Apr 01 2012
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Samba in the Sultanate
Brazilian mining giant Vale inaugurated its first 'virtual' iron ore mine in the Middle East last month. But why did it choose Oman as the base for one of its most strategic overseas investments?
Just weeks before, the Rio de Janeiro-based Company reported a record profit of $22 billion for 2011, reportedly the highest ever figure by a listed company in the South American country.
The world's largest iron ore producer attributed its stellar performance predominantly to increased sales to booming Asia and the Middle East while shipments to recessionary Europe tumbled by 400,000 tonnes. It also provides ample justification for the Company's overseas expansion strategy, the wisdom of the pace and scale of which had been questioned in Brazil.
According to official figures, China took about 44 per cent of the Company's iron ore and pellets shipments last year. Vale (pronounced Valley) sees the 'virtual iron ore mine' at Sohar Industrial Port serving essentially as a transhipment hub taking iron ore from Brazil, processing it into pellets - used in the manufacture of steel - and then distributing it to regional and Asian markets.
According to analysts Frost & Sullivan annual Gulf Co-operation Council (GCC) steel product demand is currently more than 40 million tonnes, and is expected to grow by five to six per cent over the next five years, driven mainly by large infrastructure and development projects in Saudi Arabia, Qatar and the UAE.
Trade publication Metal Bulletin Research, meanwhile, recently forecast the region would face a 6.9 million tonne annual crude steel shortage, and a 14.2 million tonne finished steel shortfall over the next few years, implying that the region's 67 steel mills would fail to keep pace with demand growth.
Beluco is adamant Vale can meet demand for pellets from under-pressure steel mills. The Sohar plant, which can currently process 40 million tonnes per year (t/y) of iron ore to make up to nine million t/y of 'direct reduction' pellets, "aims to reduce the predicted shortfall," he says. Beluco adds that Vale is already considering expanding the facility, a project which would cost up to $800 million.
The Sohar complex currently comprises a $1.36 billion pelletising plant and distribution centre linked to a $250 million deepwater terminal. By mid-2012 it will be served by two 400,000 tonne-capacity very large ore carriers (VLOCs), with another two set for delivery by the year-end. Once delivered, Vale will have spent $500 million on the VLOCs which will ply the seas from Brazil to Oman.
Beluco says the decision to locate a strategic hub in Oman - which complements an existing satellite facility in the Philippines and an under-construction distribution centre and port in Malaysia - was multi-faceted.
He says the availability of 'high quality, affordable fuels' was a big draw (it has secured long-term gas offtake and power supply agreements with local suppliers) as was Sohar's location.
"The Port's location has the advantage of deep seas which can accommodate Vale's ultra large vessels," he explains, arguing that the shallow Gulf can only accommodate vessels up to 150,000 tonnes loading capacity. Because the port lies south of the Strait of Hormuz, the VLOCs will also avoid the gauntlet of the politically-sensitive waterway.
Predictably, Oman's government has welcomed Vale with open arms. Keen to build on Sohar's status as an economic cluster - $12 billion-worth of industrial investments have already been made there - the government's investment arm Oman Oil Company took a 30 per cent stake in the venture in 2010 to lock in future potential.
"Vale's relationship with the [Omani] government is open, frank and constructive," says Beluco, pointing out that the government has fostered an export-culture. They have facilitated a smooth transition and have allowed Vale to seamlessly continue with its business operations," he notes.
Vale says the project has already created 1,200 jobs directly (and 3,120 indirectly) in Sohar and the surrounding area, alleviating pressure on a government which last year faced nationwide protests - focused on the town - from citizens frustrated by lack of services and jobs.
"Vale is positively promoting the development of the local economy," Beluco stresses, citing community programmes it is developing in partnership with other major industries in the area such as Oil Refineries and Petroleum Industries Company ( ORPIC ) and Sohar Aluminum.
Having established a manufacturing and distribution foothold in the Sultanate, Vale is also looking at broadening its local and regional business horizons.
Beluco confirms the Company is in preliminary discussions with Sohar Industrial Port Company and Oman's transport and communications ministry with a view a role in the planned $30 billion GCC rail network.
"Rail transportation plays a fundamental role in Vale's operations," he says. Vale currently operates approximately 10,000 km of track in Brazil and has agreements to use railroads in Africa to carry iron ore, steel and other goods.
The Company has a team in Oman to study the exploration potential for phosphates, copper and nickel. Meanwhile, it is conducting research in Oman on ways to combat diseases and pests affecting plantations in the Sultanate.
Vale's overseas endeavours have not always generated such positive coverage, although negative publicity has not always been of its own doing. Last month a Brazilian court suspended an order for it to pay almost $17 billion which the country's federal tax office claimed it was owed from Vale's international operations. Vale argued it had already paid the money to foreign governments, and was exempt from further taxation under Brazil's global double tax treaty network.
Vale's president and chief executive Murilo Ferreira also had to fend off accusations of state meddling in the Company shortly after he assumed the top job last May.
Yet Vale's aggressive expansion plans have not been derailed, and its global mining capacity will be practically doubled from 100 million t/y now at a cost of about $19.5 billion.
Such figures put into perspective its financial commitment in Oman to date, but its growing relationship with the country could well be one of its most shrewd and lucrative in the long-term.
© The Gulf 2012
© Copyright Zawya. All Rights Reserved.
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