Vale’s volte-face on investment is latest sign of government influence on key economic sectors

BRAZILIAN MINING giant Vale said this week it will boost domestic investment. The announcement follows months of public criticism from President Lula that the world’s biggest iron ore producer was not doing enough to help the country shake off the effects of the global economic crisis.

On Monday, the company announced it would increase its 2010 investment budget by 43 per cent to €8.5 billion, of which two-thirds will be spent in Brazil.

President Lula had been furious with the miner when it swiftly axed jobs and slashed its investment budget in response to the global slowdown at the end of last year. Since then, he has repeatedly upbraided the publicly-listed company’s management, demanding that it invest more in Brazil in areas such as steel-making, insisting that “Vale can no longer afford the luxury of just being an iron-ore exporter”.

In recent weeks the criticism even prompted speculation that Brazil’s first ever left-wing government was manoeuvring against the company’s chief executive Roger Agnelli. The state holds a small stake in Vale, which is listed on the São Paulo and New York stock exchanges and is controlled by Brazilian pension funds.

Vale’s volte-face on investment policy in the face of government pressure is the latest sign of growing state influence over key sectors of the economy, which has quickly returned to growth after a shallow recession at the turn of the year.

“This change is a direct result of the global crisis. The Brazilian government has been seen to have handled it remarkably well and President Lula is taking advantage of the moment to win a greater role for the state in the economy,” says Rafael Cortez, political analyst with the Tendências consulting group in São Paulo.

The government’s pressure on Vale follows its announcement in August of new rules designed to strengthen government control over the country’s oil industry.

That legislation, which is currently being debated in congress, would see the government inject capital into Brazilian oil major Petrobras by turning over to it an offshore reserve of five billion barrels of oil. The company will pay the government fair market value for the oil in the form of new shares.

Shareholders will be invited to accompany the capital increase but, unlike the government, will have to pay cash if they do not want their holding diluted. The operation is likely to give the government a majority holding of Petrobras ordinary shares, to go with its current majority of its voting stock.

After over a decade of increasing foreign investment in Brazil’s energy sector, the oil industry’s lobby group in Brazil, the Brazilian Petroleum Institute, has criticised the proposed changes as demonstrating an “arbitrary vision, radical and statist, as is occurring in other countries in South America”.

But the government rejects criticism that it is meddling in the economy, insisting that its policies of providing cheaper credit and investing in major infrastructure projects have boosted the private sector during the crisis.

“If there is a government who is a partner to the private sector, it is us,” says Dilma Rousseff, President Lula’s powerful cabinet chief and his chosen successor. “In Brazil, we used to have a false opposition between the private and public sectors. We had dogmas like ‘the market is always right’ or ‘the state can solve all problems’. But an important part of what this government has achieved in Brazil is to create dialogue. We call and listen and we do not think we know more than anyone else.”

Despite domestic criticism of President Lula’s pressure on Vale, markets have shown little concern, reassured by the government’s astute handling of the crisis and drawn by the lure of an oil boom.

Vale’s stock is up 70 per cent this year while the broader market is up 74 per cent and the local currency, the real, is up 34 per cent against the dollar in 2009.

“For now markets are happy to accept the government’s actions as anti-cyclical boosts to growth. But if this change in government policy continues over the long term, that would be a yellow light for markets,” says Mr Cortez.