Vale's vale of tears in Mozambique
Labor disruptions, flooding and infrastructure problems will mean a substantial reduction in coal exports.
Infrastructural limitations in Mozambique continue to pose a challenge to Vale, hampering its ability to get the coal produced from pit to port.
The reduction in export volumes, combined with falling coking coal prices in the international market, will impact revenues negatively. However, since the coal division constitutes just 2% to 2.5% of the company's total gross operating revenues, the overall impact is expected to be muted. On the other hand, the news exposes the fragility of Vale's Mozambican business and the significant challenges it faces to diversify away from its iron ore business.
Infrastructure issues in Mozambique
Infrastructure bottlenecks are the topmost concern of coal miners operating in Mozambique. Both the government and the private sector have been executing various projects to expand and build new railway lines and ports, but infrastructure will take time to reach satisfactory levels. In 2012, Vale had to cut down its initial export targets by half due to infrastructure issues.
The Sena Railway line is the sole link for coal mines located in the central Tete province to the Beira port, from where coal is exported to other countries. Production of coal has outstripped the carrying capacity of this line and it needs to be upgraded. The upgrade has been delayed for years now and is expected to complete next year. Once complete, the line will be able to carry 6.5 million tonnes of coal per year. Vale was thus planning to upgrade its production and export levels to 4.9 million tonnes in 2013. Further capacity additions will be required in the future years because Vale plans to invest heavily to increase the Moatize mine's annual production capacity to 11 million tonnes. It will expand capacity beyond this only after the completion of the Nacala railway and port project in northern Mozambique which will allow it to export greater quantities of coal.
Vale plans to start large-scale production of premium hard coking coal by 2015 which is expected to provide higher margins. However, the company first needs an efficient mine-rail-port system to make this happen.
Reason for target revision
Heavy rains and flooding in the Zambezi Valley in the central part of Mozambique closed railways in February. The Sena line remained shut for two weeks resulting in a significant disruption to operations. Trains were temporarily stopped on the line causing the company to invoke the force majeure clause on its client contracts. This clause is used to protect a company from liabilities when disruptions are caused by forces beyond the company's control such as natural forces and disasters.
There was also a two-day halt in shipments earlier this month as protesters blocked the Sena line demanding compensation. When Vale had acquired the Moatize concession, it relocated the brickmakers present there to a different area within Moatize. Around 60 brickmakers among a larger group that Vale relocated from its mining concession beginning 2010 were protesting on the railway line. They were demanding additional compensation for lost production for up to two family generations. Vale says that it has compensated three groups of brickmakers so far by paying around $2,000 per deactivated furnace. The shipments resumed after being halted for two days, but the matter hasn't been permanently resolved since the protesters moved only after Vale promised to negotiate.
Around 10,000-12,000 tonnes of coal are shipped daily from Moatize, so the total disruption of close to 16 days cannot account for the steep export target reduction. We think that the major reason is anticipation by the company that it could face similar disruptions to operations for the rest of the year, and the present infrastructure is not conducive for meeting ambitious targets.
Trefis has a price estimate for Vale of $20.
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