Bloomberg News

Vale’s Profit Erosion Prompts Embrace of Renewable Energy

July 10, 2012

Vale SA (VALE3), the world’s biggest iron- ore producer, is turning to palm-tree oil and wind turbines to insulate earnings from surging energy costs.

The company plans to produce 420,000 tons of fuel from palm oil annually by 2019 and will build two wind farms with Australia’s Pacific Hydro Pty by 2014, Giane Zimmer, Vale’s director of sustainable development, said in a telephone interview from the company’s headquarters in Rio de Janeiro.

Rising power prices have pared margins for Vale, whose fuel and energy expenses accounted for 13 percent of costs of goods sold in 2011, or about $3.15 billion. Electricity prices for industrial users in Brazil have risen 89 percent since 2003, the nation’s power regulator estimates. That compares with a 35 percent gain in electricity prices in the U.S.

“Our big challenge is to align sustainability with lower costs,” Zimmer said. “We have an obligation to our shareholders to give results.”

Vale fell 1 percent, to 39.48 reais at 11:16 a.m. in Sao Paulo. The shares had gained 5.4 percent this year before today, compared with 8.5 percent and 2.9 percent drops for BHP Billiton Ltd. and Rio Tinto Group, the world’s biggest and third-biggest miners by market value, respectively.

Power Investments

Vale has invested more than $1.3 billion in power generation in Brazil since 1995, about 2 percent of its revenue last year. While 49 percent of its power comes from hydroelectric plants, it also owns natural-gas reservoirs. The palm-oil and wind-farm programs represent an effort to diversify energy supplies.

Producing fuel and power on site is especially important for mining companies, which need to shift large quantities of material in remote areas, said Laurence Balter, a money manager at Oracle Investment, which is based in Fox Island, Washington, and oversees $100 million.

The company will produce palm-oil fuel known as biodiesel in the Amazon state of Para where it has mining operations and use the fuel to power its trains and heavy vehicles. The wind farms will be in Rio Grande do Norte state.

“It’s nice to see a company like Vale embarking on these forward-thinking projects,” Balter said in a telephone interview on July 5. “They’re going to come out smelling like a rose.”

Vale is seeking to replace a fifth of its Brazilian diesel with biodiesel by 2015, the company said in its 2011 sustainability report. All diesel sold at the pump in Brazil must contain 5 percent biodiesel.

Curtailing Production

“If we are unable to secure reliable access to electricity at acceptable prices, we may be forced to curtail production or may experience higher production costs,” Vale said April 17 in a filing with the U.S. Securities and Exchange Commission.

Vale is planting palm crops on cleared land in an area in the Amazon the size of Barcelona and will turn the fruit into fuel, Zimmer said. Last year, the company bought a controlling stake in Biopalma, which built an oil extraction plant in the city of Moju and planted 50,000 hectares of palm, the company said in a statement. A biodiesel refinery will come online in 2015.

Biodiesel made from palm oil is more expensive than diesel in countries that blend the two fuels and the same may apply to Brazil, Roberto Rodriguez Labastida, an analyst at Bloomberg New Energy Finance’s London office, said by telephone.

Biodiesel produced in Brazil’s north sold for 2.28 reais. or $1.12, a liter before transport costs in a May auction for supply contracts, the nation’s oil regulator said. Brazilian diesel sold for an average 2.05 reais a liter at the pump in June.

Price Comparison

“A comparison of the prices of diesel and palm oil biodiesel can’t be done without considering other factors” like social and environmental benefits, Joao Coral, global energy director for Vale, said in an e-mail.

Diesel sells for 1.40 euros ($1.72) in Germany and 143.90 Japanese yen ($1.81) a liter in Japan, according to data compiled by Bloomberg. About 77 percent of biodiesel sold in auctions is made from soybean oil, according to fuel regulator Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis.

Vale is interested in wind energy because it’s low-cost, Marcos Severine, an analyst at Sao Paulo-based Itau Unibanco Holding SA, said in a telephone interview. Wind farms were the cheapest form of energy in an August government-organized auction for contracts to supply energy that included natural gas-fired thermoelectric plants and a large hydroelectric dam project.

“There’s a definite economic advantage to using wind energy,” especially because those projects get 50 percent exemptions on fees to use transmission and distribution lines, Severine said.

Vale has a target to cut its greenhouse gas emissions by 1.7 million metric tons of carbon dioxide equivalent by 2020, or 5 percent of the total projected that year, the company said June 28 in a statement.

“We’re going to have rising energy demand,” Zimmer said. “We need further projects to fulfill this need.”

To contact the reporter on this story: Stephan Nielsen in Sao Paulo at snielsen8@bloomberg.net

To contact the editor responsible for this story: Jessica Brice in Sao Paulo jbrice1@bloomberg.net; Reed Landberg at landberg@bloomberg.net


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