Vale establishes a logistics company

Vale is working on the creation of a new logistics company to host assets and contracts involving the provision of services of general cargo transport, which is an expanding market in Brazil. The project now under discussion at the mining company plans that this company should open its capital at the New Market of the São Paulo Stock Exchange and Commodities Market (BM&F Bovespa) by 2012. Vale should have a participation of some 30% in Vale Logistics, as the future company is being called, depending on the appetite of the market in the public offering of shares.

The business profile of Vale Logística would be very different from that of the company Log-In Intermodal, a listed company in which Vale is a partner with a 31.3% stake. The mining company has been studying the possibility of shedding Log-In, which is focused on goods transport by containers along the Brazilian coast, or coastal navigation (navegação de cabotagem).

Logistics services ensure that Vale has an important source of income. In 2010, these services generated an income of R$ 3.2 billion, which is an increase of 14% when compared with 2009. On average, about 80% of this value corresponds to transport of general cargo, which includes products such as soybeans, fuels, wood and steel products.

In the second quarter of this year, the turnover from logistics services reached a figure of R$ 950 million, a growth of 6% when compared to the same period of 2010. The total income raked in by Vale over the quarter came to R$ 25.6 billion.

The profitability of the logistics business, however, is on the wane. The Ebit margin, which is the ratio between profit before interest and taxes and the net income of the segment, fell from 23.5% in the second quarter of 2010 to only 0.5% now. According to the company, there was a growth in the costs of railway operations, mainly through the hiring of personnel, the increase in prices and also the volume of fuel, and maintenance services.

Vale Logistica should bring together, under its own umbrella, the Center-Atlantic Railway (Ferrovia Centro-Atlântica – FCA) and the North-South Railway (Ferrovia Norte-Sul – FNS), the Ultrafértil port terminal (at the port of Santos), which now belongs to the Vale Fertilizantes division, and also the contracts for general cargo with third parties, as may be signed for transport along the Vitória to Minas Railway (Estrada de Ferro Vitória a Minas – EFVM) and the Carajás Railway (Estrada de Ferro Carajás – EFC).

The assets show that the structure of Vale Logística can be more competitive than that of Log-In, whose business plan is seen with skepticism by the market. According to one source, the new company shall be active in a market niche, which is the transport of general cargo by rail, which has been growing at significant rates in the country.

The project is still being formatted and modeled, and is also the target of judicial consultations about the transfer of assets from Vale to the future company Vale Logística. In this case, the assets involved are the FCA and FNS railways and also the terminal at the port of Santos.

FCA has a rail network of more than 8 thousand kilometers, crossing seven Brazilian States, including the Southeast Region and parts of the Northeast and the Midwest. In the case of FNS, Vale has a subconcession with state company Valec, by which the mining company has the right to exploit 720 kilometers of this railway, which serves the Brazilian Midwest and which connects to the Northeast (Maranhão) by means of the Carajás Railway.

Activities involving general cargo are not the priority of the mining company, even though they are considered profitable. Vale’s idea, according to sources close to the company, is that of making funds from the stock market available for this business, while the cash in hand is used to meet the costs of mining projects, the main focus of the company.
In the second quarter of this year alone, income generated by general rail transport came to R$ 757 million. The result was influenced by the start of the agricultural crop in Brazil, in the second and the third quarters.

Between April and June, the railways operated by Vale (Carajás, Vitória to Minas, Center Atlantic and North-South), apart from the proportional slice of participation in MRS Logística, also transported 7.043 billion tons per kilometer (TKU) of general cargo for the clients. The ports and terminals of the company handled 6.643 million tons of general cargo over this period.
The main cargo transported by the railways operated by Vale, in the second quarter, were agricultural products (48%), supplies and steel products (33%), building materials and forestry products (11.3%), fuels (6.7%) and others (1%).

The performance of general cargo reinforces the plan of the mining company to have a company listed on the Stock Exchange and operating this kind of business, say analysts.