October 18, 2010, was Vale day at the New York Stock Exchange, celebrating the 10th anniversary of Brazilian mega-miner Vale’s listing on the exchange. Vale took advantage of the occasion to offer a summary of its perspective on how the mining industry and the company will fare over the next decade.
Vale CEO Roger Agnelli echoed the views of many industry analysts, who expect emerging economies to continue to be the key engine of global economic growth, with positive implications for the demand for minerals, metals and fertilizers. Per capita intensity of metals consumption in emerging economies is expected to continue to increase, driven by ongoing urbanization and industrialization and rising consumption of consumer durables.
In China, the automobile manufacturing industry is already bigger than that of the United States, but per capita car ownership is still low at about 36 cars per 1,000 people. By way of comparison, in South Korea, ownership is more than 200 cars per 1,000 people; in the United States, it is about 480 cars per 1,000 people; and around the world, the average is 95 cars per 1,000 people. The potential for growth in China is huge.
China has made substantial strides in its infrastructure build-out but still has a way to go, Agnelli said. China’s expressways increased in total length from 41,000 km in 2005 to 65,000 km in 2009 but remain well short of a goal of 100,000 km that has been set for 2020. Railway construction tells a similar story: 75,000 km in 2005, 86,000 km in 2009, and a target of 120,000 km in 2020.
In India, ongoing improvements to infrastructure remain critical to the sustainability of its high rate of economic growth, Agnelli said. As a result, the Indian government intends to double infrastructure investment from $500 billion over the 2007–2011 period to $1 trillion during 2012–2017.
While Vale anticipates continued growth in demand for mineral products, it expects geological and institutional factors will constrain supply response to higher prices, with a likely lengthening of high price cycles. These supply constraints include declining grades and increasing stripping ratios; the increasing likelihood that world-class assets will be found in more complex regions, i.e., regions of higher political risk; environmental permitting that causes major delays to project development; natural resources nationalism; and higher taxes on mine production.
Based on its confidence that long-term global economic fundamentals will continue to favor the mining industry, Vale continues to make sizable investments to increase its minerals production and strengthen its logistics infrastructure. The company has 18 large projects coming on stream during the 2010–2012 period and expects these projects to provide growth platforms for future low-capex brownfield projects.
In late October, Vale’s board of directors approved the investment budget for 2011, involving capital expenditures of $24 billion for sustaining existing operations, research and development (R&D) and project execution. The capex budget for 2011 represents an increase of 125.1% over the $10.662 billion invested in the 12-month period ended September 30, 2010. According to a company press statement, this investment plan reinforces its focus on organic growth as a priority: 81.3% of the budget is allocated to finance R&D and greenfield and brownfield projects against an average of 74.4% over the last five years.
The company noted while iron ore and nickel will remain as its largest operations, its investment plan will entail significant expansion in fertilizers, copper and coal. Coal output is expected to reach 42 million mt in 2015, and potash and phosphate rock will also be increased, to 3.4 million mt and 12.7 million mt, respectively. Iron ore production is expected to reach 522 million mt in 2015, mostly driven by increases in Carajás production. Copper production is estimated to reach 691,000 mt, and nickel output will rise to 381,000 mt.
Regarding exploration and potential new discoveries, Vale expects the mining industry to be increasingly dependent on Africa for major new sources of supply, and Vale “is taking steps to build a large African asset base,” including building an efficient logistics infrastructure to anchor its African bulk materials assets.
The company said some $681 million is earmarked to finance its global mineral exploration program, along with $805 million for conceptual, prefeasibility and feasibility studies, and $264 million to be invested in new processes, technological innovation and adaptation.
Expenditures for mineral exploration increased by $296 million relative to 2010. Mineral exploration expenditures are primarily driven by efforts to discover reserves of iron ore ($250 million), coal ($172 million), copper ($123 million), nickel ($89 million) and potash and phosphate rock ($43 million). Mineral exploration efforts are being pursued in 22 countries.