Global Risk Management in Mining
Iqbaljit S. Kahlon
Pietro Veronesi
VALE
Global Risk Management in Mining1
July 3, 2011
It is mid 2010 and Pedro Zinner, Global Head of Corporate Risk Management of Vale, is mulling over the next move of Vale with respect to its highly publicized, enterprise-wide risk management system that he led and supported in the development since mid 2004. Over the last decade, Vale S.A., a Fortune 500 Brazilian mining multinational company, experienced a very sustained growth, placing itself as the second largest mining company in the world, and the largest iron ore producer. Recently, the Boston Consulting Group stated that Vale has created more value than any other large firm in the world over the past decade.2 Strong demand for iron ore from China has propelled Vale from a market capitalization of approximately $11B in 2001 to the second largest mining company with a market capitalization of about $147B in 2009.
While the rapid expansion is an exciting development for Vale mining, it also poses additional challenges, especially in its risk management practices.
In addition, recent changes in the pricing dynamics of the iron ore market, Vale's main product, call for new analysis on the effectiveness of Vale's risk management practices. In the last few years, the iron ore's market has been moving away from a 40-year traditional pricing practice, according to which producers and customers would negotiate the annual benchmark price for the entire industry. Instead, the market for iron ore is now moving to a more market-based pricing system in which (equilibrium) prices are determined by moving averages of the spot market for the standard 62% content iron ore delivered in China, thus reflecting shorter term fluctuations in demand and supply. Given Vale's large exposure to iron ore's prices, this change in the pricing system is likely to add significant short-term volatility to Vale's cash flows, which adds to the volatility induced by its large
Pietro Veronesi
VALE
Global Risk Management in Mining1
July 3, 2011
It is mid 2010 and Pedro Zinner, Global Head of Corporate Risk Management of Vale, is mulling over the next move of Vale with respect to its highly publicized, enterprise-wide risk management system that he led and supported in the development since mid 2004. Over the last decade, Vale S.A., a Fortune 500 Brazilian mining multinational company, experienced a very sustained growth, placing itself as the second largest mining company in the world, and the largest iron ore producer. Recently, the Boston Consulting Group stated that Vale has created more value than any other large firm in the world over the past decade.2 Strong demand for iron ore from China has propelled Vale from a market capitalization of approximately $11B in 2001 to the second largest mining company with a market capitalization of about $147B in 2009.
While the rapid expansion is an exciting development for Vale mining, it also poses additional challenges, especially in its risk management practices.
In addition, recent changes in the pricing dynamics of the iron ore market, Vale's main product, call for new analysis on the effectiveness of Vale's risk management practices. In the last few years, the iron ore's market has been moving away from a 40-year traditional pricing practice, according to which producers and customers would negotiate the annual benchmark price for the entire industry. Instead, the market for iron ore is now moving to a more market-based pricing system in which (equilibrium) prices are determined by moving averages of the spot market for the standard 62% content iron ore delivered in China, thus reflecting shorter term fluctuations in demand and supply. Given Vale's large exposure to iron ore's prices, this change in the pricing system is likely to add significant short-term volatility to Vale's cash flows, which adds to the volatility induced by its large