“The market is surprised,” Upside Investor analyst Pedro Galdi said.
At the beginning of September, the governments of China and Brazil signed several partnership deals, including one for a 3 million-tpy steel facility in Maranhão state.
The $3 billion unit is to be developed by Chinese firm CBSteel.
The surprise was mainly due to the fact that the Brazilian steel industry is passing through a crisis, resulting from a combination of the country’s economic slowdown, poor local demand and global steel overcapacity.
The Brazilian steel industry was operating at only 59.50% of its installed capacity as of June this year, according to the national steel institute, Aço Brasil.
“Besides the excess of capacity globally and the Brazilian [economic] scenario, we’ll still see the creation of new capacity in the Ceará state,” Galdi said.
Companhia Siderúrgica do Pecém (CSP) – a Ceará-based joint venture of Brazilian miner Vale, which owns 50%, and South Korean steelmakers Dongkuk (30%) and Posco (20%) – produced its first batch of slab in June.
It has crude steelmaking capacity of 3.16 million tpy, or 3 million tpy of slab.
Also, the weakening of domestic steel demand led Aço Brasil to revise downward its predictions for the national steel sector in 2016.
The association expects crude steel production to fall to 31.01 million tonnes in 2016, down by 6.80% year-on-year.
Apparent steel consumption is estimated to drop by 14.40% over the same period, to 18.22 million tonnes, while local sales are predicted to fall to 16.36 million tonnes from 18.17 million tonnes.
The new plant in Maranhão state is expected to produce slab volumes, market participants told Metal Bulletin, although CBSteel has yet to unveil details of its investment in Brazil.
“This [project] might be a long-term plan, or the Chinese [company] wants to have iron ore manufactured into slab products to secure strategic inventories,” Galdi said.
A second source agreed that slab must be the product selected by the Chinese firm for production in Brazil.
“It is good for the [Brazilian] government to have more and more slab and billet plants in the country, as it can export semi-finished goods rather than iron ore,” a Brazilian steel trader said.
“But domestic mills did not like it all,” he added, “and the biggest concern is whether the Chinese will decide to add a rolling line to the facility in the future.”
The Chinese tactic of accessing local markets through captive investments in steel plants has been seen in Asia but not yet in Latin America, according to a São Paulo-based steel analyst.
“This would be the first move [in the region],” he said. “I believe that Chinese companies could be trying to evade anti-dumping measures.”
The Chinese investment in a steelmaking plant in Brazil’s north-eastern Maranhão state has raised concerns in the Latin American country.