Vale’s Profit Erosion Prompts Embrace of Renewable Energy

July 10, 2012 by  
Filed under Green Energy News

Vale SA (VALE3), the world’s biggest iron-
ore producer, is turning to palm-tree oil and wind turbines to
insulate earnings from surging energy costs.

The company plans to produce 420,000 tons of fuel from palm
oil annually by 2019 and will build two wind farms with
Australia’s Pacific Hydro Pty by 2014, Giane Zimmer, Vale’s
director of sustainable development, said in a telephone
interview from the company’s headquarters in Rio de Janeiro.

Rising power prices have pared margins for Vale, whose fuel
and energy expenses accounted for 13 percent of costs of goods
sold in 2011, or about $3.15 billion. Electricity prices for
industrial users in Brazil have risen 89 percent since 2003, the
nation’s power regulator estimates. That compares with a 35
percent gain in electricity prices in the U.S.

“Our big challenge is to align sustainability with lower
costs,” Zimmer said. “We have an obligation to our
shareholders to give results.”

Vale gained 5.5 percent in Sao Paulo trading this year
before today, compared with 8.5 percent and 2.9 percent drops
for BHP Billiton Ltd. and Rio Tinto Group, the world’s biggest
and third-biggest miners by market value, respectively.

Vale fell 62 centavos, or 1.5 percent, to 39.88 reais on
July 6. Sao Paulo markets were closed yesterday for a state
holiday. The company had a price-to-earnings ratio of 6.38,
compared with 7.51 and 15.60 for BHP and Rio Tinto,
respectively.

Power Investments

Vale has invested more than $1.3 billion in power
generation in Brazil since 1995, about 2 percent of its revenue
last year. While 49 percent of its power comes from
hydroelectric plants, it also owns natural-gas reservoirs. The
palm-oil and wind-farm programs represent an effort to diversify
energy supplies.

Producing fuel and power on site is especially important
for mining companies, which need to shift large quantities of
material in remote areas, said Laurence Balter, a money manager
at Oracle Investment, which is based in Fox Island, Washington,
and oversees $100 million.

The company will produce palm-oil fuel known as biodiesel
in the Amazon state of Para where it has mining operations and
use the fuel to power its trains and heavy vehicles. The wind
farms will be in Rio Grande do Norte state.

‘Smelling like a Rose’

“It’s nice to see a company like Vale embarking on these
forward-thinking projects,” Balter said in a telephone
interview on July 5. “They’re going to come out smelling like a
rose.”

Vale is seeking to replace a fifth of its Brazilian diesel
with biodiesel by 2015, the company said in its 2011
sustainability report. All diesel sold at the pump in Brazil
must contain 5 percent biodiesel.

“If we are unable to secure reliable access to electricity
at acceptable prices, we may be forced to curtail production or
may experience higher production costs,” Vale said April 17 in
a filing with the U.S. Securities and Exchange Commission.

Vale is planting palm crops on cleared land in an area in
the Amazon the size of Barcelona and will turn the fruit into
fuel, Zimmer said. Last year, the company bought a controlling
stake in Biopalma, which built an oil extraction plant in the
city of Moju and planted 50,000 hectares of palm, the company
said in a statement. A biodiesel refinery will come online in
2015.

Biodiesel Prices

Biodiesel made from palm oil is more expensive than diesel
in countries that blend the two fuels and the same may apply to
Brazil, Roberto Rodriguez Labastida, an analyst at Bloomberg New
Energy Finance’s London office, said by telephone.

Biodiesel produced in Brazil’s north sold for 2.28 reais.
or $1.12, a liter before transport costs in a May auction for
supply contracts, the nation’s oil regulator said. Brazilian
diesel sold for an average 2.05 reais a liter at the pump in
June.

“A comparison of the prices of diesel and palm oil
biodiesel can’t be done without considering other factors” like
social and environmental benefits, Joao Coral, global energy
director for Vale, said in an e-mail.

Diesel sells for 1.40 euros ($1.72) in Germany and 143.90
Japanese yen ($1.81) a liter in Japan, according to data
compiled by Bloomberg. About 77 percent of biodiesel sold in
auctions is made from soybean oil, according to fuel regulator
Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis.

Cheap Wind Power

Vale is interested in wind energy because it’s low-cost,
Marcos Severine, an analyst at Sao Paulo-based Itau Unibanco
Holding SA, said in a telephone interview. Wind farms were the
cheapest form of energy in an August government-organized
auction for contracts to supply energy that included natural
gas-fired thermoelectric plants and a large hydroelectric dam
project.

“There’s a definite economic advantage to using wind
energy,” especially because those projects get 50 percent
exemptions on fees to use transmission and distribution lines,
Severine said.

Vale has a target to cut its greenhouse gas emissions by
1.7 million metric tons of carbon dioxide equivalent by 2020, or
5 percent of the total projected that year, the company said
June 28 in a statement.

“We’re going to have rising energy demand,” Zimmer said.
“We need further projects to fulfill this need.”

To contact the reporter on this story:
Stephan Nielsen in Sao Paulo at
snielsen8@bloomberg.net

To contact the editor responsible for this story:
Jessica Brice in Sao Paulo
jbrice1@bloomberg.net;
Reed Landberg at
landberg@bloomberg.net

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