ANALYSIS: Are Brazil, Turkey steel sectors moving in right direction?
Using a comparative approach, Steel First’s team of reporters examines which direction the steel sectors in Brazil and Turkey are taking.
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Brazil and Turkey have steel industries of similar sizes, and ranked eighth and ninth, respectively, in the World Steel Assn (Worldsteel) league table for crude steel production in 2015.
Political uncertainties, increased energy costs, high tax burdens and local currency devaluation are all concerns that the two countries have in common.
The Brazilian steel sector operated at only 60% of its output capacity in the first quarter of 2016, a consequence of poor economic conditions in the country arising from a political crisis, according to national steel institute Aço Brasil.
The country’s gross domestic product (GDP) dropped by 0.30% in January-March 2016 compared with the previous quarter – making it the fifth consecutive quarterly decline in economic activity, according to figures from national statistics agency IBGE.
On May 12, President Dilma Rousseff was forced to step down for as long as 180 days to arrange her defence after the country’s senate voted to impeach her for alleged accounting irregularities.
Vice president Michel Temer took over as interim president, and announced new economic measures to boost the national economy, but how it will develop still depends on the result of the impeachment process.
Meanwhile, in Turkey, the Justice & Development Party (AKP) has been ruling the country as a single-party government since 2002 – a government which survived an attempted military coup on Friday July 15.
An unspecified number of members of the Turkish military attempted the coup. They failed to gain control of the government, but economic worries were unavoidable as the lira fell in value over the weekend. On July 15, TRY1 was trading at $0.34567. It fell to $0.33017 on July 17, and was equivalent to $0.3354 on July 18, according to live rates on Oanda.com.
Market participants in the country said that any worries were mostly allayed by July 18, as the lira regained value and banks were working normally.
However, the problems in Syria and Iraq, and the threat of the self-styled Islamic State of Iraq & the Levant (ISIL) – also known as Islamic State, Isis, and Daesh – have led to a deterioration of economic sentiment in the country.
Turkey, in addition, finds itself in an open diplomatic conflict with Russia.
The country has been subject to several suicide bomb attacks recently, and these have caused safety fears among foreign investors. Tourism, one of the main pillars of the Turkish economy, is doing badly this year. This is due in part to safety concerns but also because Turkey used to have many tourists from Russia, and the recent poor relations between the two countries have caused tourists to avoid travelling to Turkey.
In terms of cost disadvantages, factors including high energy costs and a high tax burden are behind the loss of competitiveness in the Brazilian steel industry and the whole industrial sector.
Brazilian steel companies, for instance, face additional costs of around $58-113 per tonne compared with their international peers, due to the country’s national tax system and high interest rates, according to a study released by Aço Brasil.
Turkey, meanwhile, is dependent on outside energy sources, importing 90% of its oil, 97% of its natural gas and 20% of its coal requirements. Energy costs in the country are very high as a result, and increase the steel industry’s costs. And no remedy for this situation is likely in the short term.
The Turkish Steel Producers Assn (TCUD) has complained about recent price rises for electricity, adding that the cost of electricity will double at weekends and on national holidays, leading to extra production costs for the steel sector.
Electricity costs in Turkey were increased by 6% for daily use, and by 16% for weekend and public holiday use, in December 2015.
The lira was trading at TRY1 to $0.46858 on January 1, 2014, and at $0.33746 on July 18, 2016. Even if all flat steel trades – whether imports, local sales or exports – were made in dollars, production costs and economic sentiment have been negatively affected.
One of the main factors on which currency devaluation has an effect is local sales of long steel products. Flat steel sales are mostly made in dollars in Turkey, while most long steel producers announce their prices in lira. However, as their raw material purchases – such as scrap steel, coke, etc – are in made in dollars, they are directly affected by currency devaluation.
In Brazil, meanwhile, local currency devaluation has been long cited by mills as one of the variables that could positively affect the domestic steel industry. A depreciated currency makes imports less viable and encourages mills to increase their export volumes.
On July 19, the Brazilian currency was trading at 3.27 Reais to $1, compared with 3.19 Reais to $1 a year earlier. The ideal rate for Brazilian steelmakers would be 3.70-3.80 Reais to $1, a level that several sources expect will be reached at the end of 2016.
Aço Brasil sees the export market as offering the only possible solution to the issues afflicting the sector, as it does not expect a recovery in the domestic steel market in 2016-17.
Brazilian mills raised their steel export volumes by 21.10% in January-May 2016 compared with the corresponding period last year, to 5.47 million tonnes from 4.51 million tonnes, according to Aço Brasil.
“Some steelmakers are not making any profit from exports,” a source at a flat steel producer said. “But this is the only way to keep facilities operating at the moment.”
Despite having very similar crude steel output levels, steel consumption figures in Brazil and Turkey have shown mixed fortunes.
Turkish steel use increased by 11.70% in 2015 year-on-year, to 34.40 million tonnes, according to Worldsteel. Consumption is expected to rise by 3.30% this year, to 35.50 million tonnes, before growing by another 3.20% in 2017, to 36.70 million tonnes.
Brazil, on the other hand, saw its steel use in 2015 fall by 16.70% on an annual basis, to 21.30 million tonnes. For 2016, steel consumption is predicted to decline by 8.80%, to 19.40 million tonnes, before rising by 3.10% in 2017 to 20.10 million tonnes, according to Wordsteel data.
The reason for such different outlooks can be found in the performance of the major steel-consuming sectors.
Automotive production is one of the biggest steel-consuming sectors in Turkey and, as it exports most of its output to Europe, production increased in 2015 thanks to strong demand in the export markets. The producers in the country are also looking for new locations where they can increase their output.
Turkey produced 1,358,796 vehicles in 2015, up by 16% year-on-year from 1,170,445 vehicles in 2014, according to the Turkish Automotive Manufacturers’ Assn (OSD).
In a speech in February 2016, OSD chairman Kudret Önen said that Iran shows promise for automotive sector investment, and Turkey must be more competitive when evaluating opportunities for such investments not only in that country but also in North Africa.
This was necessary, he explained, because the Czech Republic, Slovakia and Hungary have advantages in terms of labour and logistics in the automotive sector. To keep improving, he added, the sector must focus on more free trade agreements, because these are the backbone of global trade.
Investments in infrastructure, construction
There have been major investments to boost steel consumption in Turkey recently, including the Sinop and Akkuyu nuclear power plants, the Istanbul-Izmir highway, the Canal Istanbul, a third airport and a third bridge in Istanbul, major pipelines, and high-speed rail lines.
Apart from these major projects, urban transformation projects in Turkey are also helping to support the country’s domestic steel consumption.
The Housing Development Administration of Turkey (TOKI) has completed 720,000 houses since 2013 within the country’s urban transformation projects.
And terrorist attacks in South-eastern and Eastern Turkey have made it necessary for many cities and towns to be rebuilt, which should also increase steel demand.
In Brazil, however, these two sectors are facing several difficulties amid the political and economic crises.
The construction sector accounts for about 37.70% of the steel consumed in the Brazilian market, according to Aço Brasil, and the prospects for the segment could be good due to the country’s logistics bottleneck. But the lack of investment, as a result of the poor economic conditions, had a negative effect on steel demand levels.
In the past couple of years, some of the major construction companies in Brazil, and state-owned oil company Petrobras, have been facing financial difficulties as investigations continue in the Lava-Jato corruption scandal.
The Brazilian Federal Police’s Lava-Jato Operation spread to energy firm Petrobras in March 2014. Although it is one of the biggest companies in Brazil, given the attentions of the Lava-Jato process, its large projects were halted.
This stoppage in investments has affected Brazil’s major construction firms, all significant consumers of steel products – whether or not they were previously involved in the Lava-Jato case.
The Brazilian car industry is operating at less than 50% of its output capacity, according to the country’s automobile association, Anfavea.
The poor conditions in the Brazilian market led Anfavea to revise downward its forecasts for 2016. The group now expects car output to fall by 5.50% this year compared with 2015, to 2.29 million units.
In 2015, Turkey’s total crude steel output reached 31.51 million tonnes, of which 11.03 million tonnes came from blast furnaces and 20.48 million tonnes from electric arc furnaces (EAFs).
Turkish mills are very flexible in terms of production adjustment.
The country has only one integrated long steel producer, Kardemir, and a number of EAF-based long steel producers. Isdemir, Çolakoglu, Tosçelik and Habas all have production capacity convertible between flat and long steel. Their production choice depends on demand and profitability.
Kardemir completed the installation of its No3 converter in late November 2014, increasing its liquid steel capacity to 3.4 million tpy.
All the other steel producers use EAFs, the largest being Icdas, which has 5.26 million tpy of steelmaking capacity.
Turkey has also five flat steel producers, and several re-rollers and coated coil producers. Four of the five flat steel producers have production capacity that is convertible between flat and long steel, giving them the ability to select the most profitable production.
The Erdemir Group is Turkey’s first and biggest flat steel producer.
The group has two steel plants, one in northern Turkey (Erdemir) and one in the southern part of the country (Isdemir), with total crude steel production capacity of 9 million tpy. Both have blast furnaces – the only flat steel-producing blast furnaces in Turkey.
The group plans to produce 9 million tonnes of steel in 2016, of which 7.20 million tonnes will be flat steel and 1.80 million tonnes will be long steel.
Meanwhile, of Brazil’s total crude steel output of 33.25 million tonnes in 2015, 26.52 million tonnes came from blast furnaces and 6.72 million tonnes from EAFs. The difference is explained by the easy access to iron ore resources, and the focus on flat steel production.
The major Brazilian steel mills – Gerdau, Usiminas, ArcelorMittal and CSN – all have captive iron ore plants, facilitating the use of blast furnaces (BFs).
Gerdau’s BFs at its Açominas works, in Minas Gerais state, have been capitalising on their access to captive iron ore resources, raising the unit’s competitiveness level. Thus, it has been increasing export volumes of semi-finished goods – slab and billet – produced via BFs.
Meanwhile, the company said in March this year that it could benefit from the flexibility of its EAF-based operations, as it would be able to operate its EAFs only five days a week. BFs do not have this production flexibility.
Of the major steel producers in Brazil, some are controlled by international groups such as ThyssenKrupp CSA, ArcelorMittal Brasil, Aperam, and Vallourec Tubos do Brasil.
Usiminas and CSN, meanwhile, started their corporate lives as state-owned companies.
Founded in 1962, Usiminas was privatised in 1991. CSN began operations in 1946 and was privatised in 1993, when current ceo Benjamin Steinbruch purchased it.
The Açominas unit, indeed, was first established as a state-owned unit in 1986, and was acquired by Gerdau in 1997. Gerdau itself was founded in 1901.
The steel oversupply situation in China has affected both Turkey and Brazil.
Low-cost Chinese billet exports into Turkey have been putting pressure on the local market since mid-2015 and are seen as the main cause of weakening prices.
In June 2015, for example, Chinese billet suppliers came to the Turkish market to offer billet at prices in the range of $355-370 per tonne cfr, while Turkish customers received offers from CIS suppliers at $380-385 per tonne. Chinese offers then started to gradually fall and dragged down prices all over the country.
Turkish steel producers sometimes tried to turn this to their own advantage, however, as they were putting downward pressure on scrap prices by booking cheaper Chinese billet. They remained out of the deep-sea scrap markets for almost a month, surviving on Chinese billet in May.
The most recent billet boo ing from China was done in the range of $330-335 per tonne cfr Turkey.
In Brazil, meanwhile, imports of low-priced Chinese steel have dropped in the past few years, after peaking in 2014.
Despite the downward trend, Brazil continues to urge better trade defence mechanisms to protect the local steel industry and to fight unfair steel imports.
“Countries are closing their doors to Chinese steel,” ArcelorMIttal Brasil ceo Benjamin Baptista recently said. “Will Brazil keep its border open?”
China continue to practise unfair trading and Brazil cannot be the escape valve for these export volumes, he added.
While the steel sectors in Brazil and Turkey are of similar sizes and face similar challenges, the outlook in the two countries is very different – Turkish steel is still growing, while in Brazil the sector continues to contract.
If Brazil is to reverse this trend, it must achieve what is keeping the Turkish steel sector strong even in difficult circumstances – investment in infrastructure, manufacturing and other steel intensive end-user sectors such as carmaking.
But while the symptoms are clear, finding an effective cure that will allow Brazil to emulate Turkey will be much more difficult.