Vale, Brasil and the world’s biggest producer of iron ore, is abandoning its $5.9 billion Rio Colorado potash and fertilizer project in Argentina’s Mendoza province. More worrying for Buenos Aires, and an indicator of the current sate of relations between the two rivals, is that the departure highlights the increasing loss of interest in Argentina’s market on the part of Brazilian companies and investors.
Some have dubbed the trend as the “Vale effect,” a domino force by which Brazilian companies are, one by one, fleeing Argentina due to the country’s protectionism, overvalued official exchange rate and increasing loss of competitiveness.
Vale formally signed off with the Argentine government to end the Rio Colorado project on April 26, the day after last-ditch talks between Brazil’s President Dilma Rousseff and her counterpart to the South, Cristina Kirchner, at the Casa Rosada. The company had suspended operations in March “as in the current macroeconomic environment the economics of the project are not in line with Vale’s commitment to discipline in capital allocation and value creation.” A few months prior to that, in December, Vale had put the work force on paid leave and halted further construction.
The Rio Colorado project comprised the potash mine, more than 800 kilometers of new and upgraded railway, and a potash-loading terminal at the port of Bahia Blanca, southwest of Buenos Aires. It was anyway at risk from Vale’s larger need to cut costs. The Rio de Janeiro based company launched a cost-cutting plan last December, aiming to cut its investment spending by 24%, or $1.2 billion this year.
But Vale has been clear about the reason Rio Colorado was on the chopping block: Argentina’s economic policies. The company was after tax breaks to help ease rising costs related to Argentina’s surging inflation: Vale had almost doubled the estimated cost of its potash project investment to $11 billion. But Buenos Aires turned a deaf ear.
Kirchner’s protectionism was another big problem. Beyond her meddling with import restrictions to promote balanced trade, which saw Brazil’s exports to Argentina drop 21% last year, only a year ago she nationalized YPF, Argentina’s largest oil producer from the Spanish firm Repsol.
But the flight of Vale’s investment from Argentina isn’t unprecedented. Several Brazilian companies have recently got out while they still could. A few weeks ago, Deca Piazza, a producer of sanitary ceramic and metal products and which has been owned by Brazil’s Duratex since 1995, said it was also leaving Argentina after 125 years there. Once again, the finger of blame was pointed at the exchange rate.
Meanwhile, Petrobras Argentina, a subsidiary of Petróleo Brasileiro S.A. (Petrobras), the Brazilian state-run energy conglomerate and largest oil company in Latin America by market value, is in talks to sell assets worth $400 million to Oil Combustibles, a local Argentine company.
The Rio Colorado potash project is also now up for grabs. Vale will seek to recoup as much of the $2.2 billion it has already spent on the project as it can. Chinese and Indian companies have expressed interest.
Last year, Louis Vuitton, Cartier or Armani all packed their no doubt elegant bags and left Argentina. The flight is now reaching in to every sector. Some are starting to compare the situation to 2002 when Argentina’s economic crisis made many foreign companies leave all at once. Today the rush for the exists is more gradual but one that is in motion without a doubt.