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Explore the successful case of Vale, a privatization example, amidst the backdrop of shifting metals prices and populist governmental influences. Delve into the macro factors affecting commodity prices and the correlation with industrial production, providing insight into the complex dynamics of the mining industry.
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The challenges of mining Rio de Janeiro August 16, 2012
A successful case Metals price behavior 1 2 Populist times 3 Agenda
A successful case 1 2 3 Metals price behavior Populist times
Vale, a successful case of privatization Annual avg in US$ million¹ State-owned Private sector owned 1943-1997 1998-2011 (A) (B) (B)/(A) Investment 667 8,248 12.4x Revenue 1,726 21,126 12.2x Net income 270 7,834 29.0x Dividend 72 2,041 28.3x ¹ nominal values deflated by the US CPI
Fifteen years ago Vale was a typical Brazilian export-oriented company Vale in 1997 Belgium USA Japan China Brazil Legend Operations Offices Exploration offices Headquarter Stock Exchange
A global reach Vale in 2012 Hong Kong Stock Exchange
Investment to meet the long-term growth dynamics of emerging economies • Investment-based demand products for housing and infrastructure. • Consumption-based demand products for durable goods and proteins.
Success was not due to chance or to cyclical factors Real metals price index¹ Real terms index ¹ The IMF metals price index is based on a basket of metals (copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium). Sources: IMF and Vale
After plunging from 1980 to 2000, real iron ore prices are trending upward Iron ore real prices US$ per metric ton US$ per metricton ¹ Long-term trend according to Hodrick-Prescott filter Sources: Vale and USGS
A successful case 1 2 3 Metals price behavior Populist times
Macro factors have a large influence on commodity prices Price variance associated to macro factors 1979-2011 % Food 45-50 Oil 85-90 Natural gas¹ 17-20 Base metals 60-65 ¹ US Source: IMF
Metals prices are associated to industrial production Global IP Metals price index¹ ¹ The IMF metals price index is based on a basket of metals (copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium). Sources: IMF and JPMorgan
16 12 8 4 0 1972 1977 1982 1987 1992 1997 2002 2007 2012 Industrial production is the most volatile component of the GDP, imparting a volatile environment to base metals prices Global IP growth volatility¹ ¹ 24-month rolling standard deviation of %3m, saar monthly IP change Source: JP Morgan
The strong EM-led recovery in IP growth has generated metal price increases much greater than in the recoveries from past recessions Metal prices in recoveries from past global recessions¹ Global industrial production % 3mma, saar¹ ¹ Global recessions: 1974, 1981-82, 1990-91, 1998 and 2001. ² Percentage change from last trough to recent peak (Al: 2,785$/t on 3/5/11; Cu: 10,148$/t on 14/2/11; Ni: 29,030$/t on 21/2/11) Sources: Vale and JPMorgan
Commodity prices tend to be negatively correlated with shocks to the value of the US dollar Correlation between US NEER and metals prices¹ ¹ Correlation between rolling two-year standard deviations of monthly changes in US NEER and commodity prices; Jan/10 – May/12.
Changes in financial markets instability tend to be negatively correlated with base metals prices Metals prices and the VIX Two-year rolling correlation between daily changes in the VIX and base metals prices
Nickel and copper prices are highly volatile Daily returns % Nickel Copper Sources: DIRI/DETM and Bloomberg
As well as iron ore prices Daily returns %
Nickel real prices cycles1 Shaded areas represent periods of downswings. ¹ Real prices, base year = 2012.
Copper real prices cycles1 Shaded areas represent periods of downswings. ¹ Real prices, base year = 2012.
Real metals price cycles ¹ months
The behavior of metals prices shows some similarities to stock prices: difficult to predict, fat tails and volatility clustering
A successful case 1 2 3 Metals price behavior Populist times
Some fallacies about commodities • A gift from God. • The Dutch disease. • The natural resources curse.
Vale - R&D investment – 2007- 2011 US$ 5.7 bilion
Global mining capex US$ billion¹ Real prices ¹ 2009 prices. Source: Vale estimates.
Despite the restrictions, natural resources have contributed to increase total productivity in Latin AmericaRelative TFP (US=1.0) Source: “On the evolution of TFP in Latin America”, P. Ferreira, S. Pessôa and F. Veloso , Economic Inquiry, 2012.
Is there a natural resources curse? • Commodities andeconomicdevelopment ¹ 2011 values Sources: Vale, Haver Analytics, IMF, Penn World Tables, MIDC-SECEX, StatCan and Statistics Norway,