Sept. 21 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva is pressuring Vale SA, the world’s biggest iron- ore producer, to build steel mills that will create more jobs. Shareholders say he’s putting politics ahead of their profits.

“This pressure is a bother for Vale,” said Regis Abreu, who helps manage 2.5 billion reais ($1.4 billion) in assets, including Vale shares, for Rio de Janeiro-based Mercatto Investimentos. “Any company that suffers political pressure ends up being diverted from its main objectives.”

Lula, 63, has publicly urged Vale to build steelworks at least half a dozen times since April. Mines and Energy Minister Edison Lobao also proposed that Vale pay more royalties, a topic that mining companies will discuss this week at an industry conference in Belo Horizonte. In addition, Lula urged the Rio- based company on Sept. 11 to buy Brazilian-made vessels to export ore to international markets such as China.

Vale has risen 48 percent in Sao Paulo trading this year through Sept. 18, trailing a 62 percent gain in the Bovespa stock index. London-based Rio Tinto Group more than doubled, while BHP Billiton Ltd., the world’s third-biggest iron-ore exporter, rose 27 percent. BHP is based in Melbourne.

Vale added 12 centavos, or 0.3 percent, to 35.57 reais at 1:49 p.m. New York time.

‘Not Irritated’

“I’m not irritated with Vale,” Lula said in an interview with Brazilian financial daily Valor Economico published Sept. 16. “I’ve insisted, systematically, that Vale builds steelworks in Brazil. Vale can no longer afford the luxury of just being an iron-ore exporter.”

Vale Chief Executive Officer Roger Agnelli, 50, said July 22 that the company is investing 965 million euros ($1.4 billion) to more than double its stake in the Cia. Siderurgica do Atlantico SA venture with ThyssenKrupp AG in Rio de Janeiro state to 26.9 percent from 10 percent.

Vale plans to invest as much as 31.2 billion reais in steelmaking projects in Brazil that may be completed by 2014 to almost double Brazil’s crude steelmaking capacity of 41.5 million metric tons, according to the company’s Web site.

Press officials at Vale, which gets 16 percent of its sales from Brazil, declined to comment. Vale is controlled by a group that includes Previ, the pension fund of state-controlled Banco do Brasil SA, Bradespar SA, Mitsui & Co. Ltd. and Grupo Opportunity. The government holds 6.9 percent of voting capital through state-controlled development bank BNDES. Press officials at BNDES, Mitsui, Bradespar and Previ declined to comment.

Oversupply

Accelerating investments may create an oversupply of steel at a time when many producers are operating below capacity, said Telemaco Genovesi, Sao Paulo-based investment manager for CBS Previdencia, which oversees $2 billion, including about $7 million worth of Vale shares.

“Rushed decisions may not be good for the commodities markets that Vale serves,” said Genovesi, who manages money for the employees pension fund of Brazilian steelmaker Cia Siderurgica Nacional. “If the steel investment timetable is rushed by the government that could bring bigger risks.”

Steel producers have 600 million tons of excess capacity, equal to a third of global capacity, Daniel Novegil, president of the economic committee of the Brussels-based World Steel Association, told an industry congress Aug. 25. Steel output may fall 20 percent this year to 1.1 billion tons after the economic crisis, Novegil said.

‘Intelligent Strategy’

Abhishek Shukla, a London-based analyst with Nomura Securities, which holds Vale shares, said local investment in steelmaking is an “intelligent strategy.” That would help Vale build a captive iron-ore market that would relieve the company from some of the expenses of shipping ore abroad, Shukla said.

“Why carry 1.6 tons of iron ore to Europe when you can carry a ton of steel, a higher-value product?” Shukla said in a telephone interview Sept. 17.

Chinese companies buy iron ore, stockpile it and are producing 535 million tons of steel a year, Lula told Valor. Brazil is producing 35 million tons and may soon have to start importing steel from China, he said.

The government’s proposal to increase iron-ore royalties alone could cut into Vale’s earnings and hurt the company’s international competitiveness, Credit Suisse AG analysts said in a note to clients Sept. 3. Vale’s net income would fall by 6 percent should the government boost the royalties to the 5.6 percent level of Australia from the current 2 percent, the analysts said.

Profits Fall

Vale’s second-quarter profit dropped 84 percent to $790 million on lower demand and prices from the global crisis, the company said on July 29. Return on common equity, a measure of how effectively the company reinvests earnings, dropped to 24 percent in the second quarter, the lowest level since Bloomberg began compiling the data in the first quarter of 2006. Return on assets in the period was 12.5 percent, down from 20.4 percent at the beginning of 2006 and below the three-year average of 16.7 percent, according data compiled by Bloomberg.

Vale shares trade for 12.3 times estimated earnings for 2010. That compares with an average weekly price-to-earnings ratio of 9.9 since the end of 2005, Bloomberg data show.

The government’s priority for Vale may not make economic sense given the company specializes in mining iron ore, said Bruno Menezes, an analyst at Opportunity Asset Management, which holds Vale shares.

“If the rate of return for mining is greater than for steelmaking it should just stick to mining,” Menezes said in a telephone interview from Rio. “The government may be Vale’s biggest shareholder via some holders’ participations but doesn’t have a majority in the group of controlling shareholders so it can’t make that decision.”

Markets

The benchmark Bovespa index rose 4 percent to 60,703.01 last week, led by JBS SA, which surged 13 percent. Light SA dropped the most among stocks in the index with a 2.9 percent decline.

The yield on the government’s zero-coupon bonds due January 2010 was unchanged at 8.72 percent, according to Banco Votorantim. Brazil’s real strengthened 1.2 percent to 1.8082 reais per dollar.

The following is a list of events in Brazil this week:

Event                                             Date
Trade Balance (FOB - Weekly)                      Sept. 21
FGV Inflation IGP-M (Preview)                     Sept. 22
FGV Consumer Confidence                           Sept. 23
FIPE CPI (Weekly)                                 Sept. 24
Unemployment Rate                                 Sept. 24
IBGE CPI IPCA-15                                  Sept. 24
Current Account                                   Sept. 24
Foreign Investment                                Sept. 24
Long Term Interest Rate - TJLP                    Sept. 24

To contact the reporters on this story: Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.netHelder Marinho in Sao Paulo at hmarinho@bloomberg.net

Last Updated: September 21, 2009 13:55 EDT