Brazil iron mining outlook undimmed by price drop

RIO DE JANEIRO Mon Sep 3, 2012 11:32am EDT

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RIO DE JANEIRO (Reuters) - Investment in new Brazilian iron ore mining capacity will be strong for at least two to three years despite plunging prices and problems in China and Europe that could sap demand, according to Brazil's state development bank BNDES.

While the bank's total mine lending fell 45 percent in the first six months of the year, demand for credit by Brazilian and foreign companies suggest that final 2012 lending may be close to the 3 billion reais ($1.48 billion) loaned for mine projects in 2011, Guilherme Cardoso, chief of BNDES's basic industry department, and department manager Pedro Landim told Reuters late Friday.

"For mining, we have not seen the end of the cycle of investments," Landim said referring to a surge in Brazilian mining capacity that began in 2005. "We don't seen any change in this for least two to three years."

The price of iron ore - the main steelmaking ingredient - in the Chinese spot market .IO62-CNI=SI has fallen by about a third in the last three months. At less than $90 a tonne, it is trading at its lowest levels in three years. On Monday, iron ore with 62 percent iron content, an industry benchmark, fell 0.33 percent to $89.10 a tonne.

With China's slowing economy and the festering European sovereign debt crisis, big mining companies such as Brazil's Vale SA (VALE5.SA)(VALE.N) and Australia's BHP Billiton Ltd (BHP.AX)(BHP.N) and Rio Tinto Ltd (RIO.AX)(RIO.N) are considering delaying or canceling major mining projects.

Vale's iron ore chief, Jose Carlos Martins, acknowledged last week the company was "surprised" by the sharp decline in ore prices but said he expects a rebound toward $120 a tonne by mid-October.

The likelihood of new mining loans increased in May, when Brazil's national monetary council allowed BNDES to increase loans to Vale beyond 25 percent of BNDES's loan portfolio. Vale is one of BNDES's largest clients.

The high quality of Brazilian iron ore compared to Australian, Chinese and Indian competitors means Brazilian mines are likely to be among the last to lose business if demand plummets, said Cardoso and Landim, who spoke to Reuters at bank headquarters in Rio de Janeiro.

This means steelmakers, especially in China, the world's largest iron ore market, will likely opt for Brazilian ore on both price and quality over ore from elsewhere, they said.

"Not only does Brazilian ore have a higher iron content than most competitors, it has lower impurities," Cardoso said, adding that new projects in Brazil are to a degree protected "because most producers in the world have higher costs."

Vale's investments in ships, including the giant Valemax carriers, have reduced transport costs, Landim and Cardoso said. Transportation is Brazil's main disadvantage with Australia, which is close to China.

MINERS THINK LONG TERM

With about $320 billion in assets, BNDES is one of the world's largest investment banks and the main source of corporate credit in Brazil. Cardoso and Landim oversee one of the bank's largest investment portfolios.

Brazil, the second largest iron ore exporter after Australia, produces more than one-quarter of the world's sea-borne iron-ore shipments of about 1 billion tonnes a year. Sea-borne exports make up more than 40 percent of the world's iron ore needs.

Cardoso and Landim's outlook for Brazilian iron ore investment comes despite global overcapacity of about 25 percent in the world steel industry, the iron ore mining industry's principal client.

"The mining companies are looking at 2015 to 2016, they're not looking at right now," Cardoso said. "We've seen little change in demand for capital in the last two to three years and those levels should continue."

BNDES lending for steel projects fell 80 percent to 195 million reais in the January-August period, compared with the same period a year ago, Cardoso and Landim said. Mining investment, dominated by iron ore, fell 45 percent to 1.01 billion reais in the same period.

Mining projects under review by BNDES suggested "lending could pick up by year end," Cardoso said. "The worst thing that is happening now is that some companies may be going a bit slower, but they aren't canceling projects."

($1 = 2.03 reais)

(Editing by Jeffrey Benkoe)

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