Brazil's Iron: Records Without Profits

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How much ore do you have to mine before you're capable of making it into the black? If you're the unlucky Brazilian mining conglomerate Vale, the answer is more than any other company in history. It was both a banner year for production and an unfortunate year for the accountants within the company and the country writ large, a year filled with economic highs as well as resounding crash from the largest economy in the southern hemisphere. What's making iron prospects look so poor, and why is Brazil bearing the brunt of the price depression?

Geological And Guesswork

Approximately thirty billion dollars worth of metal ore leaves Brazil each year to be refined and molded by industries the world over. Metal accounts for around twenty percent of Brazil's exports and iron accounts for around eighty percent of that twenty percent (for those like us who need a calculator, that means iron is sixteen percent of the total national exports). That's because the Brazilian soil is particularly rich in silicates, the main determinant of iron concentrations. Since mountain regions are more likely to contain silicate, the huge rain forests of Brazil work to the miners' advantage by ripping apart mountains with rainfall and huge plant growth, then transporting the iron concentration downstream (the same effect on a smaller scale takes place in northern Minnesota, where glaciers did the legwork). As such, it's easier to mine for iron in Brazil than in many other nations, especially given the availability of relatively cheap labor since the OECD lists the Brazilian average wage as 52nd in the world, between Mauritius and Macau. Where Brazil suffers, however, is in the fact that it's more difficult to prospect for iron and other metals due to the massive rainforest standing in the way. As such, scientists test out land patches to determine yields but have no easy reference for richer deposits if they're covered up by jungle and have no easy access to transportation, electricity, water, and so on.

World Cup Blues

Those who turned on their television to watch the biggest soccer tilt on the globe last summer know that Brazil was experiencing both highs and lows in 2014 -- and yes, the correct term is soccer and not "football", because the name is an abbreviation of "association football", the first title given to the sport with the clearly defined rules followed today. You would think that Brazil enjoyed a huge boost to their economy, but the Wall Street Journal estimates that their industrial production fell to around 68% of the 2013 peak, due in part to factors such as declared holidays for the matchups and legions of workers skipping out on work to take in the contests. The World Cup was particularly bad for the iron mining industry and its affiliates: lower iron production meant that Brazil produced only 1.6 million tons of steel in 2014, down from 2.7 in the prior year, while automobile production dropped by 33% for lack of raw materials. It's not entirely fair to blame Brazil's sudden pulling of the economic emergency brake on the World Cup, since the country that enjoyed a positive economy throughout the global recession has hit their peak and is now in the process of coming on down on a larger scale. Job creation in Brazil today is lower than it has been since 1998 due to a variety of factors, including poor weather that has mitigated the agricultural yields that the nation relies on first and foremost to power its economy. All these factors add up to make the Brazilian real a currency that has taken it on the chin in the past calendar year, especially in comparison to the resurgence of the US dollar.

Records Without Rewards

Vale SA trades on the Brazilian stock exchange as VALE5. While you may not pay much attention to the Brazilian stock exchange, it's worth taking a look at how their stock has performed within the past 365 days. After reaching a peak of about R$30 per share in August (about $10 American), it's been a downhill campaign highlighted by opening the month of February at just over R$16 per share. Their stock price can be an appropriate model of the company's fortunes after hitting highs in the past summer with record number of iron ore pulled from the Brazilian ground. Vale was already the largest iron mining company in the entire world (and third overall behind only BHP Billiton and Rio Tinto) but they took a step ahead of the curve by announcing they had mined more iron in the second quarter of 2014 than any other company in history at just under 80 million short tons -- about the annual import demand from China, for comparison. The Vale plant at Carajas (a city bordering farmland and forest in northeast Brazil) underwent a twenty-billion-dollar expansion in order to supply customers with ever-increasing quantities of iron ore. With a thirteen percent growth over the last year's supply, Vale appeared to have plenty of reason to celebrate. Yet the financial data at the end of the year showed that more isn't necessarily better: a Reuters analysis pegged Vale to profit some $2.5 billion from their operations in 2014, while the bookkeeping revealed that they had only pulled in some $650 million in profit instead. A lowered iron price, a nation-wide recession, and less demand from customers meant that they could mine more and more iron but not make the profit margins they enjoyed in the smaller-scale days of yesteryear.

The Big Picture

Iron is far from a hot commodity at the moment. Take the lesson of Vale to heart: with demand slowing and major markets like China and the EU happy to sit on their stockpiles, the price of the metal is dropping without relief in sight. Rather than invest in iron (or iron mining stock), look at mining companies that are diversifying their holdings and limiting their output of iron. One such example is J.D. Irving Limited, who is looking to open up new gold and copper mines to ride the resurgent prices of the precious and semi-precious metals. Companies and investors that stick with iron may have a particularly unpleasent 2015 -- irrespective of how much is actually mined.

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