The threat by Cia. Vale do Rio Doce (CVRD) to axe iron ore supplies to Brazilian pig iron producers not fully conforming with local labor and environmental laws should bring a positive shakeout to a sector dogged by allegations of slave labor and illegal harvesting of virgin forest.
Smaller companies with insufficient resources for reforestation projects or who buy charcoal of unrecognized origin should disappear, leaving the field more open for more-organized, law-abiding concerns.
The threat shouldn't, in itself, impact pig iron production or export levels from Brazil, which was the world's largest merchant pig iron exporter in 2006, accounting for nearly 6.3 million tonnes out of total world trade of 15.2 million tonnes.
"Quite the contrary, the CVRD prohibition will take the Brazilian pig iron industry to a higher level of international acceptability," Sergio Scherer, an industry consultant and partner in pig iron technology company Minitec, told AMM at an inaugural panel on pig iron organized by Brazilian metallurgical and materials association Associação Brasileira de Metalurgia e Materiais (ABM).
"This measure will not affect overall production or export levels because the stronger, legal companies will survive and produce more. Those that do not want to shape up will disappear," Scherer said, referring to a list recently published with the support of pig iron producers association Sindicato das Indústrias Metalúrgicas e de Material Elétrico do Estado do Espírito Santo. The list details the progress—or lack of progress—by producers in developing reforestation schemes.
According to state-level law, producers in the Amazonian region of Carajas, Para state, one of the two big producing states in north Brazil, must achieve 80 percent self-sufficiency in their provision of planted forest by 2015. Carajas is Brazil's single-largest pig iron exporting region, with shipments currently running at 3.7 million tonnes annually out of total production of around 4.1 million tonnes. Carajas was responsible for nearly half of Brazil's total output of 9.5 million tonnes in 2006.
A study presented by one of the area's major producers, Viena Siderúrgica do Maranhão SA, showed producers in the region currently have plantations totaling 321,300 acres, which is only about 55 percent of legal requirements. They must raise this to 584,100 planted acres by the 2015 deadline.
"Most of the producers will achieve the target, but others won't," said Rodrigo Valladares, Viena's sales director. On average, a eucalyptus forest takes seven years to reach its first harvest, he said. Cost factors are an essential ingredient. "It costs $3,000 per hectare (about $1,215 per acre) to purchase land, plant eucalyptus and carry out a first maintenance on a eucalyptus plantation, with new investments needed after seven years," Valladares said.
Financing is available to producers to set up their own reforestation schemes from Brazilian development bank Banco Nacional de Desenvolvimento Economico e Social. The bank introduced a "green policy" earlier this year, but on the understanding that producers' operations have up until now been totally in accordance with laws, including on the labor front.
In late August, CVRD sent out letters to eight pig iron producers that receive its iron ore, warning that if they can't prove their operations are in compliance with Brazil's labor and environmental laws their iron ore supplies would be axed.
The eight that received letters include two of Carajas' largest producers, Cia. Siderúrgica do Para SA and Viena Siderúrgica. The two companies, along with Ferro Gusa do Maranhao Ltda., were confident they had the documentation to prove their legal standing. The others—Usina Siderúrgica de Marabá SA, Siderúrgica Ibérica do Pará SA, Siderúrgica Marabá SA, Siderúrgica do Maranhão SA and Itaminas Comércio de Minérios SA, the only one located in Brazil's southeast region in Minas Gerais state and which recently shut down a blast furnace—reportedly were holding meetings with CVRD and checking their legal standing.
CVRD's measure follows growing concern during the past year by U.S. users of Brazilian pig iron of alleged occurrences of slave labor and illegal chopping of virgin forest among Brazilian producers of charcoal, the main raw material for merchant pig iron production. "CVRD can no longer ignore these pressures, as it is now quoted on the U.S. stock exchanges," Valladares said.
The situation will test not only the merchant producers, but CVRD itself. CVRD is already involved in a protracted battle with Brazilian antitrust authority Conselho Administrativo de Defesa Econômica (Cade) over its alleged iron ore market monopoly in Brazil. A unilateral axing by CVRD of its iron ore supplies to captive pig iron customers could complicate its standing with Cade further.
Some pig iron producers allege that it would be impossible for CVRD—itself a medium-size pig iron producer, given its ownership of the 400,000-tonne-a-year Ferro Gusa Carajas plant—to wield its market power to the extent of simply excluding competitors from the market.
The pig iron producers also point to the considerable advances achieved in lifting the sector's profile since 2004. In that year, key companies in the sector signed a pact with Brazil's labor ministry and founded their own non-government watchdog organization, the Citizens Coal Institute (ICC), to spearhead the fight against slave labor and illegal charcoal production. "Since that time, the ICC has shut down 316 of a total of some 1,500 charcoal producers in the states of Para, Maranhão, Tocantins and Piaui following inspections and virtually eliminated slave labor in the regional charcoal industry," ICC director Claudia Brito said.
While comments were guarded on the possible iron ore prohibition for some works, a CVRD representative at the ABM event said there had been relatively slow progress in the sector in converting pig iron production to coal or coke-based processes.
However, this is mainly due to cost factors, said Machado Corrêa. Coke, which has to be imported, costs producers about $320 a tonne compared with $200 a tonne for charcoal.