Brazil’s 2015 steel market outlook is ‘alarming’, Itaú BBA bank says

The outlook this year for the Brazilian steel market is alarming, analysts at investment bank Itaú BBA have said.

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The bank expects Brazil’s steel consumption to decline by 5% year-on-year in 2015, as the country’s domestic gross product (GDP) is predicted to contract by 0.5% this year.

If this proves to be correct, local flat steel consumption will drop to 10.6 million tonnes from 11.2 million tonnes in 2014, while long steel use will decline to 9.1 million tonnes from 9.6 million tonnes.

This contraction reflects weaker activity in Brazil’s construction, automotive and industrial sectors, according to Itaú BBA.

In the construction industry, “the fact that we saw weaker average launch levels [in Brazilian Real terms] in the past two years implies weaker steel demand in the residential and non-residential sectors”, Itaú BBA steel and mining analyst Marcos Assumpção said.

For the automotive sector, even with production having suffered a significant drop of 15.3% last year, the bank believes that the sector will once again report a decline in 2015, probably of 10% on an annual basis.

The construction and automotive industries together account for about 59.8% of the steel consumed in Brazil, according to the country’s steel institute, IABr.

In addition, Itaú BBA believes that it is unlikely to see positive growth in the industrial sector, given the low level of business confidence, reduced government incentives, rising interest rates, higher taxes and the unfavourable demand environment.

Energy issue
But “things could get worse with energy rationing”, Assumpção said.

Itaú BBA’s utilities team estimates that the risk of energy rationing in Brazil is currently 75%.

“The government has already indicated that it will attempt to rationalise demand in some way,” he added.

Over the past few weeks, the government has begun to discuss measures to ensure energy supply in 2015, which will include incentives for large commercial and industrial consumers to generate their own energy during peak hours, and tariff increases to discourage energy consumption.

“However, our team believes that this strategy is unlikely to be enough to avert the need for rationing,” Assumpção said.

In the likely case of energy rationing, “we believe that Brazilian steel consumption could drop by more than 5% in 2015”, he added.

Insufficient heavy rains in the country’s summer season, a lack of investment in infrastructure and growing energy consumption are the principal factors that created this potential problem.

In 2001, the Brazilian government introduced energy-rationing measures for similar reasons, including partly cutting supplies to the industrial sector.

With the recent depreciation of the Brazilian Real to around 2.86 Reais to $1, Itaú BBA now sees domestic flat and long steel products at premiums – the differences between prices for local and imported goods – of 11% and 9%, respectively.

This situation will not allow companies to fully implement price increases announced at the beginning of the year for both flat steel and long steel, according to the bank.

“The weak domestic demand, coupled with volatility [in the Brazilian Real] and the expectation of further downside to international steel prices, is making this process somewhat more difficult,” Assumpção said.

He has seen indications that, in many cases, attempted price increases “have hit a wall”, as clients have been reluctant to digest higher production costs in a stressed macro environment.

“We believe that, if the downward trend in global steel prices is confirmed, we will see some pressure being exerted on domestic steel prices [in Brazil],” Assumpção said.

But local flat steel producer Usiminas recently said that it was “successfully passing on” January’s price increase to the local distribution chain.