* Alpa halted as key waterway suffers budget cuts
* Vale faces challenges to execute steel projects
* Vale to give priority to mining over steel plans
By Sabrina Lorenzi
RIO DE JANEIRO, Sept 28 (Reuters) - Vale put on hold construction of a steel slab mill in northern Brazil after the government cut investments in a waterway project critical to the plant, people with knowledge of the situation told Reuters.
Work at the laminated steel project Alpa in the northern state of Pará stopped after the federal government cut a project to make port and navigation improvements on the Tocantins River, from its flagship investment program PAC, state officials said.
Some government officials oppose the 43-kilometer (27 mile) waterway project for its high cost and technical difficulty.
“We have information Vale started preparing the site of the project -- invested a few million reais -- but they decided to suspend that ... due to the lack of work on the Tocantins waterway,” David Leal, industry and trade secretary for the state of Pará, told Reuters in an e-mail.
Vale is waiting for a decision on the waterway before resuming work at Alpa, the Rio de Janeiro-based company said in a statement sent to Reuters on Friday. Vale is committed to continue with Alpa, a $3.5 billion project that could produce up to 2.5 million tonnes of rolled steel products a year.
The situation reflects the challenges facing Vale as the government steps up pressure on the company to invest in steel. Government officials argue that Vale ought to invest more in industries such as steelmaking and infrastructure, a move that could put Vale at the center of a conflict of interest with its biggest clients -- steelmakers -- as well as its shareholders.
Since 2008, it has been giving in to demands by the government to use some of its hefty profits to develop steel assets in the country to create jobs. The company ousted Roger Agnelli as chief executive in May last year, chiefly because of his stance against the company’s involvement in steel.
According to Leal, Vale wants the federal government to sign a letter of intent that included a resumption of budget financing for the waterway. If signed, Leal said, Vale would commit to continuing work on Alpa.
The government is not willing to sign the document.
“We don’t believe this to be the right course of action,” a government source told Reuters on condition of anonymity.
Vale recently commissioned a feasibility study for the waterway, which would connect the regions of Araguaia with the northern state of Tocantins, Pará state officials told Reuters, with results expected by November. Vale did not confirm the information.
The unfavorable economic outlook is also an additional motive for Vale to put the brakes on its steel projects, analysts said.
The recent tumble in iron ore and steel prices have forced the company to shift focus toward its mining projects, the most relevant in its portfolio. One source with knowledge of Vale’s plans said steel plants are not a priority for the company and therefore will be pushed back.
Alpa, as well as the Ubú plant in Espírito Santo state, have yet to be approved by Vale’s board. Yet, the projects were included in the company’s investment plan pipeline.
“If the situation remains difficult, priorities must be re-evaluated ... there’s no use insisting on a project that doesn’t make part of the company’s core strategy,” said the source, who declined to be quoted because of the sensitivity of the issue.