Itaú BBA - Mining: Despite the Overseas Deterioration, Investments in the Sector Should Continue in 2013

Sector Insights

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Mining: Despite the Overseas Deterioration, Investments in the Sector Should Continue in 2013

junio 28, 2013

Brazilian mining industry was hit by the slowdown in domestic activity last year.

  •    Brazil is among the biggest global players in mining; it is the second largest exporter of iron ore, manganese and bauxite, and the largest exporter of niobium.

  •    Iron ore accounts for 80% of Brazil’s mining exports. China is the largest buyer of Brazilian iron ore (about 50% of the total volume).

  •    The slowdown in the Chinese economy has been one of the key drivers behind the drop in international iron ore prices, and consequently, the drop in extraction and exports of this product.

  •    Though Chinese demand weakened, it remains at high levels, and expectations for 2013 are still positive.

  •    The mining industry is one of the largest investors in Brazil. According to the Brazilian Mining Institute (IBRAM), the industry is expected to invest about $75 billion in the 2012-2016 period, with 60% of the amount being invested in iron ore projects.

  •    Given slower growth in international demand and a possible increase in supply as investments in the sector mature, we expect international ore prices to drop slightly in coming years.

  •    New projects depend on the regulatory framework and on environmental licenses, which have created a challenging business environment. The New Regulatory Mining Bill, which was recently announced by the government, should bring some improvement, reducing uncertainties.


 

The Mining Sector in Brazil

Good performance in recent decades

The international crisis has worsened the outlook for the mining industry, but its growth had been vigorous in Brazil in recent decades. Growth was fueled mainly by urbanization and development in nations that are geographically large, are densely populated and have high GDP, such as the BRIC countries (Brazil, Russia, India and China), which are, as a matter of fact, also very important global producers in the mining industry.

Brazil is particularly important for the global mining sector; it is the largest producer of niobium (used in steel production) and the second largest producer of iron ore, manganese and tantalite in the world. As of 2011, the country had 8,870 mining companies, most of them located in the Southeast, according to IBRAM.

But mining production has been falling in Brazil in recent years. According to census bureau IBGE, after rising 4% in 2011, production of  ferrous minerals dropped 1.4% in 2012, and fell 7.9% in the first four months of 2013. The decline for non-ferrous minerals has been even more substantial:  -1.7% in 2011, -2.8% in 2012 and -18.8% in the first four months of 2013. The drop is largely driven by the slowdown in the Chinese economy and by weak growth in Europe, Japan and the U.S., the largest global buyers, dragging down exports and international prices.

Additionally, the Brazilian mining industry was hit by the slowdown in domestic activity last year, especially by the deceleration of sectors that follow mining in the production chain, such as steel, construction and the automotive industry. In early 2013, the slowdown was also caused by operational disruptions in some mines.

Please open the attached pdf to read the full report.



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