VENEZUELA, learns to diversify after turbulent political times LATEST REPORT April, 2002
Venezuela emerging from a difficult decade
Orinoco Iron
Interview with
MrAlberto Hassan President of Orinoco Iron
For World Investment News Ltd, September 7th 2000.
Orinoco Iron is a mega project resulting from the alliance between BHP and Sivensa in order to launch a 900 million dollars project, which is expected to become the largest producer of iron briquettes in the world. Can you tell us what BHP’s and Sivensa’s respective shares are, what motivated this association and what are the main advantages of producing briquetted iron in Venezuela?
Venezuela has an abundance of natural resources, which makes this industry unique. We have an abundance of iron ore. We have plenty of water, natural gas, electricity and a navigable river, with direct access to the ocean. We have been in the direct reduction of iron ore business for more than 24 years. Nevertheless our business is relatively not well known outside the steel industry. In fact, it is only recently that merchant reduced iron became more available and known.
We basically manufacture one single product called iron ore briquette. The reduced iron ore is compacted into a small briquette and is used in the steel and foundry industry. We take iron extracted from the mines to process it and convert it into pure iron. Our final product "Briquettes" conform the raw material for further steel and foundry processes. The iron in its original form is an oxide, with little usage, unless we remove the oxygen trapped with the ore, and there are various ways of doing this. Since natural gas abounds in Venezuela, we convert it into a reductant agent we use to remove the oxygen.
We had always felt that Venezuela had the advantages to produce this product at a low cost, therefore, Sivensa, one of the partners in the venture, had decided to concentrate all their direct reduction business into a division called IBH (International Briquettes Holding). We have been in the business for a long time. We were the first company in the world to manufacture and sell hot briquetted iron. We started in 1976; the second plant was only built in 1985 and the third one in 1989. We know and understand the market, this business as well as the steel industry is commanded by cycles that in the past were between 5 – 7 years, but have been getting shorter, extremely shorter to the point that is very hard to predict prices even for the next quarter period. We became the largest exporter of HBI in the world in 1991. Then, we found that there was an opportunity to continue doing this business and expand. We began planning the construction of another facility in 1992, using a process that we had just patented. In 1994 we were ready to launch an IPO in New York, to go by ourselves with the construction of a million tons facility. Unfortunately, in June of 1994, President Caldera decreed an exchange control system in Venezuela and all the banks decided that it was not the appropriate time to launch an IPO. We saw two options: either to postpone the project until the situation in Venezuela improved or to look for a partner that had the financial muscle in the international markets to allow us to obtain the loans that would permit the construction of the new plant. After looking for different partners, it turned out that BHP decided to invest in this business in Australia and in other parts of the world. They felt that being one of the largest producers of ore in the world, it was only natural to add extra value to the ore and sell a product that was more valuable. They had other motivations; the Western Australian government was asking the companies to integrate. Not to just sell the ore but to add value. We came together and formed a joint venture; it took us a long time to implement all the details of this venture completely. We finally completed all the necessary steps to create Orinoco Iron. We obtained the funds to construct a very large facility, a 2.2 million ton facility. It took us about two years to obtain the financing. In December 1997 we obtained about 615 million dollars worth of finance from different multilateral associates. US $ 315 million were obtained from the KFW of Germany with guarantees from Hermes of Germany, which is the export agency of the German government, in combination with the OKBF of Austria. We obtained an additional 300 million dollars of finance through twenty-two independent banks. Meanwhile we had been working on the engineering of the project for some time and we started civil works in January 1998. In May of this year we started the first train. The plant consists of four operating trains and two modules.
The project itself at this moment has attracted about a 900 million dollars worth of investment and this includes about a 160 million dollars worth of interest rates during the construction period. It is the largest private investment ever made in Venezuela. Most large projects are related to the oil industry or the steel industry but they were all financed by the State. Of course SIDOR has now been privatized but the oil industry remains in the government’s hands.
What are Orinoco Iron’s major export markets?
We have been in the export business for twenty-three years. We have exported over six million tons of products to twenty-three countries. Our main customers are located in the United States, which accounts for 62 to 65 percent of our total exports. The rest basically goes to Europe and a small portion to Asia.
What are your expectations regarding your market shares in those markets?
By the time we are finished and fully operational we will have approximately 27 to 28 percent of the total world market share. We operate three facilities; the first plant produces about 380,000 MT per year. Then, we constructed a facility that originally started with 600,000-ton capacity but after two plant updates we ended up with a current production of 850,000 tons, plus the 2.2 million tons coming in from the new facility, which equals to 3.4 million tons of available product for the world market. The total market for HBI is currently about 9 million tons and the total market for HBI and DRI combined is approximately 42 million tons on a worldwide basis. Venezuela itself has the highest concentration of direct reduction modules in the world. We have approximately 16 modules installed in the Guayana region of Venezuela.
Besides the upgrade of your facilities, to which extent have you invested in infrastructure in the Orinoco area?
When you are going to build a facility like this, you need to have some basic infrastructure already built in. You need a good road system, supply of energy, gas and water and some way to transport the iron ore from the mines to your facility. The infrastructure was already there but we did improve it, of course. We had to build a new gas pipeline interconnection to bring the gas to the plant. We also built five kilometers of railroad tracks. We had to buy a vast piece of property, approximately 600 thousand square meters, out of which we developed about 350 thousand square meters. We have enough property to build another facility if we decide to expand in the future. We had by the year 2000 around 5.200 people working onsite in the construction of the plant. We hired about thirty-seven contractors in site. We have bought equipment almost from all over the world.
We improved the port facility on the Orinoco River. There is a port that we received in the concession from Ferrominera, which is the state owned sole mining company. We made a venture with our two competitors, the Korean POSVEN and the Japanese COMSIGUA. We spent about 17 million dollars to upgrade these facilities to be able to export the product.
We recently had an interview with Mr. Vicente Brito of Fedecamaras; one of his main concerns was the decentralization program in order to develop the economy of the regions in Venezuela. In your case, how would you evaluate Orinoco Iron’s impact on the regional development?
When you commit to a project of this size in one particular area, there is a benefit because you employ a lot of people who in turn support another huge amount of workers inside and outside the area. We bought a lot of goods and services locally. We are going to consume over six million tons of iron ore from Ferrominera, so we are going to be their second largest customer of ore in Venezuela. We consume an enormous amount of natural gas and electricity, generated in the area. By the time the plants are fully operational we will be exporting approximately US $ 400 million. We will export almost a hundred percent of our production; only a small percentage sometimes stays in the country.
We recently spoke to Mr. Ali Araque Rodriguez the Minister of Energy and Mining about the government’s intention to reform the mining regulations in order to attract national and foreign investors within the sector. They are talking about 6.4 million dollars to be captured within the period 2000-2004. May I have your opinion on the investment climate in Venezuela and particularly in the mining sector?
The government decided to change their approach and began giving concessions. Venezuela has about fourteen billion tons of resources of iron ore but only sells about twelve to 18 millions tons of iron ore a year, between local consumption and exports. If they give some of these mines under concessions to private companies they will start promoting the sector. So far they have only allowed Ferrominera to commercialize and mine the ore and this is a State owned company. President Carlos Andres Perez nationalized the entire industry in his first term. We are currently working on a project with BHP, Ferrominera and SIDOR to be able to approach the government and hopefully obtain a mining concession that would allow us to feed our own facilities with this mine. In Venezuela we have a particular problem with our ore. Around the world it is usually in the form of 50% lump ore and 50% fine ore. Our mines are between 75 and 80 percent in the form of fines. We have very little good quality lump ore. This has led us to develop a process, which we call Finmet. It consumes the fines as they come out the mines. Instead of the competitors’ processes where they take the fines and grind them, making small balls or pellets that are then fed into the process. Our process consumes one hundred percent fines. Now there are three plants in the world using this process, one in Australia and two in Venezuela. We have approximately 130 patents and 32 countries in the process itself. The other advantage of using iron ore fines is that it produces the best quality product. This is recognized by our customers and even by our competitors.
We totally depend on the export business and the international market. Our company is shielded from the ups and downs of the Venezuelan economy with the exception of labor, which is subject to inflationary factors and fluctuations of the currency. Gas, energy, and iron are priced in dollars so we are rather protected from the local inflation. The overvaluation of the bolivar however makes us as a country less competitive overall on the world market.
The government’s policy does not seem to prevent you from being optimistic as far as the success of the Orinoco Iron project is concerned. But what is your point of view about the general investment climate and what would you advise for potential investors looking at the Venezuelan market?
There is not much investment being done in the country lately. A lot of the industry is down to the bare levels at this moment and barely meeting ends. I do not think there is an industry really making money these days. Like I said we are kind of shielded from the Venezuelan economy, but we depend a hundred percent on the government for the supply of gas, electricity, water and iron ore additionally our industry worldwide have been hit very hard in the past two years. We have a twenty-year contract with each one of our. If there is a moment to invest in Venezuela it is now, provided you believe that things are going to change and the government will support investments as everything is so depressed that you can get enough labor to construct your facility and an appropriate supply chain.
Can you tell us about your professional background and your professional experience at the head of Orinoco Iron?
I started in the automotive industry as a process engineer. I moved from that to end up being a plant manager of General Motors in Venezuela. I worked with them in the United States for a couple of years. And then I decided to move onto the steel business and began working with Sivensa in 1980 managing their steel mills in Caracas and Barquisimeto. Then I became interested in the direct reduction business when we decided to build our own facility. I was project director for two plants, a steel mill and a direct reduction plant. The projects were carried out in 1989 and 1990 and both were very successful operations. Then we wanted to build a new facility. I started the project itself and then became executive president once the venture was formed. I am an engineer by profession, with a postgraduate degree in the United States.
It has been very challenging to be part of a 900 million-dollar project and carry it out in the time we did. I am very fortunate because I have an excellent team of people working with me. It makes life more interesting and easier. The Venezuelans we work with are excellent professionals and they are very dedicated. It has been very rewarding to be able to build the project as a team. It is very positive that we have two companies. The Australian BHP brings very interesting experiences to the table because it is a very large company and Sivensa is a big Venezuelan company with a very particular style of doing business, as we delegate responsibility to our people.
NOTE: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions.
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