Investors should be worried by government rumblings in Brazil about mining giant Vale.
AUSTRALIAN workers are not alone in demanding greater local content in major resource projects. The issue has become a political flash point in Brazil, and could soon threaten the entrenched belief that globalisation is good.
Union demonstrations in Perth over the alleged loss of work on the Gorgon LNG project to overseas contractors is the major local example of anger at international companies seeking the cheapest quote rather than placing work locally.
In Brazil, anger over the local content question has led to government threats to re-take control of management at its biggest company, the giant iron ore miner Vale.
If that happens the global resources sector would be shaken to its core, with governments around the world using the Brazilian example to step up their demands for a greater share of the profits flowing from the resources boom.
In Australia, the government push to extract more from the mining and oil industries has been largely about higher taxes.
In South America, Africa and Asia, the possible return of government control over Vale could lead to the acceleration of nationalisation of large parts of the industry, repeating what happened in the 1950s and 1960s when governments last tried to run mines – and ruined them.
What’s happening in Brazil is that the country’s deep-seated adherence to socialist ideology is rising back to the surface, with draconian labour laws starting to slow foreign investment at the same time Vale comes under attack for being ‘too global’.
Shipbuilding contracts were the start of Vale’s problems. Three years ago, in order to get bigger and newer ships to haul its iron ore to Asia, it placed orders with Asian shipyards rather than with Brazilian shipyards. That led to a Brazilian outcry over local content.
But Vale is different from any company operating in Australia. The government of Brazil holds a ‘golden share’ in the business, which enables it to exert control over an organisation that was once a government agency.
Back in the 1960s and 1970s, when it was known as CVRD (Companhia Vale do Rio Doce) and the government of Brazil was a military dictatorship, Vale management did precisely what the government said, or else.
Today, Vale is a separate legal entity listed on the New York Stock Exchange, run by a team of Harvard University educated Brazilian-born executives, and led by an enigmatic chief executive, Roger Agnelli, who has shaped Vale in the mould of BHP Billiton and Rio Tinto.
Agnelli’s problem, and the potential problem for the global resources sector, is the golden share, which vests ultimate control of Vale with the Brazilian government, and led to a demand made last week to “act more in the national interest” rather than in the interests of foreign shareholders.
Part of the local campaign against Vale includes a demand that Agnelli leave when his contract expires in May, that Vale pays what the government argues are back iron ore royalties totalling more than $US3 billion, and that the company focus on Brazilian investment opportunities, and award contracts to local firms.
Management at Vale has retaliated by saying that most of its directors will quit if the demands are enforced, with the government left to figure out how to run a global mining business.
The nasty question in the background of what’s happening with the rise of resource nationalism in Brazil, and in Australia with its similar objectives via an aggressive tax regime, is what’s going to be left for investors.
Australia started the ball rolling in this latest phase of governments using the resources sector as a piggy bank to fund social welfare spending programs. Brazil is following with a variation on the theme, with other countries certain to jump aboard the passing gravy train.
Flash points to watch in the inevitable rise of resource nationalism are Africa, South America and Asia. It’s in those places that a company can lose everything at the barrel of a government gun.
In Australia at least, you only face a bigger tax bill and greater government red tape.
China via Hong Kong
ANOTHER change that could affect the way Australian business is done in the future can be found in Hong Kong, where the government has given its blessing to the attraction of more foreign stock exchange listings, especially resource stocks.
So far most of the action has been in the form of talking. But plans are being hatched by a number of Australian company promoters to use Hong Kong as a way of accessing the vast cash flows being generated in China.
In theory, this is a good thing. Australia has the resources and China has the capital thanks to its non-stop 10 per cent growth rate, and Hong Kong remains its primary contact point with the Western world.
What investors should never forget is that putting your money into a Hong Kong listing is no different to putting it into a China listing.
In other words, Hong Kong might appear on the surface to be a well-run, business-focused city with deep traditions of English law, pleasant pubs, and the occasional rugby tournament – but it is actually part of China and ultimately subject to Chinese law.
The nearest corporate parallel to the Hong Kong/China situation is, somewhat amusingly, in the company mentioned earlier, big Brazilian Vale.
For the past 20 years, Vale management believed it had shaken off the government grip embedded in that golden share. Wrong. The government has come back to bite the business, and one day the Chinese government will come back to bite Hong Kong and the investors who foolishly believe it is somehow different to the rest of China.
No sale?
A FINAL thought on the theme of nothing really changing in life can be found in a recent survey of broker tips in Britain and the US, where ‘buy’ or ‘hold’ are the favourite recommendations (around 90 per cent) while ‘sell’ is said just 10 per cent of the time.
What that survey shows is that, three years after the global financial crisis started, stockbrokers are back playing their favourite game of simply selling shares to gullible investors rather than providing balanced investment advice because it is impossible to believe that only 10 per cent of listed stocks deserve a sell tag at a time when the Middle East lurches closer to war, oil prices surge, and Japan is flattened.
“No man is rich enough to buy back his past.”
Oscar Wilde
