by Staff Writers
Buenos Aires (UPI) Mar 12, 2013
Argentina's hopes of becoming a major potash producer and exporter are at risk of a setback after Brazilian mining major Vale announced it is abandoning a $6 billion Rio Colorado project in the country's north.
Argentine President Cristina Fernandez de Kirchner made the potash venture in Mendoza a prestige undertaking of her administration and last year predicted great strides in the sector, which is key to agriculture, medicine and metals.
The government said it regretted Vale's decision but has yet to issue a comprehensive response or outline how it intends to deal with the snub.
The suspension raised the temperature in bilateral trade issues, already under strain after Argentine import curbs and Brazil's tit-for-tat countermeasures.
There hasn't been a full-scale public response characteristic of Fernandez to what appears to be a major setback to her government. Critics say Vale's decision may be linked to the company's frustration with government policies toward the project.
Vale had been pressing for significant tax breaks to cushion it against escalating costs of bringing the project to completion.
The Brazilian group has been asking for government incentives to compensate it for losses it says it has suffered in Argentina's runaway inflation and currency fluctuations that have been affecting U.S. dollar parity with Argentine peso.
Both the inflationary spiral and currency ups and downs have been a source of tension between Fernandez and Argentine business and industry.
Argentina's inflationary pressures worsened in January, with independent analysts estimating the monthly rate rise may be the highest in 22 months.
Critics of Fernandez want the government to do more to control inflation and promote job creation.
Independent financial analyses of Argentina's inflation contrast with government figures that are usually lower. Independent financial analysts are banned from releasing research data.
Early reports didn't give details of Vale's decision to suspend work on the Rio Colorado project. Most reports suggest Vale began drawing down its operations on the project in December.
About 45 percent of the project is said to have been completed but Vale officials gave scant details of the work that remains to be done to complete the project.
Several outsider investor groups, including the state sector in China and Arab investor funds from the Persian Gulf region, are said to be interested in taking on what Vale has left off.
Vale cited macro-economic factors in its decision to abandon the project which, when implemented, will make Argentina one of the world's largest potash exporters.
Canada is the largest potash producer, followed by Russia, Belarus and China. The United States ranks the seventh, with about one-fifth of Canada's potash production, which is said to be about 9,500 tons a year.
Vale pronouncements since the suspension have sought to defuse diplomatic tension over the project's future direction. Vale Chief Executive Officer Murilo Ferreira said the company intended to honor commitments and continue to look for solutions to help resume its construction.
The Rio Colorado project isn't the only example of recent pressures on Vale's performance. Faced with falling profits the company in 2012 had to cut spending and sell off assets, partly in response to falling demand from China.
Chinese demand has slumped both in response to slower industrial growth in the Asian country and China's effort to gain self-sufficiency in some metals and ores.
Vale is the world's largest iron-ore producer but last year had to sell nearly $1.5 billion of assets including properties in Canada, Colombia and Guinea.
The company says it has spent $2.23 billion on Rio Colorado, an indication of the scale of cash input Vale may be expecting from potential future buyers of the project. It's not clear yet how Argentina would react to new investors moving into the project.
Huge infrastructural outlays are still required before the project can go on stream. These include railroad and road networks and secondary facilities.
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