Brazil’s rise to recovery

The financial crisis has severely though not homogenously impacted South America. The continent’s main economies of Argentina, Mexico, Colombia, and Peru are starting to heal their economic wounds after a tough year.

Also among them is Brazil. An important player on the international economic stage, the country has suffered heavily from the impact of the global downturn, particularly during the second and third quarter of 2009.

Brazil found itself in one of the direst situations of recent times, highlighted by the fact unemployment was at its highest level in nearly ten years, 654,946 higher than predicted by President Luiz In‡cio Lula da Silva. The biggest cuts came in construction and automobiles, key volume markets for industrial minerals.

IBAR produces magnesite in Brumado, Minas Gerais,
just a few kilometres from Magnesita’s mine,
seen here across the valley in the background.
Brazilian magnesite will be covered in a follow-up
feature in IM February 2010.


One of the major negative impacts on Brazil’s industrial minerals industry is not just the drop in demand from end markets, but the fall in revenue owing to the exchange rate of the Brazilian real (R$) against the US dollar, particularly as most companies trade in the US$.

As a consequence of the global downturn, some of the main companies in Brazil had to reduce production over the last year, such as magnesite and refractories producer Magnesita Refratorios SA, and kaolin producers Vale SA and Rio Capim Caulim (RCC), the latter a subsidiary of French mining giant Imerys.

However, as reported by the International Monetary Found (IMF), South America is starting to experience cautious optimism, showing signs of stabilisation, with Brazil leading the way to recovery over Argentina and Mexico.

Brazil’s economy appears to be bouncing back quickly from the global recession. This is in part owing to its large domestic market and diversified export products and markets, and especially the increasing links to Asia.

The fifth largest population in the world and a major food (1^st) and oil producer (14^th), Brazil owns a wide range of industrial mineral and farming resources, ranking among the world top-ten producers for steel, iron, coffee, cotton, meat, phosphate, graphite, fertilisers, cement, and ceramic tiles (see Brazil at a glance). Therefore, Brazil’s promise as an “Eldorado” for investors may not be so far fetched.

As Switzerland-based Holcim Ltd, the second world leading cement producer with operations in Brazil, confirmed to IM, the perspectives are “very promising and there are many opportunities in the Brazilian market.”

Cement is among the main industries starting to kick off. Leading Brazilian magnesite producer Magnesita Refratorios SA reported to IM that the Brazilian cement industry, boosted by stronger demand from construction, “practically did not feel the crisis, maintaining stable demand for refractories”.

Among the positive factors that will allow future market growth are several initiatives of the Brazilian government, such as the programme “Minha Casa, Minha Vida” (My House, My Life); the Growth Acceleration Plan (PAC) of the Federal Government, and obviously, the preparation of the cities that are going to host the FIFA World Football Cup in 2014 and the Olympic Games in 2016.

Another growing sector is the fertiliser industry, since Brazil is a major food, biofuel, and fertiliser producer. Edison Lobeo, Brazil’s Minister of Mines and Energy (MME), revealed to IM that the first move of the country will be to develop its phosphate resources in order to become fertiliser self-sufficient within the next four years.

Fertiliser minerals production in Brazil



Source: ANDA


Towards fertiliser autonomy?

“The long-term outlook for fertiliser demand is promising, considering the prospects for both food consumption and biofuel use,” commented Vital Jorge Lopes, chief executive officer of Fertilizantes Fosfatados SA (Fosfertil), Brazil’s leading fertiliser producer.

Brazil has indeed a relevant position in terms of global fertiliser consumption as it is the fourth largest consumer of fertilisers in the world, following China, India, and the USA.

In 2008, the country accounted for approximately 6% of the global consumption of NPK (Nitrogen-Phosphorus-Potassium) fertiliser, and an estimated of 9.4m. tonnes of nutrients (22.3m. tonnes of products) in 2009.

The increase in harvest productivity in Brazil is due, among other factors, to the use of agricultural technology, in particular in fertilisers. The sector has grown remarkably over recent years, following the strong development of the agribusiness industry and contributing to the creation of jobs in Brazil.

Brazil has the highest growth rate in fertiliser usage among the world’s top four consumers and its fertiliser consumption represents 70-75% of South America’s consumption.

Over the last ten years, fertiliser sales in Brazil posted a 4.3% Compound Annual Growth Rate (CAGR), reaching 22.4m. tonnes in 2008, above the GDP 10-year CAGR of 3.3% for the period.

However, the domestic market depends heavily on imports. The robust growth of domestic fertiliser sales in Brazil in the last 10 years has been supported by increasing imports. In 2008, fertiliser imports amounted to 15.4m. tonnes of nutrients and accounted for 63% of fertiliser supply in Brazil (excluding inventories), compared with 50% in 1998.

During the last ten years, Brazil’s fertiliser market has grown by over 50%, resulting in a huge fertiliser production base and demand for feedstock minerals production. “One of the main reasons is the growth of food and biofuel consumption, which will ultimately translate in a higher planted area and applications rates of fertilisers,” said Lopez.

Calorie consumption per capita has been growing at a sustainable rate of 0.5% in the last 40 years and is expected to increase continuously. In 2008, total NPK consumption was 165,496m. tonnes, a figure expected to significantly grow in the next few years.

“The expansion of grain production in Brazil towards new frontier zones with poorer soil conditions supports the maintenance of strong growth rates for fertilisers sales in Brazil,” underlined Lopez.

Even though the fertiliser sector has suffered from the appreciation of the Brazilian real against the US dollar, which hiked phosphate fertiliser prices on occasion by more than 50% impacting domestic farmers hard (see Table: Prices evolution of imported fertiliser minerals & fertilisers), the sector is seen as one of the most promising in Brazil in terms of developments.

Agribusiness exports 2008: $71,800m.; 182 countries


*Aladi: Latin American Integration Association.

Mercosur: Southern Common Market, which includes Argentina, Brazil, Paraguay and Uruguay.
Source ANDA


The Ministry’s plans

“We are big consumers of fertilisers and import 60% of our domestic demand. This is very uncomfortable for the country. As one of the biggest food producers in the world, the country cannot afford such vulnerability.” As Edison Lobão, Brazil’s Minister of Mines and Energy, revealed to IM, he is determined to push Brazil towards fertiliser self-sufficiency by 2013.

Therefore, Lob‹o, who has “great expectations” for Brazil’s potash and phosphate resources, is carrying out a policy to get autonomy in fertiliser production for Brazil in the next four years.

At present, Brazil is the world’s sixth largest phosphate rock producer (see below), but the country hopes to increase its phosphate production by developing unexploited resources. For that to happen, the Ministry started a three-year campaign to estimate its phosphate resources in August 2008 which should be complete by August 2010.

According to Lob‹o, the country also plans to use the resources of Brazilian companies exploiting phosphate in South America, such as mining giant Vale SA, which has phosphate projects in Argentina and Peru (IM 8 September 2008: Vale begins 3.9m. tpa Peru phosphate project).

“We are making a domestic effort but Brazilian companies are also doing their part abroad in order to guarantee the supply of fertiliser in our agriculture sector,” Lobão said.

However, Eduardo Daher, executive director of Brazilian fertiliser association ANDA, remains cautious, pointing out the lack of sulphur in Brazil (see The sulphur issue). “I do not have the feeling that we can be self-sufficient in a short term”, he told IM.

Brazilian grain production, area & consumption 1992-2008



Source: ANDA/CONAB/IBGE


Phosphate outlook

Phosphate is one of the segments in Brazil that depends least on imports since Brazil ranks 6^th for phosphate production (4.2% world production) after China (25%), the USA (21%) and Morocco (20%) (IM December 2009: Phosphate face-off).

In 2007, the country produced 6,185m. tonnes of phosphate rock in 2007 and owns about 319m. tonnes reserves of the ore, mainly located in Minas Gerais (67%), Goi‡s (14%) and S‹o Paulo (6%).

However, it is not seen as enough for Brazil, which is a major food and biofuel producer and as a consequence a huge fertiliser consumer. Therefore, the country plans to consequently boost its phosphate production in order to become fertiliser self-sufficient by 2013.

Edison Lobão, Brazil’s minister of mines and energy, revealed to IM that he wants the country to become fertiliser self-sufficient by 2013 (see above).

In 2008, about 46% of Brazil’s total phosphate-based fertiliser supply (excluding inventories) was met through imports.

Brazil also has a high dependence on sulphur imports, sulphur being the basic raw material used in the production of sulphuric acid, an intermediate raw material used in the production of basic phosphate-based fertilisers.

Prices evolution of imported fertiliser minerals & fertilisers (2003-2008, $/tonne)

Fertilizantes Fosfatados SA is the leading supplier of raw materials for the fertiliser industry (78%) and of inputs for chemical companies (19%). The company operates mines, and processing plants, in S‹o Paulo, Paran‡, Goiˆs and Minas Gerais, in the centre and the south of the country.

Fosfertil production capacity of phosphoric acid is 0.8m. tpa (1.5m. MAP Equivalent) and its production capacity of rock phosphate is 3m. tpa.
As explained Vital Jorge Lopes, Fosfertil’s chief executive officer, the company’s “growth strategy is aligned with government strategies focused on the production of high-concentration phosphates, aiming at partially replacing imports”.

Lopez revealed to IM that over the next five years, Fosfertil intends to increase its production capacity of phosphoric acid to 1.6m. tpa, and its production capacity of high concentration phosphates by 65%, to 3.3m. tonnes. About 230,000 tonnes of the production increase of phosphoric acid is expected to come from the expansion of the brownfield of Uberaba (Minas Gerais), scheduled to begin operations in 2011. The other 560,000 tonnes are likely to come from the “Projeto Salitre” greenfield, where the estimate operations is planned for 2014.

Brazilian phosphate rock production by company (2007)



Source: DNPM


Anglo American’s phosphate on sale

Global mining group Anglo American Plc - Base Metals is the second leading fertiliser manufacturer after Fosfertil in Brazil with a production of about 982,000 tonnes in 2008. It has a controlling interest in Copebrás, a leading Brazilian producer of phosphate fertilisers and phosphoric acid.

Anglo American announced in October 2009 that it intends to sell its phosphate fertiliser assets in Brazil. After Anglo American rejected the proposal of its rival Xstrata Plc in June last year to consider a merger between the two companies, market analysts are pointing their fingers at new suitors (IM 23 June ’09: Anglo rejects Xstrata’s proposal).

There is speculation that Brazil Vale SA, the world’s second largest miner with kaolin operations (IM July ’09: Kaolin: Amazon to Antwerp) and potash assets, may be eyeing the phosphate assets of Anglo. Both companies declined to comment. “We have not put any deadline,” Anglo American said to IM, which intends to sell its Brazilian asset “at the most appropriate time”, meaning when the market will have recovered.

However, it would seem a logical move for Vale which intends to develop its phosphate assets in South America, and in relation to the minister Edison Lob‹o’s policy to make Brazil fertiliser self-sufficient within the next few years.

Evolution of phosphate rock production in Brazil since 1996 (m. tonnes)



Source: DNPM, ANDA


Unexploited potash resources

Brazil ranks at the 7^th and 9^th position for world reserves and production of potash, respectively. According to the DNPM, an arm of the Ministry of Mines and Energy, Brazil produced 471,000 tonnes of potash in 2007, a small figure in comparison to Canada and Russia which are the two world leading producers.

Vale is the only potash producer in Brazil and has operated its mine since 1992 at Taquari-Vassouras, in the state of Sergipe, which has a capacity of 850,000 tpa. According to the DNPM, Sergipe has estimated resources of 494.2m. tonnes of potash (9.7% K₂O).

However, because of the economic downturn, the Brazilian mining giant’s potash production fell from 671,000 tonnes in 2007 to 607,000 tonnes in 2008, representing a 9.6% decrease.

Nevertheless, Vale told IM that it does have “large growth potential deriving from a rich project pipeline” with its operations on Peru and Argentina, in addition to a new Brazilian mine in Carnalita, near Taquari-Vassouras.

Brazil, and in particular the Amazon Basin, is also regarded by many as the world’s greatest untapped source of natural resources. Today, junior potash companies such as Amazon Potash Co. are using historic exploration data for potash exploration.

Actual production from this area is expected in the next two to four years and despite the recent downturn in the potash market Ð a correction of sky high fertiliser prices in 2008 sparked by the economic crisis Ð medium and long term demand is set to be strong as the mineral has no natural or synthetic substitutes.

Reinaldo Brito, head of the department of mineral resources of CPRM (Geological survey of Brazil), confirmed to IM that the Amazon Basin owns huge potash resources. According to the DNPM, the official reserves (measured + indicated) of silvinite in Fazendinha and Arari, region of Nova Olinda do Norte in the state of Amazon, amounts 1,008m. tonnes, with an average 18.8% of K₂O.

This could come as good news as potash demand is increasing in Brazil, notably because of sugar cane. “We need more potash than any other country,” affirmed Eduardo Daher from ANDA to IM. But even though a few companies have shown an interest in the Amazonian deposits, obvious environmental and technical issues might challenge any exploitation in the near future.

Brazil’s main industrial minerals production and reserves (2007)

Brazil’s race to reach fertiliser self-sufficiency in four years could be slowed by one matter. The country indeed has a high dependence on sulphur imports, sulphur being through sulphuric acid a key element in the process to transform phosphate rock into phosphate fertiliser.

In Brazil, sulphur can be found in deposits in the Sergipe sediment basin, near Siriri city in Castanhal. But the country only produced a tiny 480 tonnes of sulphur in 2007 according to the DNPM. As a consequence, it is mainly imported from Vancouver in Canada and Russia.

“Brazil almost does not produce sulphur and has to import from abroad,” Daher explained to IM.

“It will be an issue in the future for the country’s plans to become self-sufficient in the production of fertilisers,” he forecasted.

However, a few new projects are on the way to produce sulphur as a by-product. Brazilian oil producer Petr—leo Brasileiro SA (Petrobras) intends to expend its production by 2014, reducing the sulphur content in the gasoline and diesel to 50ppm. Votorantim Metals intends to expand its nickel production to 17,000 tpa at Mineracao Serra de Fortaleza, therefore increasing its sulphur output.

Challenges

Brazil is seen as a blossoming field of opportunities for investors in the mining industry. Firstly, because it is relatively politically and economically stable, and secondly, owing to its diversity of resources, products and markets in addition to a developed agritechnology and agroenergy knowledge (eg. the ethanol fuel experience since the 70s).

However, the country still has to face a few challenges before being able to develop its industry at maximum capacity.

Infrastructure

“Brazil has a lot to do but infrastructure is still an issue,” Livio Togni, operations director of refractories group Togni SA Materiais Refratorios, explained to IM.

As an example, if the crisis had not happened, analysts report that Brazil would have more than doubled its steel production by 2015 to 80m. tonnes from the 33.8m. tonnes produced in 2007. In theory But it was without counting on Brazil’s main weakness which continues to curb its race to development. “In that case, we would have been stopped by the lack of roads and infrastructure,” regrets Togni.

In Brazil, infrastructure can indeed be a major problem, more or less important depending on the area. As Vale underlined to IM, “sustaining mining activities in the Amazon region requires special management skills, in which problems go from poor infrastructure to the difficulties in finding qualified service providers.”

Therefore, it is sometimes more challenging to supply the domestic market compared to the international one.

“Shipping the product in the country can sometimes be more difficult than exporting it, notably when kaolin is sent 3,000km away to São Paulo in the south of the country on trucks. It is logistically complex,” said David Holt, global business development manager, Imerys Minerals Ltd, UK.

Power

Concerns have arisen in the mining industry that Brazil’s power infrastructure may not be adequate to reliably serve its mushrooming commodity-based economy. A power outage plunged as many as 60m. people and 16 of Brazil’s 27 states and part of Paraguay into darkness on 10 November 2009.

Transmission problems at a power substation in Parana state in the south of the country apparently caused a disruption at the Itaipu dam, one of the world’s largest operating hydroelectric plants which generates 19.3% of Brazil’s electricity. Commodity-based companies including Vale and Petrobras had to suspend their operations because of a lack of electricity.

According to Edison Lobão, adverse weather conditions caused three transmission lines to collapse, triggering a domino effect that caused the Itaipu dam to go offline. President Lula da Silva insisted the blackout was an isolated incident that had nothing to do with a lack of investment in the energy sector.

The industry remains confident, though cautious. “Power is fragile in Brazil but it will not be a problem to develop the mining industry,” said Togni, adding that the main challenge was in fact to “distribute the energy”.

Strong currency

Amid signs of an economy getting stronger, the Brazilian currency became a source of concern as the R$ is now described as “too strong compared to the US$”. As Togni explained, “it is very good to import raw material but it is a problem to export.”

Outlook

After having suffered the effects of the global downturn, Brazil seems to be on the path of health. This recovery may not be homogeneous and depends on the sector.

“Recovery will take some time,” believes Livio Togni who forecasted a “flat” year for 2010, “stable but in very low capacity”, followed by recovery at the beginning of 2011 before facing “a firm recover.”

The cement market may lead the way to better days, as it is expected to continue its steady growth in Brazil, far before Europe and the USA, more heavily impacted by the crisis. The perspective of the 2016 Olympic Games and the 2014 FIFA Football World Cup in addition to the government plans for construction will certainly boost the growth.

“Brazil is expected to go through a sustained growth phase in the next few years, as the country has demonstrated political and economical stability, along with a responsible management of public finances,” Holcim told IM. Therefore, this attitude is seen as “an encouragement to new investments”.

The long-term outlook for fertiliser demand is also promising, considering the prospects for both food consumption and biofuel use. Brazilian Agribusiness Consultants estimate a long-term growth rate of between 3.1% and 4.1% for fertiliser sales in Brazil, which is in line with estimates of the long-term growth rate for the country’s GDP, 4.5%. “More than half of this growth is expected to come from the expansion of the planted area (which is well balanced between soybean/corn and sugar cane) and the other half from the increasing use of fertiliser per hectare in Brazil,” said Lopez from Fosfertil. The MAPITO region (Maranhao, Piaui and Tocantins) as well as the west of Bahia are the areas in Brazil where grain production is expected to expand in the coming years.

Therefore, if Brazil can resolve its infrastructure issues which have been until now one of the major concerns, growth is expected to continue, reaching a full recovery around 2011. “We have some job to do in order to prepare Brazil for the future,” concluded Silvio Togni.


Brazil at a glance

• President: Luiz Inácio Lula da Silva
• Minister of Mines and Energy: Edison Lobão (see interview on p. 33)
• Capital: Brasilia
• Population: 194m. (5^th after China, India, the USA and Indonesia)
• Area: 8.5m. km² (world’s 5^th biggest country, 50% of South America)
• Largest city: São Paulo
• Language: Portuguese
• Currency: Brazilian real (R$1.7 ~ $1)
• GDP: $1.61 trillion (2008)

Industries

•  Agriculture
• Coffee: 1st producer/1^st exporter; Sugar: 1^st producer/1^st exporter; Orange juice: 1^st producer/1^st exporter; meat: 1^st producer/1^st exporter; soya complex: 2^nd producer/1^st exporter; Poultry: 2^nd producer/1^st exporter; Cotton: 6^th producer/3^rd exporter
• Fertilisers: 4^th world’s market; 3^rd import’s market
• Consumption: 165,496m. tonnes NPK
• Phosphate rock: 6^th producer
• Ceramic tiles: 3^rd producer
• Cement: 8^th producer
• Steel: 8^th producer
• Oil: 14^th producer (2.3% of world production); 16^th for proven reserves

“We are waking up”

Edison Lobão, Brazil’s Minister of Mines and Energy, talked to IM about his plans to develop Brazil’s mineral assets, which includes a new Mining Law

“The policy is to become self-sufficient in fertiliser
production in Brazil in the next four years”, Edison Lobao,
Brazil’s Minister of Mines and Energy.
Courtesy Francisco Stuckert/MME


IM: How would you describe the mining industry in Brazil?

EL: We are great exporters and producers of minerals, with big reserves of iron, uranium and other minerals. We are in a boom of development in Brazil and the challenge is to produce minerals for consumption but also to export as well. Despite not developing in the race like China, we are doing our best to keep the same pace.

IM: Where do you export your minerals?

EL: We have a strong trading relationship with South America and the Mercosul countries [Argentina, Brazil, Paraguay and Uruguay] in addition to a very tight relationship with Arabian countries and Africa. They are an already open opportunity for Brazil. A present, we are sort of waking up for this general and very big international market.

IM: What are the plans for Brazil’s fertiliser market?

EL: We are the biggest food producer in the world [see Brazil at a glance]. For that reason, we are importers and big consumers of fertilisers, importing 60% of our domestic demand, which is very uncomfortable for the country. We cannot have such vulnerability.

Therefore, the policy that we are carrying out now is to become self-sufficient in fertiliser production in Brazil in the next four years.

IM: How will you achieve this?

EL: We have great expectations and resources for phosphate and potash. Therefore, the Brazilian government is making a big effort in order to assure our self-sufficiency in fertilisers.

We have strong competition from Argentina which has big phosphate plants, including a project with Vale. Vale also has projects in Peru [IM 23 November 2009: Phosphate rival for Vale in Peru]. The company has found big resources over there and is developing them at the moment. Colombia is also a big competitor.

The project is to develop our own resources and these from the Brazilian companies in South America for the Brazilian market. The Brazilian companies are doing their part abroad in order to guaranty the supply of fertiliser in our agriculture sector.

IM: You are working on a new mining law?

EL: The law that regulates the sector is the mining code. Now, we are working on a new set of laws to modernise the sector in order to improve the old laws and bring a more modern and feasible environment for the sector.

IM: In what way?

EL: The old mine laws allowed people to keep their mining rights almost for ever with no responsibility for the state. The rules were not very tight in order to oblige people to put their mining rights into opportunities to get into production rapidly.

Now, with the new law, you will have a short period of time to production. Otherwise, you lose these rights.

For exploration rights, the deadline between the licence award and the time to use the opportunity to start exploration will be five years, instead of the previous indefinite time. The limit for mining rights will be 35 years.

IM: What happens after this?

EL: The government will withdraw the licence because the underground resources belong to the country and the population. The old code does not preview that.

IM: When will this law be enforced?

EL: The law will be sent to the parliament at the end of this year [2009]. We estimate that it will take one year to discuss about it and to approve the law. We expect it to be enforced in one year, at the end of 2010 or beginning of 2011.

IM: What has been the reaction?

EL: We have organised consultations with associations, syndicates of producers, mining companies, exploration companies etc. and had a very warm and welcome reception. The idea is to defend national interests in addition to not jeopardise any individual interests [see New Mining Law: impact on the industry].

IM: What do you think of China?

EL: China is not a mineral exporter. It is a consumer, an importer. So our commerce with them is in one way: to feed them. But even though they produce some industrialised products related to the mineral industry, we produce different minerals so our trade is going to be complimentary.


New Mining Law: industry reaction

Some in the Brazilian mining industry have pointed out a few issues that may arise when this new law is enforced.

First, a “trading market for mining rights” could appear, people holding their rights until the expiration date in order to get funds.

Second, the main concern is that it will disturb the development of long term projects.

As Silvio Togni, operations director of refractories group Togni SA put to IM: “If you have planned to start exploration in ten years but have the rights for five years, what will happen after that?”

“What will happen if you know you will need the resources in a few years but are not ready yet to develop the project?” he added.

“We have a good law at present which gives us the possibility to plan for the future. I hope the government will take these concerns into consideration,” said Togni.