The global effects of Brazil’s Vale mining disaster

. Feb 18, 2019
vale brumadinho

In the wake of the Brumadinho dam collapse, which killed at least 169 people so far—with 141 others still missing— the Brazilian government issued a resolution to end so-called “upstream” dams. There are currently 84 of such dams around the country, consisting of embankments, made from tailings, piled on top of one another to create a staircase effect and moving the dam upstream. The method is the cheapest and least secure way of building a dam. The national mining agency (ANM) also wants mining companies to remove facilities from risky areas in no more than six months. After a second mining disaster in three years involving Brazil’s biggest mining company Vale, authorities promise to enforce controls and fulfill their watchdog obligations.

This will have lasting effects on the global iron ore industry—such as tighter controls and the need for more investments in sustainability and safety. “The Brumadinho tragedy affects the entire industry horizontally—not only in Brazil, but also abroad,” says Rafael Benke, a former executive at Vale. “Scrutiny from authorities will increase, with the risk of operating licenses being revoked and processes being changed—which will have a deep impact on cost and investment,” he told newspaper Valor.

</span></p> <p><span style="font-weight: 400;">Moreover, the tragedy is having a considerable impact on international iron ore prices. As Vale, the world&#8217;s largest producer, is suspending its iron ore production in many sites of questionable safety conditions, the markets&#8217; reaction is to stockpile as much iron ore as possible. In China, the commodity has gained 18 percent since January 25, when the Brumadinho dam failed. In London, Barclays projects a 10-percent hike for the first quarter, up to USD 79 per ton. </span></p> <p><span style="font-weight: 400;">The ones benefiting from this &#8220;crisis&#8221; are Australian companies such as Rio Tinto and BHP—which have gained over 9 percent in market value. These companies can sell high-quality iron ore to China, stealing part of Vale&#8217;s market share.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-14172" src="" alt="iron ore prices vale china" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>More collapses in sight?</h2> <p><span style="font-weight: 400;">During the weekend, roughly 200 people were evacuated from their homes in a region next to a Vale tailings dam. Sirens went off, alerting people of the risk of another collapse. This alert came two weeks after a similar episode happened in the same region, increasing fears that the Brumadinho tragedy might not be the last dam collapse caused by Vale.</span></p> <p><span style="font-weight: 400;">The mining giant knew there were problems with safety equipment in the Brumadinho dam two days before its failure. Email exchanges between Vale employees and security auditors show that five sensors to measure liquid pressure weren&#8217;t working.</span></p> <p><span style="font-weight: 400;">Last week, eight Vale employees were arrested for their <a href="">role</a> in the January 25 incident. They were connected to the site&#8217;s administration or to risk management. The list includes an executive accused of pressuring a consultancy firm to sign a fraudulent report attesting to the dam&#8217;s safety, just one month before it collapsed.</span></p> <h2>Vale: a fallen angel?</h2> <p><span style="font-weight: 400;">Analysts are still waiting for harsher penalties on Vale. &#8220;Some years ago, Chevron was responsible for a major offshore oil spill in Brazil and the national petrol agency suspended its production immediately and imposed a charter of safety measures in order to reopen the company. That&#8217;s not the treatment Vale has received so far,&#8221; said a consultant for emerging markets. &#8220;People seem too interested in iron ore revenue—but little in improving producing conditions,&#8221; he added.</span></p> <p><span style="font-weight: 400;">Analysts of Swiss bank UBS, however, estimate that Vale is to have at least USD 3.2 billion in costs with the tragedy—if taken into account the pecuniary penalties imposed to Samarco (a joint venture between Vale and BHP, <a href="">owner of the dam that collapsed in Mariana</a> three years ago). But UBS also works with much higher projections, taking into consideration that the Brumadinho case is Vale&#8217;s second disaster in recent years. The bank believes that the company can absorb a hit of up to USD 20 billion in penalties without &#8220;irreparable damage&#8221; to its credit level.</span></p> <p><span style="font-weight: 400;">UBS states that the expected increase to levels of scrutiny and litigation from victims, authorities, and business partners could pressure the company&#8217;s credit ratings down from investment level. Three major ratings agencies—S&amp;P, Fitch, and Moody&#8217;s—have already downgraded Vale, which now risks falling to a speculative grade.

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Gustavo Ribeiro

An award-winning journalist, Gustavo has extensive experience covering Brazilian politics and international affairs. He has been featured across Brazilian and French media outlets and founded The Brazilian Report in 2017. He holds a master’s degree in Political Science and Latin American studies from Panthéon-Sorbonne University in Paris.

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