Brazil’s government ousts the CEO of Vale (VALE) – but this saga ain’t over (Guest post!)

Setty note: I pretend to cover natural resources all across South America, but the reality is that our biggest country, Brazil, is almost totally off my Spanish-focused radar. So it’s thrilling to have this site’s first guest post, from regular reader Mineirinho. He is looking at what happened over the past few weeks, as the Brazilian government forced out the top dog at the world’s biggest iron company, Vale SA. Take it away Mineirinho!

Vale Brucutu mine

Vale's Brucutu mine, from Click for remarkable original photo essay.

There were always a lot of reasons people said Roger Agnelli got shown the door of Vale. He wasn’t building enough steel mills was the always the top one. He wasn’t helping Brazil’s economy grow. He commissioned a huge set of cargo ships from Asia instead of from local shipyards that employ Brazilians.

I happen to think Dilma Rousseff was just plain sick of him – in large part because none of those problems can be seriously addressed by the new CEO. This adolescent pissing match is done, but the tension between the company and the government is far from over.

People frequently ask how the government can change the chief executive of Brazil’s largest private company. The reality is the 1997 privatization of Vale, once the state-run Vale do Rio Doce, created an intentionally vague shareholding structure that left the government with ample albeit indirect influence over the world’s largest iron ore producer through pension funds linked to the state.

Dilma, much like her predecessor Lula, wanted a company much more like Petrobras that had a clear national development agenda. Petrobras, for example, is spearheading the efforts to expand Brazil’s shipbuilding industry by building drilling rigs and offshore platforms from domestic shipyards, even if it costs more, takes longer and results in lower quality vessels. They wanted the same from Vale.

The big beef with Vale was ostensibly that it wasn’t building enough steel mills to create jobs at home. I always had problems with this explanation, mostly because Vale is already a partner in four Brazilian steel projects, and because steel in the end doesn’t create that many jobs. A steel mill requires trained workers, which are in short supply in Brazil, and is most likely not going to employ many folks in the place it’s built. Steel mills also do a lot to piss people off. Some of the biggest complaints about Vale relate to steel mills in the Amazon that it supplies (but does not own) that have huge environmental liabilities. The CSA mill in Rio de Janeiro state, a joint venture with Germany’s ThyssenKrupp, has hardly started operations and is already up to its neck in pollution complaints.

The turning point for Agnelli came when he laid off workers in the wake of the 2008 financial crisis as the company idled mines in response to demand drying up. This went against Brazil’s response to the crisis, which was to boost spending as a countercyclical measure. Agnelli made things even worse by slashing the company’s investment budget in 2009. Lula was livid. Even after Agnelli upped the investments, Lula – who’s quite good at holding a grudge – never forgave him.

Agnelli added fuel to the fire last year by telling reporters that ruling Workers’ Party hacks were constantly pressuring for jobs at the company. That was the last straw for the incoming Dilma, who’s also an expert axe-grinder.

An insufferably arrogant banker, Agnelli alienated most people that had anything to do with the company by centralizing power and building an iron grip over every aspect of the Vale’s operations. But investors loved him because he vastly expanded Vale’s iron ore business, helped it diversify into metals like nickel and copper, and gave the company a global presence.

Rousseff was smart enough to replace Agnelli with an experienced Vale hand rather than a political hack with a socialist agenda. But the underlying problem is the same – unrealistic expectations by the government about what Vale can and can’t do for Brazil. It is still a privately run company, despite the government’s evident sway, and therefore can’t sacrifice shareholder returns to meet national development goals. It simply cannot become a major steel producer, because that would leave it in competition with all of its primary clients around the world. It cannot become a major job creator because natural resource industries never do, they create few highly specialized jobs for highly educated people, not for the guy selling ice cream on the street.

There are plenty of folks that suffer from Vale’s operations that may be happy to see Agnelli’s head on a lance. The migrants that live in swelling slums around Vale’s mines, the kids run over by Vale’s trains that cut villages and communities in half, the communities of African descent that are fighting tooth and nail with the company over land rights. Politicians like to point out that Vale doesn’t give a crap about these people. They’re less likely to point out that neither does the government – Vale generates too much foreign exchange and provides too much in tax revenue for some poor Amazon dwellers to get in its way.

Investors have, oddly enough, come to the conclusion that Vale will be better off with a new CEO that the government likes better, which can make it easier to get crucial concessions and environmental licenses. In the best of all worlds, this really was a sandbox dispute between people that didn’t get along and Vale can go on about its business. More likely, somebody in Brasilia has really gotten their hopes up about how Vale is turning over a new leaf, and is going to be pretty hoppin’ mad when they realize the company’s never going to be a government ally.