2020 PREVIEW: Brazilian rebar market participants anticipate demand recovery

Demand for rebar is set to recover in Brazil this year, market participants say - and mills have already announced a first round of price increases.

Sources widely forecast steel use to grow in 2020, with long-steel demand poised for a quicker increase than flat-rolled products. The construction sector reversed a five-year freefall in mid-2019; estimates suggest it will grow further this year.

Instituto Aço Brasil, the country’s steel association, expects consumption to reach 21.78 million tonnes in 2020, up by 5.2% from its forecast of 20.71 million tonnes for 2019. Executive president Marco Polo de Mello Lopes said long-steel demand will climb faster than flats usage.

ArcelorMittal and Gerdau, the two rebar market leaders in Brazil, have announced a 12% price increase for January – a move that will be followed by smaller producers such as Simec, Companhia Siderúrgica Nacional (CSN) and Aço Verde do Brasil (AVB), market participants said.

Customers, however, are skeptical about such price increases – or, at least, do not expect them to be implemented right away.

Fastmarkets’ price assessment for steel reinforcing bar (rebar) domestic monthly, delivered Brazil was at 2,220-2,320 Reais ($540-565) per tonne on December 6, unchanged from the previous month but up from 2,165-2,300 Reais per tonne on October 4.

Demand recovery
The domestic rebar price hit its lowest 2019 level on September 6 at 2,125-2,300 Reais per tonne. Struggling demand and a global price downtrend put local prices under pressure.

According to Aço Brasil data, long-steel use totaled 7.08 million tonnes in the January-October period of 2019, down by 2.5% from 7.26 million tonnes in the corresponding months of 2018.

These figures were 6.7% higher than the 6.63 million tonnes in the same period of 2017, the decade’s lowest. Volumes, however, were still down by 14% from 8.23 million tonnes in the first 10 months of 2015, before an economic crisis hit Brazil.

The country’s gross domestic product (GDP) fell year on year during 11 consecutive quarters until October-December 2016 and has not yet returned to pre-2014 levels. A significant public deficit, coupled with the “Car Wash” federal police investigation, dragged the economy down.

The Car Wash investigation was aimed mostly at state-owned oil company Petrobras and large construction companies such as Odebrecht, Queiroz Galvão, OAS, Camargo Corrêa and Andrade Gutierrez. As a result, the crisis had a big impact on the construction sector.

Brazilian construction GDP decreased for 20 straight quarters until April-June 2019. It is now set to grow by 2% in 2019 and by 3% in 2020, the São Paulo state association of construction companies, Sinduscon-SP, said on December 5.

While flat-rolled steel consumption would have to increase by 11% to regain its all-time peak from 2013, long-steel use would have to grow by 39% to reach its highest-ever level, steelmaker Gerdau said on November 7.

In fact, looking at a 12-month moving total, flat steel consumption fell to its recent lowest level in August 2016, dropping to 10.18 million tonnes. It has since climbed by 22.3% to 12.45 million tonnes (as of October 2019). Long-steel use, on the other hand, hit its recent lowest point at 7.71 million tonnes in August 2017, and has grown by only 7.6% since then, to 8.29 million tonnes.

“While the [long-steel demand] recovery is still in its infancy, we believe these trends are poised to substantially accelerate,” BTG Pactual bank analysts Leonardo Correa and Caio Greiner wrote in a report on November 22. “We are convinced that the revival of construction markets is set to continue for years.”

“We hosted a meeting with Carlos Jorge Loureiro, president of Brazilian steel distributors’ association Inda, and Mr Loureiro has a more positive view for long steel in 2020, compared with flat steel, as volume growth for the former should be supported by increased residential construction,” Safra bank analysts Conrado Vegner and Victor Chen wrote on November 25.

Full increase still uncertain
The 12% rebar price hike, however, does not seem to be set in stone. A previous attempt in September did not fully materialize and this latest announcement will also depend on global trends.

“Last time a price hike was announced, mills aimed for 7% but only about 3% passed through,” one distributor source said. “I believe about half of this 12% increase will be implemented, and maybe only in February.”

The Brazilian domestic rebar price is dependent on Turkish trends and currency movements. The steelmakers usually tend to sell rebar in the local market at a 10% premium over imports after foreign exchange, duties, taxes and overall costs.

The price premium stood at 3-6% for most of the fourth quarter of 2019, market participants said.

Fastmarkets’ assessment for steel reinforcing bar (rebar) export, fob main port Turkey was $445-450 per tonne on December 27, up from its 2019 low of $395-400 per tonne on October 10.

Foreign exchange rates were also still supportive of higher prices, although the Brazilian Real was stronger than a month earlier. On December 27, $1 was valued at 4.05 Reais, down from 4.25 Reais on November 29 and 4.16 Reais on November 13.

“It is going to depend on Turkish rebar prices and of course currency exchange,” a second distributor source commented. “But the market is much stronger now, and I expect orders to keep growing, even during the weakest season, in December-January.”

“I don’t see how someone would think the hike is unjustified,” one mill source told Fastmarkets. “But the size of it and duration throughout the year remains to be seen.”