FEATURE: Brazilian scrap sector concerned about steel 'uncertainty'

Brazilian scrap dealers are “wary” of uncertainty affecting the steel market from the second half of 2014 onwards, a senior executive has said.

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“I have never seen such an uncertain scenario as now,” Marcos Sampaio da Fonseca, president of the country’s institute of iron and steel scrap companies, Inesfa, told journalists on Tuesday April 28.

“I don’t know what is going to happen [with steel production in Brazil] after the end of the [football] World Cup [tournament finals in mid-July]”, he added.

Despite recording an annual 1.5% increase in crude steel production for the first quarter of 2014, the country’s steel institute, IABr, already expects that it will revise downward its output forecast for 2014 because of a gloomy economy and global overcapacity.

The input of scrap material into the production of crude steel in Brazil currently ranges between 26% and 28%, much lower than the global average of 45%, according to Inesfa.

Prices
Scrap prices in the Brazilian market have surged since October last year and are now being negotiated at more than 600 Reais ($269.45) per tonne, Fonseca said.

“Mills were holding small inventories [in early 2014],” he noted.

São Paulo-based scrap dealers confirmed this price level. “Scrap is being sold at about $280-300 [or 624-668 Reais] per tonne,” a source said.

Despite this increase in scrap values, exporting is still more profitable for scrap dealers than domestic sales, even taking into account international freight costs, Fonseca said.

“The freight [cost] between Santos [in Brazil’s São Paulo state] and South Korea is set at $15 per tonne, while the freight cost between Santos and other cities in Brazil can be higher than this,” he explained.

“Export prices are around $80-100 per tonne above domestic prices,” he added.

However, an exchange rate of 2.23 Reais to $1 on April 30 – according to Oanda.com – may contribute to reducing the attractiveness of export transactions.

“The ideal rate is 2.40 Reais to $1,” Fonseca said. “Export data for the month of April will certainly show a fall in shipments.”

From January to March 2014, Brazil exported 130,512 tonnes of ferrous scrap, against 140,880 tonnes a year earlier, according to the country’s foreign trade ministry, MDIC.

Stimulus
It is important, therefore, for the scrap sector to secure suitable conditions in the export market.

Last year, IABr proposed to the Brazilian government the establishment of an export tax on ferrous scrap, but Inesfa was confident that this proposal would be ignored.

“We won,” André de Almeida, Inesfa legal adviser and a lawyer at the Almeida Advogados law firm, said on Tuesday.

In addition, in order to stimulate scrap use in the steelmaking process, Inesfa is urging the government to remove ICMS, the tax on internal circulation of goods and services which varies from state to state.

“The ICMS tax should be paid by the steelmakers,” Fonseca said.

Inesfa
Inesfa is comprised of 44 associated companies, which account for 47% of Brazil’s total scrap sales, or 300,000 tonnes per month.

But only 29 firms responded to a research study by consulting company GO Associados, published on Tuesday.

Of this total, 76.9% negotiate scrap prices directly with mills while 52% were not satisfied with the current transaction values.

“Scrap cargoes are mostly sold on a spot basis in Brazil,” Almeida said.

Besides the resulting financial stimulus, the scrap sector intends to gain market share in the steel industry for environmental reasons.

“The scrap processing operation consumes less energy and water [than other steelmaking raw materials] and pollutes less,” GO Associados partner Gesner Oliveira said.

Emissions of carbon monoxide (CO) from a blast furnace can be as high as 19.9kg per tonne, while emissions from an electric arc furnace are 1.8kg per tonne.

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