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Eike Batista: life is not so easy anymore
Crisis made a bubble blow up in Brazil. In the last three years, due to high prices of iron ore, a lot of investors decided to buy some mines which were not so interesting before. Prices raised almost 400% since 2003, due to strong economic growth in China. The high prices made financially feasible to explore mines with not so high pureness (as Vale’s mines) and not so large amounts. Even when prices reached the higest level ever seen, experts still predicted prices would not accomodate until 2011. As demand grew, the world was getting hunger and hunger for iron ore – any ore, even the less pure one. So, for the investors, it was obvious that it would be a great business. In addition, steelmakers started buying their own mines, in order to get away from Vale’s negotiation power (we can not forget that demand was very, very high and perspectives were of even higher demand).
The ones that first foresaw that made a lot of money. They were the ones who bought very cheap assets and sold them some months before the peak. Eike Batista, who appears in the world’s richest men list published by Forbes, was the most representative example. He spent less than 500 million dollars to build a project of mines and, less than two years ago (January 2008), he sold some of these assets by astonishing 5.5 billion dollars (and I am not reckoning the money he raised in the stock market) to Anglo American Mining Company. Another company created by a group of foreing investors bought a mine for 100 million dollars and sold it a year later for 800 million dollars to ArcelorMittal, the biggest steemaking group in the world.
So making money seemed to be very easy. I reckon that, only this year, investors and steelmakers spent 15 billion dollars buying the “not so good” mines (comparing to Vale’s mines). But, as every bubble, it blew. The crisis came, the iron ore prices fell almost 30% in less than two months. Now there are a lot of projects that appear to be financially unfeasible. Imagine: if even Vale is in trouble, what to think about these projects, which in the past could “stand up” just because of high prices.
There is a lot of uncertainty and investors are very unconfortable with that situation, naturally. Experts think that many of them will just quit. The answer will be known when Vale finishes negotiations wich their clients, which should happen in February or March. Since Vale is the biggest iron ore producer, its negotiations set the trends.
Eike Batista, the protagonist of the best deal in the mining sector this year, had to stop producing in one of his mines (the one he was not succesful in selling) and doesn’t know when production will return. And Anglo American, the mining company which bought Batista’s mines, announced today that will stop the project for at least one year. Attention: they will stop the project in which they invested 5.5 BILLION DOLLARS…
