COMMENT: Brazil’s flaccid economy leaves steelmakers glum

This year’s edition of the Brazilian Steel Congress marked the 50th anniversary of the local steelmakers’ association, IABr, but the general perception was that there were not many reasons for celebration.

Paragraph entered by Atlantic migration, in order for SteelFirst articles to display correctly on Metal Bulletin.

The mood, both on the sidelines of the event and at the panels and presentations, was quite sombre.

During coffee breaks, groups of executives discussed passionlessly about the current low price levels for steel products in the international market and the difficulties that Brazil has been facing at home, such as weak economic growth, higher production costs and inflation.

Reflecting the challenging conditions of the Brazilian economy at the moment, 2013’s conference also looked modest in comparison with recent events.

Last year, for example, some 3,000 people – 700 of them delegates – gathered in São Paulo for an event that combined both the conference and ExpoSteel, a business fair with over 3,700 sq metres of constructed area and dozens of stands rented by steelmakers, mining companies and equipment suppliers.

“The Steelville”, a mini town displaying the different applications of steel products in a city, was even featured at the event.

This time, however, there was no fair and no stands and no steel town, and fewer than 600 delegates attended the conference in Rio de Janeiro.

Underperforming economy
Global overcapacity in the steel industry, low international steel prices and tight profit margins were naturally some of the reasons behind the sombre mood at the conference.

Joachim Schröder, ceo of Switzerland-based Research & Consulting Group (RCG), said that the more than 190 million tonnes of new crude steel capacity coming on stream in the next few years will further hit the already low utilisation rates in the global market.

Another expert – Sigurd Mareels, director at management consulting firm McKinsey & Co – noted that there were only three difficult options for steelmakers to improve their margins: cut production, reduce raw materials costs or raise steel prices.

But the main reason for the dispirited mood at the event was one closer to home: a persistently underperforming Brazilian economy.

Brazil’s gross domestic product grew 7.5% in 2010, driven by increased local consumption and heavy governmental expenditure during an election year.

But a year later, it grew only 2.7%.

A 4.5% growth was expected for the Brazilian economy in 2012 following several measures undertaken by the government to stimulate consumption, but it grew only 0.9%.

The official estimate of a 3.5% rise for 2013 has already been lowered to 3% by the country’s central bank. Private banks and consultancy firms are forecasting even lower figures.

“The economy is not taking off,” one senior executive from ArcelorMittal Brasil told Steel First on the sidelines of last week’s event.

Most of this underperformance is attributed to the Brazilian manufacturing industry. The sector’s output rose 10.5% in 2010, but a year later it grew by only 0.4%. In 2012, it contracted by 2.7%.

The segment most impacted was that of capital goods, which saw output declining by 11.8% last year, directly affecting the steel sector.

The overall evaluation is that Brazil continues to delay necessary reforms to grow its economy despite enjoying a decade of high commodity prices and strong export revenues.

Since 2000, Brazil’s GDP has quadrupled from 1.08 trillion Reais ($533 billion) to 4.4 trillion Reais ($2.17 trillion) in 2012. The country also went from being the world’s 10th-largest economy to seventh place.

Millions of people moved out of poverty over this period, with successive increases in minimum wages and low unemployment rates leading to income increases and higher purchasing power in Brazil, André Gerdau Johannpeter, ceo of local steelmaker Gerdau, told delegates at the conference.

But labour costs, on the other hand, rose significantly in the country, impacting Brazilian companies, he said.

This is the most serious problem right now, in addition to the country’s very high taxes. Brazil needs to implement major reforms as it is “unable to compete” under the current circumstances, Johannpeter warned.

Local demand

Other problems, like high energy costs, infrastructure bottlenecks and an overvalued currency, further affect the capability of Brazilian mills to export steel products.

Local steelmakers used to ship huge volumes of semi-finished steel, especially slabs, abroad but this is no longer a profitable business, according to Benjamin Baptista, ceo at ArcelorMittal Tubarão.

The company used to export as much as 5 million tpy of slabs, but it is now shipping only 500,000-600,000 tpy, he said.

Weak exports have led to the Brazilian steel industry operating at low utilisation rates.

Mills have an installed capacity of 48.9 million tpy of crude steel, but domestic demand is expected to hit just 29.1 million tpy this year.

That leaves 19.8 million tpy of excess crude steel capacity in the country at the moment, IABr said when disclosing its 2013 estimates.

Utilisation rates are currently at 70-71%, the association’s president Albano Chagas told reporters before the beginning of the conference last week.

Gerdau’s Johannpeter noted that utilisation rates in Brazil – which reached a record level of 96.7% in 2004 – have been below the global average figure since 2005.

Apparent steel consumption is expected to rise 4.2% to 26.24 million tonnes in Brazil in 2013, while sales in the domestic market are predicted to increase by 7.6% to 23.25 million tonnes.

Nevertheless, local steelmakers will not fully benefit from the expected increase as imports will remain high in Brazil.

Direct steel imports are forecast to fall by 15.4% to 3.2 million tonnes this year, but the volume is not far from the 3.78 million tonnes unloaded in Brazilian ports in both 2011 and 2012.

“Brazil will remain an attractive market for imports from countries with an oversupply,” RCG’s Schröder said.

Growth potential
Despite all these major problems, Brazilian steelmakers do have some key advantages, such as a huge, young workforce, modern industrial facilities and especially good access to raw materials.

Brazilian steelmakers are “very competitive inside the plant”, Johannpeter stressed.

And the per capita consumption of finished steel is low, “which is bad on one side but at the same time good, because of the growth opportunity”, he noted.

Consumption in 2012 amounted to only 128kg per capita, way below the world average of nearly 217kg per capita, he noted.

Schröder concurred.

“This is the one figure we have to keep in mind: 128kg of consumption, still 100kg below world average,” he pointed out.

If Brazil’s government and companies manage to increase local investment rate and promote steel consumption growth over the next few years, local executives might have good reasons to celebrate at the future anniversaries of the country’s steel industry.

What to read next
Following a six-week consultation period, Fastmarkets can confirm it will amend the calculation method for all the average functions on the Fastmarkets platform from Wednesday March 1, 2023.
Consolidation, the recycling of electric vehicle batteries, US steel exports and the benefits of sustainable steelmaking were key talking points at Fastmarkets’ Scrap & Steel 2023 conference in Dallas in January
Green shoots of increased demand will emerge in US ferrous markets courtesy of the Biden administration’s trillion-dollar infrastructure package in 2023, Schnitzer’s executive vice president and chief strategy officer Richard Peach said at Fastmarkets’ Steel and Scrap Conference 2023 in Dallas, Texas
US special bar quality steel prices rose in January in line with rising scrap and alloy costs, according to market participants
European metal industry association Eurometaux has called on the European Commission to follow the lead shown by the Inflation Reduction Act and deliver a “powerful” policy to support the industry in the EU while it tries to keep up with the move to a new generation of energy markets
The fallout from Russia’s invasion of Ukraine is changing global trade flows for bauxite, with Brazilian material once again flowing into China and with the introduction of export restrictions elsewhere likely to influence availability through 2023
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.