Vale of the trolls

NOTEWORTHY encounters between Brazil and Norway are rare. Norwegians could point to their country's unexpected 2-1 victory over Brazil's footballing princes at the 1998 World Cup. Brazilians may prefer to focus on a recent business deal. On May 2nd Norsk Hydro announced that it was acquiring the aluminium assets of Vale, the world's second-largest mining company. In a deal valued at $4.9 billion, Norsk will add a mammoth bauxite mine, the world's biggest alumina refinery and a large smelter to its own substantial aluminium business. In return the Brazilian mining giant will take a 22% stake in Norsk and pocket $1.1 billion in cash.

Producing aluminium competitively requires cheap energy and cheap alumina, the stuff—made from bauxite—that is smelted into the metal. Most aluminium firms with the lowest costs have both. Norsk hopes to join them. It already generates bags of hydro-electric power but has relied on pricey long-term contracts with miners, or the volatile spot market, for raw materials. The availability of huge quantities of bauxite at competitive prices also offers Norsk the opportunity to expand a recently opened smelter in Qatar.

For Vale, ridding itself of its aluminium business, its third-biggest source of revenue after iron ore and coal, marks a significant change of course. Its purchase of Inco, a Canadian nickel miner, in 2006 and its failed attempts in 2008 to take over Xstrata, another big competitor, indicated that Vale's strategy was to become a diversified global mining giant like Rio Tinto and BHP Billiton. But now, as Jordi Dominguez, an analyst at HSBC, puts it, the Brazilian company is “de-diversifying”.

Having shovels in many different dirt-piles is meant to provide mining giants with insurance in a cyclical industry: not all commodities will plummet and peak at the same time, according to the theory. And of course Vale's big shareholding in Norsk will give it continuing exposure to aluminium for the time being. But Vale clearly reckons that its best bet is to concentrate on supplying the world's steelmakers. (Even Inco's nickel is a vital ingredient of stainless steel.) Selling its underperforming aluminium business just days after it revealed a $2.5 billion investment to develop blocks of Simandou, a vast iron-ore deposit in Guinea, reinforces the notion that Vale wants to stay big and global but become less diversified.

Iron ore has always been the most important part of Vale's business, sucking up half of its capital spending. This year it is set to dig up over 300m tonnes, nearly 30% of global supplies. And iron ore is selling on the spot market at close to record prices. China's huge appetite for steel for vast infrastructure projects suggests that the price will stay high for some time.

Moreover, Vale's attempts at diversification have not always gone smoothly. Inco, which made pots of cash in its first years under Brazilian ownership, is paralysed by a strike, now in its tenth month, that shows no sign of ending. And Brazil's government holds a golden share in Vale that lets it block big deals. It takes a keen interest in Vale's activities and has never been keen on global diversification, preferring that the company build its business at home. So even if Vale had found a target for a huge, transforming deal, Brazil's government, like Norway's footballers in 1998, would have proved difficult to beat.