9.2 per cent growth in 2011 and 10.4 per cent in 2010.

Global carbon steel output is running at 1.5 billion t/y. China remains the main growth driver with 50 per cent of the demand, but expansion has broadened. While the Middle East is a larger consumer of iron ore now, it is unlikely to fully compensate for waning Chinese consumption.

Vale’s interests in the Middle East stretch beyond ore exports. In September last year, it exported Mozambique’s first coal shipment in 28 years to Dubai - a 35,000-tonne cargo.

“The Arab world is becoming more important than it was for Brazil,” says Alaby. “Last year we exported $15bn and imported about $10bn, making $25bn trade. If you compare trade in the 10 years to 2011, it increased more than four-fold.”

Vale’s growing status in global markets has attracted the attention of Middle East downstream users, who have identified investment opportunities in teaming up with the Brazilian giant.

Commercial relations

In May 2009, Dubai Aluminium (Dubal), operator of one of the world’s largest single-site aluminium smelters, became a partner in Vale subsidiary Companhia de Alumina do Para (CAP), with a 19 per cent holding. CAP is one of the largest global producers of aluminium and will be responsible for the implementation and operation of an alumina refinery located in Barcarena, 5km from the alumina refinery of Vale subsidiary Alunorte in Belem, Brazil.

The greenfield alumina plant is due to come on stream in late 2012. The initial production capacity will be 1.86 million t/y of alumina through two lines, each with a capacity of 930,000 t/y. Future capacity expansions at this refinery have the potential to reach up to 7.4 million t/y.

In the past, Vale has expressed interest in assisting Saudi Arabian Mining Company (Maaden) in exploiting its bauxite ore deposits. The Maaden Bauxite and Alumina Company, a joint venture between Maaden and the US’ Alcoa, operates a bauxite mine and an alumina refinery project at Ras al-Khair in the east of the kingdom. Brazilian contractor Fidens is reported to have won a contract in February to help develop the bauxite deposits.

Vale is not the only Brazilian corporate giant to have built close commercial relations with Middle Eastern companies focused on raw materials. In 2009, Brazil’s state energy company Petrobras made a high-profile visit to Jubail industrial city in Saudi Arabia’s Eastern Province, expressing interest in helping out with plans to build a fertiliser plant to produce ammonium nitrate and a green petroleum coke calcining (CVP) unit to supply the aluminum industry. CVP is used domestically by the steel industry as a substitute for higher-priced metallurgical coal.

Petrobras negotiated the supply of CVP to the calcining plant, as well as possibly participating in the two projects in association with Saudi firm Modern Mining Holding Company. A memorandum of understanding was signed and in May 2010, the two sides signed a major deal to build the plant at Jubail, covering 400,000 square metres.

The 50:50 joint venture project, expected to be operational before mid-2012, will have an annual production capacity of up to 700,000 tonnes. It will also establish strategic alliances and offtake arrangements with aluminium producers in Saudi Arabia and other Gulf countries. Under the terms of the agreement, Petrobras will supply the feedstock.

Aluminium demand

Petrobras’ decision to build the CVP plant in Saudi Arabia reflects booming demand from the region’s expanding roster of aluminium companies. It will be looking to target customers in other Gulf states apart from the kingdom. As Middle Eastern economies continue to chart a downstream industrial effort, more such agreements are likely to emerge from leading Brazilian suppliers of raw materials.

Despite the recent Arab uprisings, Brazilian firms have demonstrated a robust risk appetite for the region, says Alaby. Brazilian investment in Middle Eastern mineral resources is increasing across the region, defying near-term events. “While there has been some decline in exports to Libya and Syria, for most of the other countries such as Saudi Arabia, Kuwait, Egypt and Morocco, our exports have increased,” he says.

The willingness of Brazilian corporates to partner with well-positioned and strongly capitalised Middle Eastern investors should ensure a greater presence along the value chain, bringing Brazilian raw materials to one of the world’s faster-growing economies and offering spin-off opportunities for all sides.

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