Brazil sends bad market signal scalping Vale’s CEO

April 1, 2011

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

By Rob Cox

Last week’s ouster of Vale SA’s chief executive sends a terrible signal to the markets about the Brazilian government’s intentions. Roger Agnelli resisted the state’s designs to push the $180 billion mining group into lower-return, if labor intensive, activities. With President Dilma Rousseff’s government forcing his departure, investors must brace for a strategy that favors jobs over profit – think Pemex instead of BHP Billiton.

Tensions between Vale and Brasilia predated Ms. Rousseff’s 2010 electoral victory. She is merely finishing off a mission, begun by her predecessor Luiz Inacio Lula da Silva, of using Vale and other Brazilian companies such as energy giant Petrobras, as instruments of social policy.

This has manifested itself in numerous ways. While Vale excels at mining and processing iron ore, it has been pressured into producing steel. Vale did so, on the margins. For shareholders that’s just as well as there is no discernible market, or competitive advantage, for Brazilian steel. But its efforts haven’t been deemed sufficient for a government wanting full employment and industrial self-sufficiency.

Vale has also come under fire for not sourcing enough of its spending domestically. For instance, though it says it has the world’s second-largest shipping fleet it often procures vessels outside of Brazil. From the perspective of investors, that’s fine if it means Vale is getting the best value. The government would naturally rather see Brazilian shipyards receiving all the business, putting voters to work.

Mr. Agnelli balanced well the competing desires of shareholders and government. Vale today employs 160,000 and has seen its value double in the past half-decade to $180 billion. Its shares have performed nearly as well as those of BHP, the Anglo-Australian mining kahuna, and bested those of rival Rio Tinto. Its swelling profits have created billions in tax revenues for the state.

The company’s controlling shareholder group, Valepar, has a majority vote though a minority economic stake. Its other, non-government, members, including bank pension funds, can certainly influence the choice of Mr. Agnelli’s replacement, which could come Monday. But with the genie of state meddling already out of the bottle, shareholders should prepare for their future interests to come second.

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