Metals: Big Business in the Amazon


In Brazil, leading iron ore miner Vale is struggling to keep up with growing steel demand that's creating shortages in workers and equipment

From deep in the Amazon jungle comes the latest theory, or stereotype, about women drivers: Apparently, they go easier on tires.

Valid or not, the assumption is one reason given by managers of Companhia Vale do Rio Doce (RIO), or Vale, the world's biggest iron ore miner, for stepping up hiring of females to drive mammoth, 190-ton Caterpillar dump trucks. The trucks are used to move 1 million tons of earth a day at the company's iron ore mine in Carajás, Brazil.

Every centimeter of precious, rubber tire tread counts to keep up production of the world's most used metal at Carajás, and meet surging demand from steelmakers. Big mines have been "suffering" from a short supply of equipment like off-road tires, Vale said in a filing last year to the U.S. Securities & Exchange Commission. These days, a single 12-foot "super-giant" tire for mining dump trucks can cost as much as $90,000.

Perhaps nowhere is the urgency, and difficulty, of satisfying the world's appetite for commodity metals more palpable than around Carajás, a mining complex Vale operates in a swath of forest in the Amazon Basin of northern Brazil. Vale plans to invest nearly $2 billion in the area this year, and around $15 billion within the next five years. It's spending $11 billion to expand Carajás' iron ore output by 2012, and will also build or expand copper, nickel, and other mines nearby.

Few Signs of a Slowdown

Those massive projects reflect the runup in demand for steel worldwide this year and the race among the biggest mining outfits to up capacity, whether by expanding their own mines or buying others. But they also show just how risky these huge bets can be, even for a company that had sales last year of $39 billion. Vale's American depository shares ran up 40% from late January through Feb. 28, partly on its plan to buy Xstrata, a Swiss mining outfit. But turmoil in the financial sector may well have sunk that $90 billion deal, and Vale's shares have dropped 14% from their high through Mar. 17, partly reflecting concerns that the slowing U.S. economy could lead commodities demand lower. While past U.S. slowdowns have slammed commodities markets, Vale executives are convinced that demand for the company's main products, like iron ore, will continue to rise fast despite any U.S. recession, on strong demand in China, Brazil and other regions.

Here in Carajás, though, there are few signs of a slowdown. The challenge Vale faces if it is to continue cashing in on the global commodities boom is to overcome surging costs and scarce supply of heavy equipment, geologists, engineers, and operators. The Rio de Janeiro company has expanded in recent years to become a one-stop shop for the world's steelmakers. Vale envisions building 10 to 20 mines around Carajás someday, making it the world's richest source of iron and a major fount of copper, nickel, manganese, and gold. It hopes to boost its capacity in iron ore—the key ingredient in steelmaking—by 50% through 2012, to 450 million tons.

Tito Martins, a Vale executive director, says the company envisions Carajás as the most sustainable major industrial development ever in the Amazon region, with perhaps enough iron and other materials to continue feeding the world's big steel companies for three centuries or more.

Combating the Region's Deforestation

But to accomplish that, the company will have to buck a dismal track record for past investment in the Amazon region, where expansions into mining, rubber, and agriculture have often gone abruptly from boom to bust, destroying a fragile ecosystem in the process. Vale says it seeks to minimize the environmental impact by recycling the water used in mineral processing, and planting native seedlings to "reforest" the 750-foot hills of mine tailings. The company has committed to protecting primary rainforest of around 1.2 million hectares (2.96 million acres) that surrounds its mining properties, which cover only around 2% of the forested area.

Still, satellite imagery shows vast deforestation in this region since the 1970s, mostly from ranching, charcoal production, farming, and small-time "wildcat" mining. "What Vale is trying to do is a longer-term and more environmentally conscious project than we have seen here in the past," says Ana Cristina Barros, the Brazil representative for the Nature Conservancy. "But it's not clear whether Vale's activities will actually reduce wildcatting and other destructive practices in the Amazon." Some say the wildcatters only dropped off in recent years around Carajás because they ran out of fresh spots to pan for gold and moved elsewhere. Soaring gold prices are one reason wildcat mining is alive and well in other parts of the Amazon. Adds Barros: "Vale is protecting a significant slice of rainforest, but that's an isolated activity. Whether Vale is bringing a whole new economic model to the Amazon is certainly not clear yet to me."

China's Steel Use Triples

For the world's steelmakers, though, the Carajás expansion couldn't come soon enough. Despite the U.S. slowdown, global steel demand is rising about 5% a year. And in spite of records in production, the iron ore industry hasn't kept up with growing demand, especially from China, which is erecting cities at a record pace. Last year, Vale shipped almost 100 million tons of iron ore products from Brazil to China, its largest client, or five times the volume in 2002. Those shipments increasingly came from Carajás, whose ore, at around 67% pure iron, is the world's richest. China is still the world's largest iron producer, but its poor-grade ore reserves are typically just one-third as iron-rich.

That's one reason why in February, Vale won 2008 price increases of between 65% and 71% for its ore products from big clients around the world, including in China. Iron ore prices have more than tripled over five years. China's steel use nearly tripled between 2000 and 2006, and the country now consumes almost half of the world's iron ore. Last week, Citigroup (C) analysts in Japan canceled previous estimates that iron ore prices may finally stop rising in 2009, and instead predicted another 30% rise next year.

Vale says it needs such price increases to keep expansions, like Carajás, on schedule despite soaring capital costs. Vale will probably have to pay at least $10 billion to develop huge new iron mines in its nearby, untapped Serra Sul project, which may contain 12 billion tons of ore resources, Chief Executive Roger Agnelli told reporters on Feb. 29. Agnelli said that as recently as 2002 Vale had hoped to develop Serra Sul for around a fifth of that cost.

New University Degree Program

That explains an intense work rhythm at Carajás, which operates 24/7. At the headquarters for Carajás' iron operations, Vale managers gather every morning for strategy meetings on how to maximize the day's iron ore haul, scouting locations for explosive detonations that shake ore from the hillsides. After each blast, they quickly send trucks into 1,500-foot-deep pits. At an ultramodern command center, technicians in constant radio contact with heavy-equipment operators beam the pinpoint GPS location of every truck, bulldozer, or railcar at Carajás onto massive video walls, to visualize any potential bottlenecks at the mine, and quickly correct them.

Vale can't hire fast enough. Ninety minutes north of here by car in Pará State is Marabá, where the local university recently began a degree program in mine engineering. The first class of graduates will emerge in 2009. Vale staff say those new engineers will be virtually guaranteed work at Vale, although last year Agnelli said BHP and other mining companies were anxious to poach Vale's newly trained workers for themselves. For geologists and any other mining specialist, demand is just as high. "Show me a single out-of-work geologist in Brazil," says Martins. "I don't know one."

Here in Canaã do Carajás and Parauapebas, company towns for Vale, locals are paid to study bulldozer, truck, and mining equipment manuals. The company will hire almost anyone who excels at them. This was once a backwater area of one of Brazil's poorest states, but one study commissioned by Vale last year shows the area's economy growing 20% a year. The men and women who drive the massive ore-hauling trucks make $600 to $700 a month.

End of the Human Anthill

Vale's developments in the Amazon region have not come without problems. Last year, landless peasants blocked Vale's railroad in the region several times, making demands on the company as well as on Brazil's central government—with some even demanding a renationalization of Vale, which was privatized in 1997. The railroad invasions continued in early March, this time in southeastern Brazil. Last year, Vale also cut sales of its iron ore to several local pig-iron producers in the Amazon region, which rely on charcoal made from eucalyptus trees to power their operations. The pig-iron companies faced allegations of environmental degradation, and in some cases, keeping workers in slave-like conditions.

Vale has broken with one shady mining legacy in this region. Serra Pelada, once a Vale mining concession itself, a frontier town a few miles down the road, became a showcase for the extremes of wildcat mining here in the '70s and '80s. Once a Vale gold mining property itself, Serra Pelada was overrun by wildcatters, who piled on top of each other creating a treacherous mine described by many Brazilians as a "human anthill." Some killed fellow prospectors for gold nuggets. Mercury used in gold-mining poisoned the forest's rivulets. Brazil's government eventually condemned the mine.

"A Feeling of Bigness"

Nowadays, says Vale worker Riverley Torres, 26, there are few wildcatters in this region, although illegal wildcat mines still exist in some Amazon areas. Like many Vale workers here, Torres migrated from central Brazil when his father came to try his luck at Serra Pelada. Today, Torres works in an air-conditioned trailer, training heavy-equipment operators on a multimillion-dollar truck simulator.

Socorro Placido, 37, says she was just the fourth woman to be hired to operate a house-size off-road truck in Vale's iron mine, back in 2004. At around 5-foot-5, she looks doll-like next to the truck, but prides herself for the kind of "cautious" driving that helps extend tire life.

"It was unusual for women to drive these, but I wanted the job so badly," she says. "Sitting in the cab gives you a feeling of bigness."

For more, see BusinessWeek.com's slide show.


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