Brazil’s iron ore industry in murky water

Brazil’s iron ore industry has seen better days.

RIO DE JANEIRO, BRAZIL - NOVEMBER 16:  A protestor washes muddy water over the Vale logo at the entrance to Vale headquarters on November 16, 2015 in Rio de Janeiro, Brazil. The bursting of two dams at the Samarco mining operation, jointly owned by Vale and BHP Billiton, unleashed a flood of muddy waste which mostly levelled a village in Minas Gerais state. The massive mudflow left ten people dead and an environmental aftermath polluting downstream waters.  (Photo by Mario Tama/Getty Images)

RIO DE JANEIRO, BRAZIL – NOVEMBER 16: A protestor washes muddy water over the Vale logo at the entrance to Vale headquarters on November 16, 2015 in Rio de Janeiro, Brazil. (Photo by Mario Tama/Getty Images)

On November 5 in Amapá, Brazil, a massive dam collapsed. The ensuing damage killed at least 13 people, and more are still missing. The dam is property of the Samarco mine in the Amazon region, and that mine is shared 50/50 between two of the world’s largest iron ore firms: BHP Billiton and Vale. Both companies hit 10-year valuation lows on November 30.

Brazil is now poised to make the companies pay up to the tune of $5.2 billion, according to a BHP statement. The Samarco joint venture mining operation will be closed for months. It annually produces more than 12 million tons of Brazil’s iron ore, one of the country’s main exports.

BHP is based in Australia, the world’s biggest iron ore market. But Vale, the world’s biggest iron ore producer, is based in Brazil and has a lot more skin in the game. Samarco makes up 3.5 percent of BHP’s revenue, but 9 percent of Vale’s revenue. Brazil had 31 billion tons of iron ore reserves in January 2015, which is 16.3 percent of global reserves. In 2014, Brazil’s iron ore production brought in $25.9 billion.

So, even if we assume Vale produces all of Brazil’s iron, which it doesn’t, the fine by Brazil’s Ministry of Mines would take out 20 percent of revenues for the year.

On the production side, however, Vale might have gotten lucky with a closed mine – China, a major global steelmaker, isn’t buying enough iron as their economy slows its growth. Vale was already trying to cut production for a time, because demand is not high enough to sustain current production levels. It shows on the income statement – Vale posted a $2 billion loss in the third quarter.

At the same time, Vale is building a $19.4 billion mine in Sera Sul, in the Amazon region, that would add 90 million tons of low cost iron ore to its output, while reducing costs from $12.70 per ton to around $10. So, Vale pumped a significant chunk of capital into a bet on China’s growth, meanwhile the opposite occurred. Add in the Samarco disaster, and Vale can count on several quarters of losses before turning around in the latter half of 2016.

Beer Goggles

It’s difficult to taste the difference between Bud Light, Coors Light and Miller Lite. Not to mention the other slight variations on those beers. So, right off the bat, the mainstream beer market has several big players with almost no product variation. The only product variation in the mainstream beer market is the bottle and can. Barring the introduction of a new type of beer, the scarce informational beer advertisement is usually about a new bottle. The rest is persuasive.

U.S. alcohol consumption per capita. Source: International Journal of Advertising

U.S. alcohol consumption per capita. Source: International Journal of Advertising

The goal of beer advertising is not to add more drinkers to the market. The number of people who drink beer in total tends not to be ad elastic, and in fact doesn’t change much at all; so the big firms fight to redistribute shares of the market.

For example: the Miller Lite vortex glass bottle, which was advertised as creating an easier pour. Miller Lite, Coors Light and Bud Light all advertised its aluminum bottles with screw tops. Bud Light recently designed different can artwork for every NFL team.

The reason, again, is product similarity. When the product is the same (maybe a few calories more or less), advertising, including packaging, becomes a serious part of the interactions between beer giants. According to market research firm Statista, Anheuser-Busch InBev spent $539 million on ads in 2014. MillerCoors spent the second-most, at $417 million.

The ads are almost exclusively persuasive. They focus on groups of people socializing, often out of the house. The marketers want consumers to associate being part of a group with drinking their light beer.

Beer is a low-risk purchase, meaning the consumer knows more or less what they will get when they open the bottle or can. Until you get to the craft beer segment, which I will ignore for this post, drinkers of mainstream beers will not investigate the qualities of light beers – for example, Coors Light versus Miller Lite. Consumers rely more heavily on the attitude surrounding a beer brand instead of the beer itself because the taste is almost indistinguishable. That’s why humor and fun are used more than information.

So, we should take a look at some examples:

bud light-up for whatever

Bud Light advertises the night life. Going out with friends, not knowing what awesome thing you might do together, and knowing you’re safe with Bud Light. It’s all about comfort with the product. Beer drinkers already know what Bud Light tastes like. But when they plan to be with a group of people, Anheuser-Busch marketers want beer drinkers to think, no matter what, Bud Light is a safe and familiar choice.

cl-cold

Coors Light might trick the occasional viewer into thinking its advertisements are informative; but I struggle to believe “coldness” is an informational quality of the beer. Coors will set a lot of its advertisements at bars and in cold places. During football season, Coors joins Miller and Bud in deploying NFL-related advertisements. The prisoner’s dilemma comes in here: If only one firm advertises to the football crowd (men who are group-oriented and generally more susceptible to the fear of missing out), the other firms lose significant market share. If they all advertise to this market segment, Anheuser-Busch and MillerCoors split a small gain in total profit.

Miller Lite - hops

Miller Lite gets closest to informational advertising with a focus on triple hop brewing. It advertises a light beer with few calories, and emphasizes the actual product in its ads, especially in print. On television, you see a mixture of product-focused ads and “Miller Time” ads, which play on the same theme as Bud and Coors – young men socializing with a group of friends.