Companhia Vale do Rio Duce

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Companhia Vale do Rio Duce

Avenida Graça Aranha
26-20 Andar
Post Office Box 2414
20005 Rio de Janeiro
Brazil
(21) 272 4477

State-Owned Company
Incorporated: 1942
Employees: 21,755
Sales: US$2.33 billion

Companhia Vale do Rio Doce (CVRD) is one of the world’s most important producers of iron ore, iron pellets, and other minerals. Owned primarily by the Brazilian government, it has taken a leading role in developing the mineral resources of the Amazonia region. Much of the company’s success is based on its ability to draw on foreign expertise and capital while at the same time retaining effective control in Brazilian hands.

Companhia Vale do Rio Doce was formed in 1942, receiving the assets of the Itabira Iron Ore Company, including the “iron mountain” of Caué Peak in the Itabira region of Minais Gerais state. The Brazilian government held 80% of the shares in the company, reduced to the present level of 53 %. Initially hampered by poor management and inadequate transport facilities, it was only in the early 1950s that the company started on its path to becoming one of the world’s most important exporters of iron ore.

With its success closely linked to improvements in transport which it helped to finance, CVRD also expanded into the production of other minerals, the provision of shipping services, and iron pelleting. It also helped finance and organize a wide range of other industrial and service enterprises. When the huge iron ore reserves of the Amazon region were discovered in the 1960s, it was natural that CVRD be given responsibility for spearheading their exploitation. It was equally natural that CVRD become a specific target of international opposition to mining activities in the region, which were considered to threaten the traditional lifestyles of inhabitants.

Funds for expansion came not only from government grants and the company’s reinvested profits, but also from foreign investment in the form of loans and joint financing of new ventures involving Brazilian and various foreign banks and companies. By 1990, CVRD ranked 294 in Fortune’s list of the 500 largest companies in the world. In the mining and crude oil production sector, it ranked fifth in terms of sales value, but first in terms of profits; at some US$2.944 billion, these represented 65.1% of sales and a 45.5% return on assets, figures which no other firm on the Fortune list approaches.

Brazil is one of the world’s major sources of iron ore with reserves estimated at about 50 billion tons, second only to the Soviet Union. Some of the more easily accessible deposits were worked in the early days of Portuguese rule, but were developed more significantly in the wake of the 18th-century gold and rubber booms. Even these were very small-scale operations, and it was only in the late 19th and early 20th centuries that serious efforts to promote iron mining and exports, along with steel manufacturing, began. Not until after World War II did Brazil’s iron ore exports begin to acquire worldwide significance, with CVRD in the vanguard.

The company’s roots are in the formation of the Itabira Iron Ore Company Ltd. by Sir Ernest Cassel on March 31, 1911. The company acquired Caue Peak and 18,000 acres of land around it, along with a 52% interest in the then-uncompleted Vit6ria-Minas railway line. Caue Peak, largely made up of hematite, containing 69% exceptionally pure iron, was expected to be the foundation of an enterprise integrating iron mining, steelmaking, and shipping. Ore was to be sent to and exported from a port that the company was to build about 52 kilometers north of Vitόria, the ships returning with coke for the company’s steel mill, replacing the charcoal that was and has continued to be used for Brazilian iron smelting.

In 1918, Cassel sold out to a group of British financiers and steel manufacturers, who sought the support of Percival Farquhar, an American entrepreneur of varying fortunes, who took the lead in subsequent negotiations. He too was unsuccessful in securing government approval for Itabira’s scheme. Brazilian firms and various individuals objected to the grant of such extensive rights to foreigners. In 1923, agreement seemed likely, but was not achieved, at least in part because of Farquhar’s insensitive treatment of members of the Brazilian government, but also because of continuing and growing feelings of economic nationalism. Brazilians increasingly wanted to limit the extent of foreign control of their economic resources in order to ensure that they secured a substantial share of the profits generated, and that the exploitation of the resources would be managed to Brazil’s own advantage.

Some of the objections were recognized in 1940 when the Companhia Brasileira de Mineragao e Siderurgica was created as an all-Brazilian company, acquiring Itabira’s assets without the proposed steel mill. That year Itabira shipped out its first cargo of 6,000 tons of ore, and over the next two years exported a further total of 100,000 tons. Hardly a successful company, Itabira’s fate was sealed in 1942 when the British government, apparently at the behest of the United States, using special war powers, expropriated the Brazilian holdings of the company’s British investors. These assets were handed over to the Brazilian government, which in turn took over most of the original company’s Brazilian assets which became the base of CVRD. The Itabira company was dissolved in 1945.

Although it did not reach any significant agreement with Farquhar, the Brazilian government was very eager to promote the development of the region’s mineral potential, an aim which coincided with Allied interests during World War II. The agreement whereby the Brazilian government acquired Itabira also included provision for U.S. assistance for the extension of the Vitόria-Minas railway, which had been completed in 1936, and of ore-loading facilities at Vit6ria, as well as the development of the mines themselves. Also of strategic importance to the Allies was the formation, in the previous year, of the Companhia Brasileira de Aluminio to develop the bauxite deposits at Pocos de Caldas.

To finance CVRD, a grant of US$14 million was made by the Office of Lend Lease Administration, the U.S. agency which administered the post-World War II lend lease scheme for helping the Allies recover from the effects of the war. An equal amount was put up by the Brazilian government. A part of the loan made by the United States Export-Import Bank for the development of the important Volta Redonda steelworks was also available for developing the Itabira deposits. Even with this financial injection, CVRD’s early years were marked by inefficient management, political interference, and a serious bottleneck created by limitations on the railway’s carrying capacity. Against an annual export target of 1.5 million tons, in 1947 only one-sixth of that amount was being shipped. In the late 1940s Morrison-Knudson, a U.S. company, was brought in to upgrade the railway, but local political machinations were such that improvements could only be made in 1951-1952 when a new administrator was appointed by Brazilian President Getúlio Vargas after his return to power. By 1953, CVRD reached its initial export target, and by 1963 the company was exporting 7 million tons annually through the port of Vit6ria, out of a total Brazilian production of 10 million tons. Of the difference, 1.5 million tons was consumed domestically, the remainder being exported via Rio de Janeiro.

By this time, the railway and port once again created a bottleneck, but improvements were hampered by political unrest which sapped the confidence of foreign investors. That confidence returned in 1964 following the military takeover which brought down the government of President Joao Goulart who, among other things, was considered by U.S. investors to be too close to the Brazilian communists. In 1965 the Inter-American Development Bank provided the funds for CVRD to improve its mining equipment; construct a new port at Tuberao, some ten kilometers south of Vitoria; and expand the Minas railway’s capacity. The ore terminal at Tuberao was completed in 1966 with an annual capacity of 15 million tons, doubled in 1969 to meet the increased demands associated with the start up of CVRD’s pelletizing plant.

The export of iron pellets, in addition to iron ore, became an important part of CVRD’s activities, and of several associated companies. By 1989, CVRD itself produced 5.3 million tons of pellets, while three associated companies devoted to pelletizing, NIBRASCO, HISPANOBRAS, and ITABRASCO, produced a further 12.9 million tons. The pelletizing work is actually done by CVRD, but these associate companies are examples of one of the important ways in which CVRD has secured foreign finance for expansion as well as assured markets. The production of each of these companies is destined exclusively for the participating country’s steel industry which, along with banks in that country, helped finance the building of the plant. In addition to the immediate financial and commercial advantages this provides, such arrangements help protect CVRD from the vagaries of decision-making by foreign companies which might otherwise be inclined to give a lower priority to CVRD’s or Brazil’s interests.

Another important technique used to finance expansion and diversification has been the negotiation of long-term supply contracts linked to or separate from joint ventures. Expansion in the 1960s was partly a response to an agreement reached in 1962 with a consortium of Japanese steel producers for the supply of 50 million tons of iron ore over 15 years from 1966. Similar contracts have enabled CVRD to bring in important foreign investment to supplement grants from the Brazilian government and the company’s own reinvestment of profits. Such cooperation also has facilitated the importing of modern technology on terms which, unlike the situation often found in connection with technology transfers to Third World countries, have been favorable to Brazil and CVRD.

During the 1970s CVRD embarked on major expansion and diversification. This went further than its investment in infrastructure—ports, roads, shipping, and railways—which serve CVRD, the region, and the country in general, as well as a number of companies which actually compete with CVRD. On the basis of substantial profits derived from iron ore exports, CVRD helped finance a range of companies involved in mining a variety of nonferrous metals including gold; mineral surveying; reforestation; and pulp and paper production. The joint pelletizing ventures, like CVRD’s involvement in shipping, were also important for diversification and had the additional advantage of enabling CVRD to process and transport ores produced by other companies, thereby gaining a share in overall profits.

The massive rise in oil prices in 1973-1974, followed by a prolonged worldwide slump in steel production, led to problems for CVRD’s investment plans. When iron ore prices fell drastically in 1977, cutbacks in what critics referred to as CVRD’s “empire building” and “irresponsible diversification” were necessary. Some subsidiary activities were sold off to the private sector and a substantially higher proportion of supplies were acquired from domestic rather than foreign producers—some 60% in 1976 compared with less than 20% earlier in the decade.

Support from the Brazilian government was clearly an important factor in CVRD’s success. In contrast to its early days, the quality of its management has also played a significant part, but of prime importance has undoubtedly been the purely fortuitous circumstances of declining iron ore production in the United States and the Soviet Union coupled with the development and expansion of steel production in Japan, South Korea, and other countries with limited or no domestic sources of iron, to an extent, Brazil itself. For whatever combination of reasons, by the late 1970s CVRD had become the most important single company in the world’s oceanborne iron ore trade— accounting for some 18.3% of world trade in 1978—and was well placed to play a major role in the opening and exploitation of mineral resources in the Amazon area, more specifically the greater Carajás region.

This part of Brazil is immensely rich in a wide variety of nonferrous metals, manganese, copper, bauxite, cassiterite, nickel, and gold, as well a containing massive iron ore reserves. These last were discovered accidentally in 1967 when a geologist, prospecting for manganese for U.S. Steel’s Brazilian subsidiary landed his helicopter to refuel on a hill which subsequently proved to be composed of some 18 billion long tons of hematite, average grade 66% iron. U.S. Steel sought exploration rights over 160,000 hectares in the region, but because of Brazilian reluctance to allow a foreign company to have such extensive rights, it was only able to secure a 49% share in a joint undertaking—Amazona Mineracao SA— formed in 1970, with CVRD holding a 51% stake. U.S. Steel sold its share to U.S. CVRD in 1977 for US$50 million.

U.S. Steel and other multinational companies have reason to be cautious about involvement in the region’s development due to its remoteness, requiring the construction of extensive infrastructure—railways, roads, and hydroelectric capacity. By late 1981, these development costs were estimated to be some US$3.62 billion, excluding financing charges. Private investors preferred to leave this to the Brazilian government, and waited until the region was opened up to bid for its nonferrous ores.

In elaborating Brazil’s Grand Carajás Program (PGC), which was formally announced in November 1980, CVRD was to play a major role in the agricultural, industrial, ranching, and forestry project, as well as in the development of mineral resources. Both CVRD and the Brazilian government relied heavily during the 1970s on advice and subsequently investment from Japan. The Japan International Co-operation Agency (JICA), part of the Ministry of Foreign Affairs, continued to play an influential role until the mid-1980s, and aroused considerable opposition in various quarters, Brazilian and foreign.

CVRD began to develop the Carajás iron ores in 1978, the failure to attract foreign capital forcing it to scale down the project from its original size. Neither this nor most other parts of the PGC were viable without the construction of a railway, the Estrada de Ferro de Carajás, to the coast at a port in Sao Luis. This impressive engineering feat was completed 18 months earlier than planned and—at a cost of US$1.5 billion-some US$600 million under budget, in February 1985.

Also vital to the success of the PGC was the Tucurui hydroelectric project, which was particularly important for the development of aluminum processing. As early as 1976, a tied loan from France of US$230 million was destined for this scheme. The uncertainties of the 1970s, exacerbated by the 1979 oil-price rise, meant that serious work only began in 1981, and the scheme was inaugurated in 1984. Aluminum production has, over the years, involved various foreign companies such as Aluminum Company of America and Billiton Metals, and has been subject to considerable reorganizaton; for CVRD, aluminum has not always been particularly profitable.

The need for Japanese cooperation and cheap loans meant that the Brazilian government had not only to provide necessary basic infrastructure, but also to agree to subsidize electricity prices very heavily. Throughout Carajás, subsidized electricity has indeed proved essential for industrial and commercial success, at considerable cost to the Brazilian government—a cost, however, considered acceptable because of the perceived advantages of development.

For the iron ore project itself, CVRD raised about US$200 million of the US$3.3 billion investment by issuing debentures. This resulted in the gradual reduction of the state shareholding in the company from 70% to 56% by 1985. In contrast to earlier government reluctance, a further US$700 million came from the National Development Bank. In 1981, Brazil’s planning minister traveled the world to seek finance, arranging loans of US$1.7 billion for PGC, most of which was destined for the iron mine. This total included US$600 million from the European Economic Community, US$500 million from Japan, and US$305 million from the World Bank. The European and Japanese loans were tied to contract to supply ore to particular European or Japanese steel companies at world market prices, which were soon to fall. Further loans were later arranged: US$250 million from United States commercial banks, and US$60 million from the USSR. In 1986, CVRD and the USSR signed contracts for the supply of ferro manganese. CVRD needed the finance, but with repayment terms of 10% interest over 15 years, the terms were not favorable.

Having in essence drawn up the PGC in the first place, CVRD continued to play a major administrative as well as financial role in it, in the opening up of mineral resources, the creation of infrastructure, agriculture, and the provision of housing and other amenities. As the government’s mining company, it was inevitable that CVRD should be seen as an enemy by those opposed to the destruction of the Amazonian rain forest and the disruption of the lifestyle of the people living in it. This opposition has been repressed by CVRD. In 1982 the company signed an agreement with the National Indian Foundation (FUNAI) in support of FUNAI’s projects designed to support and protect the 14 indigenous groups living in the Carajás iron ore area. While this shows a greater degree of interest than might be expected, there is justification for considering this a token gesture.

In one activity, the mining of Amazonian gold, CVRD finds itself in conflict not only with people living in the region, but also with the Brazilian government. This centers on the prevalence of garimpeiros, or freelance miners who, organized to a greater or lesser degree in groups, work open-pit or alluvial gold deposits, often as a way of paying off creditors, sometimes simply to earn a living in circumstances of poverty, both rural and urban. These workers, some of them children, labor in inadequately supported but ever-deepening pits. Another problem is the uncontrolled use of mercury to separate gold from its ores. Nonetheless, with little or no alternative for many people, there is strong local pressure for it to continue.

In attempting to stamp out garimpeiro production, CVRD has not always had government support, as it has generally been in the government’s interest to have access to unofficial supplies of gold. In 1983, for example, arrangements with creditors required Brazil to sell gold worth US$500 million, approximately 40 tons. A high proportion of the total 54 tons acquired by the Brazilian Central Bank that year was garimpeiro -produced, bought at the going black market rate with no questions asked regarding taxes. A further political argument was that garimpeiro gold working provided a safety valve for urban tensions, leading the government in 1984 to extent garimpeiro rights for a further five years.

CVRD for its part has argued that garimpeiro working is wasteful, leaving large amounts of gold untouched, depriving the company and its subsidiaries of profits and the government of revenue, and making it more difficult and costly ultimately to work the deposits when the garimpeiros have abandoned them. Throughout the 1980s the company was attempting to expand and improve production, opening new mines and reopening old ones. Once again there was foreign financial support from companies such as Rio Tinto-Zinc, Anglo American Corporation of South Africa, and BP Minerals, as well as technical services in prospecting and treatment. In 1987, CVRD sold 460,575 grams of gold; in 1988, 834,676 grams. In 1989, it sold no gold, but produced 2.79 million grams, 79% from the Fazenda Brasileiro mine, the remainder from Itabira. With the Brazilian government’s financial support and building on its generally profitable arrangements with foreign markets and investors, CVRD has been a profitable company, bringing in a substantial portion of the country’s foreign-exchange earnings. In 1987 the company recorded losses totaling some US$179 million because of circumstances outside its control. The worldwide fall in iron prices and the weakening of the dollar against European currencies and the Japanese yen had serious consequences, while the need to protect the company’s foreign debt, which was calculated in dollars, against further devaluation placed further strains on finance. The company returned to profit in 1988, and by the end of 1989, with the help of the Brazilian government, was able to reduce its corporate debt—US$3 billion at the end of 1987—by half. Overall, the success of CVRD demonstrates that state ownership is by no means incompatible with financial and commercial success.

Principal Subsidiaries

Vale do Rio Doce Navegacao S.A. (96.8%); Vale do Rio Doce Aluminio S.A.; Florestas Rio Doce S.A. (99.7%); Rio Doce Finance Ltd. (U.K., Cayman Islands, 99.8%); Itabira International Co. Ltd. (U.K., 99.9%); Rio Doce International S.A. (99.9%); Rio Doce Geologia e Mineracao (99.9%).