Brazil's Steel Industry Copes Well in Global Downturn

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Ferrous Metals, Global Trade

Brazil has been hailed as one of few countries to have largely survived the downturn without going into recession and to be growing strongly on the back of domestic demand. The Brazilian metals industry has historically been characterized as resource rich but processing poor. However, in the last decade, the country has developed both aluminum and steel to become a major player both as a primary and downstream producer. Although the world undoubtedly has an excess of production capacity in both metals, that does not stop national interests from promoting further domestic production to reduce reliance on imported material and boost local regional dominance. It is just this approach that President Luiz da Silva’s government has taken to steel leaning heavily on Vale to invest more domestically, in Brazil, to boost downstream production. Previously Vale has always maintained they do not want to get into semi finished steel production because it would put them in competition with their core iron ore clients but so far it has become a major stakeholder in four projects set to increase Brazilian production by 15.5m metric tons per year, a 50% increase over current levels.

According to Reuters, Vale will take a 25% equity stake in the new flat rolled steel plant with steel company Aco Cearense holding the other 75%. The plant will be integrated into a larger Vale slab and HR steel mill project called Alpa in the state, but Vale is looking for a partner in the larger project. Investments will depend on the results of a feasibility study and their success in finding a partner. The Vale-Aco Cearense plant is expected to cost $750 million and have the capacity to produce 710,000 metric tons a year of HR steel, 450,000 metric tons of CR steel and 150,000 metric tons of galvanized steel with Alpa supplying steel slabs to the project. Vale announced in October it would build the $3 billion Alpa complex if it could identify a strategic partner.

Brazil’s Gerdau, the world’s second largest producer of long products is facing stiff competition in its home market from a surge of Chinese imports in spite of a tariff increase in June on some steel products. Gerdau has responded by downsizing some of its units and slashing costs. So far, any expansion plans seem to be on ice but the firm is cutting back exports to feed a growing domestic demand driven more by a strong Real making exports less attractive than limits to available capacity.

Usiminas, Brazil’s second-biggest steelmaker is also facing a tough time this year, although better than producers in many other countries. Sales are obviously down on 2008 because exports have been severely hit by the lack of overseas demand and the strong Real but domestic demand is holding up well.

ThyssenKrupp’s long running saga at Sepetiba Bay looks like it is finally due to come on stream. Construction delays and then a global downturn have repeatedly postponed a start date and ramp up plans. Eventually the plant will produce 5 million metric tons but only one blast furnace and converter will start in 2010 with the other now in 2011. Thyssen has sold 27% of the plant to Vale and is reported to have agreed a metal off take agreement as part of the sale.

Generally steel demand is expected to increase by around 3-5m tons on the back of construction for the 2014 Soccer World Cup tournament and the 2016 Olympic Games. With major oil discoveries off the coast of Brazil this year it would suggest the New Year could see the start of this country’s decade. At last, the country may be fulfilling the potential it has for so long held unrealized.

–Stuart Burns

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