New Brazil political scenario fuels talk of Vale CEO change

With a formal impeachment of Brazil’s former president Dilma Rousseff of the Workers’ Party (PT) now expected at the end of August, talk has resurfaced of a change of command at Brazilian iron ore miner Vale.

Vale, with a wide Brazilian and international shareholder base, has been classed as a “privatized” company since 1997, but its state-owned shareholders still hold a majority in Vale’s controlling shareholders’ group Valepar, and the government’s “golden share” gives it power in strategic decision-making.

Political influences from the now discredited PT are said to have been behind the sudden exit of former Vale CEO Roger Agnelli in 2011 and his replacement with Murilo Ferreira, a former Vale aluminum area director. The switch occurred well before Agnelli’s contract ended, but coincided with the start of Rousseff’s presidency.

Informed steel and iron ore market sources tell S&P Global Platts that Brazil’s changing political scenario may lead to Ferreira’s exit as CEO before his contract finishes in April 2017. Ferreira, who has managed to stabilize Vale’s financial results following 2015’s iron ore price plunge, is seen as able and agile but some say he is a little too close to Rousseff for the comfort of what is set to be Brazil’s new political establishment. The PT, under Rousseff and former President Luiz Inácio Lula da Silva, has been found in recent investigations to have corruptedly awarded state contracts to large companies in return for donations to support the party, a practice now outlawed.

There is no suggestion that these practices have occurred at Vale. However, the interim government of Michel Temer of the democratic movement PMDB party, to be confirmed as the country’s president if Rousseff is impeached, “is already imposing new rules on companies, trade and associations,” said one metals sector analyst. “The changes are seen as positive for the economy. The government has carried out a spring-clean at companies like Petrobras, Caixa Economica (a state-owned bank) and Banco do Brasil.”

The question is whether Vale can escape the wave of change. And whether a change could be pejorative for the company’s image, suggesting that the company may still be prone to political interference.

“An unnecessary management change at Vale could penalize investors on the perception of rising political risk,” noted analysts at BTG Pactual in a recent report, drawing attention to Ferreira’s achievements over the past year.

Vale reduced iron ore cash costs to an industry-leading position, at $12.30/mt in Q1 2016 and $13.20/mt in Q2, lowered expenses and investments,  increased productivity and asset sales.

“We consider Mr. Ferreira competent and believe he’s on track to prepare Vale for a prolonged commodity down cycle,” the analysts said.

Despite Vale’s 2Q improved performance, some claim a change at the top could still be justified given losses last year and the bad publicity and sensitivity generated over the fatal accident at a Samarco tailings dam last November. “Vale lost value and didn’t assume its environmental obligations,” said one steel industry observer. Vale has been criticized by some for distancing itself from the incident at Samarco, which is operated by an independent management, but is nonetheless a 50:50 joint venture between Vale and BHP Billiton.

Vale declined to comment officially. Still, close observers of the company tell S&P Global Platts that the process of selection is moving ahead, with vetting of at least four potential candidates for CEO already underway at an international consultancy. The four are understood to be Vale’s former ferrous and strategies executive director Jose Carlos Martins, retired; former CFO and base metals executive officer Tito Martins, currently superintendent director of Brazilian zinc producer Votorantim Metais; Vale’s current ferrous executive director Peter Poppinga; and its current HR, health & safety, sustainability and energy executive director Clovis Torres.

The choice is likely to be made by Vale’s control group Valepar, in which state-owned bank BNDES and major pension funds including Banco do Brasil’s Previ represent the government, while Bradesco bank and Mitsui are the private-sector representatives. Poppinga is rumored to be the favorite of Bradesco, while a motion to impose an age-limit of 65 on any new Vale CEO was thrown out at last Friday’s Vale shareholders’ assembly in Rio, clearing the way for Jose Carlos Martins, aged 66, to return to the company he served for nearly 11 years.

“This process may accelerate if Dilma is impeached,” one observer noted.

The specific interests of the supposed candidates could color the future strategy of Vale, the world’s biggest iron ore producer, but which has diversified into fertilizers and coal and significantly stepped up its copper and nickel interests, notably under the leadership of Roger Agnelli. In recent years, with fluctuations in Chinese demand causing market volatility, Vale has embarked on a sale of certain assets, including its fleet of ships, oil and steel interests.

With the mammoth 90 million metric ton/year S11D iron ore project set to come on stream in H2 2016, Vale is likely to focus more intensively in the immediate future on investments in its iron ore core business. The project’s design, with the ecologically important innovations of truckless ore transport and dry processing, has the potential to achieve record low cash costs, and success of this project needs to be Vale’s priority.