Brazil's mining giant gets ready for the future
Published: 03 November 2008
Tight supply, strong demand from emerging markets and a weak US dollar pushed commodities to a new high in early 2008, but all this changed with the global credit crisis.
The recent strengthening of the US stronger dollar, increased production and a slump in global demand has already hit the metals and mining industry. Since June, commodities have seen the sharpest drops since 1989.
The down side of high demand
But not every commodity has suffered. While demand from developed markets, particularly from the construction industry, has contracted sharply, demand for raw materials for local industry, construction and infrastructure in emerging markets has helped insulate the industry.
As a result, HSBC expects the market for iron ore and steel to balance, rather than contract, boosted by robust demand from emerging markets, and particularly from China.
The downside of demand for the base metals industry will be higher production and falling prices. HSBC Global Metals & Mining team expects increased production in China, Brazil and Australia to have a direct impact on the price of iron ore for the next four years, despite continued growth in demand.
With production increasing by 20 million tons in Brazil and 25 million in Australia, Brazilian iron ore prices are likely to fall by about five per cent in 2009.
Forward planning
During the recent growth period, many base metal producers launched aggressive capital investment programmes. They expanded through consolidation, increasing their scale and operating efficiencies, building ore reserves, and consolidating production.
Consequently, as the market has contracted, the industry has not been burdened with excess capacity or unwanted development commitments.
Brazilian mining giant Vale do Rio Doce was one company that has planned ahead, remaining confident in the long-term fundamentals of the minerals and metals markets.
Vale is the world's largest producer of iron ore and iron ore pellets and the world's second-largest producer of nickel and kaolin.
To finance its capital investment programme and in anticipation of market volatility, Vale invited HSBC to act as joint bookrunner on what would be the biggest equity offering yet in Latin America. The July 2008 share sale, which represented eight per cent of the company, attracted global investors and raised USD12.2 billion.
Despite challenging market conditions, the deal was over-subscribed, with strong demand from the US and Brazil, pricing at USD25 per preferred share, and USD29 per common share.
Cross-border experience
Vale has grown quickly in recent years, making high-profile acquisitions outside Brazil and building a reputation among foreign investors, said David Noble, head of Equity Capital Markets, Americas.
Though the core business of Vale is iron ore, the company has been working to diversify its product range and extend its geographic reach. "Vale made a rather transformational acquisition a couple of years ago when they bought 'Inco' in Canada. This was very likely the initial splash on to the international scene," said Mr Noble.
Vale's 2006 acquisition of Inco made the company one of the world's largest producers of nickel, copper, cobalt and precious metals, and brought with it operations in Canada, Indonesia, the UK, Japan and China.
Planning the offer during a time of economic uncertainty was a challenge for both client and bank, said Mr Noble. "The market was very challenging all year, but then this company has a good profile and has performed well both locally and internationally over the past few years. Although much of its production is in Brazil, it is serving growing markets in India and China."
Investors seek alternative markets
Traditionally, Brazilian companies look first to the US and then to Europe to drive their overseas sales. "In the future, we cannot depend on that, so we need to look at alternative markets, which is where HSBC has performed well," Mr Noble said.
The offering highlights the ability of HSBC to help emerging market businesses to reach investors in both emerging and developed markets.
During the nine-day global roadshow through Asia and the Middle East, six management teams held more than 220 investor meetings and 20 events in twenty-seven cities, reaching 573 institutional investors.
Vale was the first major Latin American deal in which HSBC was able to successfully leverage its Middle East and Asian distribution capabilities
Brazilian domestic investors accounted for 40 per cent of the offering, with the remainder of interest from a diverse group of investors including sovereign wealth funds and institutional investors in Asia, Australia, Canada, Europe, the Middle East and United States.
The landmark transaction highlights HSBC's strong global equity franchise, said Mr Noble. "It also shows our ability to execute jumbo transactions even during challenging market conditions."
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