ROGER Agnelli, who was forced out as chief executive of Brazil's Vale in May 2011, may have been lucky to leave the world's second-largest mining company when he did.

Since Murilo Ferreira replaced him as CEO, a series of setbacks have raised questions about Vale's ability to increase sales and profit and maintain its place as the world's top producer of iron ore, the main ingredient in steel.

Costs are soaring, new mines are behind schedule and growth in China, Vale's largest market, is slowing. The price of iron ore, responsible for nearly three-quarters of the Rio de Janeiro-based company's sales, recently sank to three-year lows.

Making matters worse, Brazilian laws and government interference threaten to hobble Vale, the country's biggest exporter. Vale shipped US$42 billion of raw materials in 2011, 16 percent of exports from the world's sixth-largest economy.

"What the government is doing to Vale won't kill the proverbial golden goose, but it could make the goose sick," said Mauricio Canedo, an economist specializing in industrial policy and commodities at the Getulio Vargas Foundation (FGV), a Rio de Janeiro economic research institute. "Vale's future looks less promising now than it has for some time."

Government influence has been most obvious in efforts to get Vale to build steel mills and invest in fertilizer production while a new mining code threatens to triple royalties.

Agnelli and Ferreira declined to comment. Vale is well-positioned to weather a downturn and will announce a revised investment plan in December, the company said in an e-mail.

At about 36.20 reais (US$17.72) a share, Vale's main stock trades at close to where it did when Ferreira took over, 36.80 reais. In a decade under Agnelli it rose nearly 12-fold.

Vale's predicament stems from its 1997 privatization for US$3.3 billion, which still rankles with many Brazilians, including members of President Dilma Rousseff's Workers' Party-led government.

For them, Vale's success doesn't ease the sting, even with Brazil getting more than ever in royalties and taxes from the company. Vale's profit soared more than 17-fold to US$22.9 billion in 2011 from US$1.29 billion in 2001, bolstered by Chinese demand.

In Brazil, only oil giant Petrobras is bigger and more revered by nationalists. Petrobras has private investors, but the government has a majority of voting stock.

Still, Rousseff expects Vale to support government industrial policy even if Brazil only has an indirect minority stake in a holding company that controls Vale with partners Brazil's Banco Bradesco and Japan's Mitsui.

When Agnelli laid off 1,300 workers in 2008, Rousseff's mentor and predecessor Luiz Inacio Lula da Silva demanded an explanation. Agnelli's refusal to build a fleet of ships in new, untested, high-cost Brazilian shipyards annoyed Lula further.

To create jobs and turn mine output into higher-value goods, the government pushed Vale to build steel mills in Brazil. It also pushed Vale to invest more in fertilizers.

Brazil, a major producer of coffee, beef, sugar, orange juice and soybeans, imports most of its fertilizer. Vale has the biggest railway and port system in a country where high transport costs choke growth.

"The government is increasingly interested in what Vale is doing," said Leonardo Alves, a mining company analyst with Banco Safra in Sao Paulo. "This is not good for the company."

Brazil's mining ministry declined to comment. Previ, through which the government exercises its indirect stake in Vale, did not respond to questions. Previ is the employee pension fund of state-led Banco do Brasil SA, Brazil's largest bank.

When it comes to interference, steel has caused the most problems. Vale has long invested in mills, but usually as a non-operational minority investor. In return, Vale got a long-term iron ore contract and avoided competing with its own clients.

Yet, in the 16 months since Ferreira took over, Vale has spent more than US$658 million on four steel projects. That's 13 percent more than it spent for steel projects in Agnelli's last three years.

ThyssenKrupp's Cia. Siderurgica do Atlantico, a Rio de Janeiro mill, is in crisis. Financial, currency and environmental setbacks forced Vale to more than double its stake to 27 percent. Two years after starting up, ThyssenKrupp is selling out of the 7 billion-euro (US$8.8 billion) plant.

Acos Laminados do Para SA (ALPA), totally owned by Vale and one of the projects Agnelli resisted, has now been halted, Reuters reported on September 28.

The reason? The government, which lobbied hard for the plant, dropped plans to improve navigation on the Tocantins River. Without those improvements, ALPA can't ship coal in or steel out.

ALPA is planned for Marabá, a city far from a major ocean port in an Amazon region with no major customers for its steel.

But even if steel investments pay off, steel is less profitable than iron ore. World steel capacity outstrips demand by a third, according to Brazil's state development bank BNDES. CSN, the No. 3 Brazilian steelmaker and No. 2 iron ore exporter, is boosting mining as steel margins fall.

Other Vale efforts to diversify have also stalled. The US$11 billion spent on nickel, used to make steel rust resistant, has failed to make Vale the world's No. 1 supplier of the metal.

Vale's Goro mine in New Caledonia, potentially the world's largest, barely produces. It is about four years behind schedule. Canadian mines have been hit by strikes, and Vale's On?a Puma mine in Brazil is also missing targets.

"That's US$11 billion down a rat hole," said John Tumazos, mining analyst with US-based Very Independent Research LLC.

But steel troubles could pale next to the challenge of new legislation. Proposed mining code changes could triple mining royalties to about 6 percent from 2 percent, Canedo at FGV said, citing mining ministry studies published this year. It could also force Vale to buy more equipment from higher-cost local providers.

Meanwhile, Brazilian states have passed royalty-like charges that could add US$500 million a year to Vale's tax bill.

Vale declined to comment on the mining code. Mines Minister Edison Lob?o, a critic of Vale's 1997 sale, has said mineral exports without local processing could "de-industrialize" Brazil by boosting its currency and choking manufacturers.

Similar reforms to Brazil's oil laws have choked off the sale of new exploration areas for four years, and minimum national content rules are driving up costs and pushing back oil project completion targets for Petrobras, sometimes by years.

Volatile prices

Many of the problems facing Ferreira, whose reserved personality contrasts sharply with Agnelli's flashy, high-profile corporate style, are beyond his control.

China's move to cool its superheated economy has put the company's main business, iron ore, into crisis.

Essential to everything from cars and stoves to bridges and skyscrapers, iron ore accounts for 90 percent of Vale profit. Vale produces more than a quarter of the world's high-grade iron ore exports, down from a third a decade ago.

Every US$1 drop in the ore price cuts about US$300 million a year from Vale revenue. With the spot price for iron ore at US$115.80 a ton, Vale will earn about US$8.6 billion a year less than it would have at the 3-year average of US$144.60.

In September ore fell to a three year low of US$86.90 a ton. Few expect iron ore to regain a record high of US$191.90.

"Those who invest in iron ore should do so in the full knowledge that supply will meet demand in due course," said Marius Kloppers, CEO of BHP Billiton Plc, on a conference call on August 22. "Scarcity pricing that we have seen over the last 10 years is unlikely to be repeated."

As some see Vale's good times ending, costs are rising. The cost of goods sold, a category that includes salaries, equipment and distribution, jumped 15 percent in the 12 months ending June 30 compared with the 12 months ending March 31.