Plunging profits at Vale SA , the world's biggest miner of iron ore, have raised concerns about the vulnerability of Brazil's economy to the global crisis and the fate of the region's other commodity giants.
The Rio de Janeiro-based company took the market by surprise by reporting a third-quarter net profit of $4.94-billion (U.S.), down 18 per cent from last year and more than $1.5b-billion below analysts' average estimate.
Iron ore miners across the world have struggled with falling demand for the steel-making ingredient, particularly from China, while Brazilian companies have been put under extra stress by a sharp drop in the local currency.
"We see a kind of credit crunch in China now," José Carlos Martins, Vale's marketing and sales director, said on Thursday at the results' presentation. "It is creating a lot of pressure," he said, adding that the smallest customers had been the most affected.
China overtook the U.S. in 2009 to become Brazil's top trading partner, raising concerns that the Latin American country and its biggest companies have become too reliant on the commodity trade with Asia.
If it were not for Vale's overseas revenues, of which about 68 per cent come from Asia, Brazil would have run a trade deficit last year rather than its $20.3-billion surplus.
Vale's net operating revenues still rose 16 per cent to $16.36-billion in the third quarter from $14.10-billion in the previous year, but analysts pointed to growing tension over prices with its biggest customers.
As global iron prices have plummeted, Chinese steel makers have called on the company to adjust its prices accordingly, which analysts say would result in short-term losses.
Miners had previously based their contracts on quarterly averages, but are now under pressure to sell iron ore closer to the spot price, which is down about 30 per cent since August and fell below $130 per tonne this week for the first time in over a year.
Rival BHP Billiton Ltd. already sells iron ore under shorter contracts and Mr. Martins said Vale was likely to follow suit in China, where most of its customers are now demanding price negotiations.
Unlike its competitors, though, Vale was also hit by an unexpected $2.19-billion currency loss in the third quarter, and a further $568-million loss on derivatives related to foreign exchange and interest rate bets.
Fears over the euro zone suddenly caused the Brazilian real to reverse its appreciation trend and plummet about 15 per cent against the dollar in the third quarter, hitting companies such as Vale, which has more than 90 per cent of its debt in dollars.
"Many companies are going to be hurt by this one-off currency effect," said Pedro Galdi, an analyst at SLW Corretora in São Paulo, adding that Brazil's state-run oil company Petrobras would be one of the ones negatively affected.