With the greatest respect to Roger Agnelli, chief executive officer of Brazil’s Vale, he may head up the largest iron ore company in the world but how he keeps a straight face sometimes begs an answer. In a recent Reuters article, Mr. Agnelli is said to have warned that reducing, or heaven forbid removing, import taxes on steel products would weaken Brazilian steel producers and could have very serious consequences for the domestic market. Hold on a minute Mr Agnelli. Brazilian steel producers are said to be (literally) sitting on top of some of the lowest cost and highest grade iron ore and coking coal deposits in the world. As a result of the vertically integrated nature of domestic producers, Vale itself only sells about 10% of its production in the domestic market. Along with Russia, India and Ukraine, Brazilian steel producers are said to have some of the lowest power costs. They are also blessed with a robustly growing domestic steel market that would be the envy of steel producers in Europe or North America, ensuring they are running at or near capacity. Last but not least they are partially protected by the comparatively higher cost of freight foreign producers have to pay just to ship to Brazil in contrast to producers in Europe or the US who face freight rates that were so low last year some shipping lines were on the verge of bankruptcy. The only factor counting against domestic steel producers is the strength of the Real, which makes imports more competitive than they would have been historically raw material costs being constant.
The authorities threat to remove the import tariffs is not unreasonably driven by the rising price of steel in the domestic market, rises that the government claims are helping push inflation to 5.3%, above the governments 4.5% target. Yet domestic steel producers like CSN and ArcelorMittal are said to be raising prices this month by 10% or more such that now they are some 40% above the world market price according to this article. Although steel imports into Brazil surged to 1.8 million metric tons in January-April 2010, up 156% from the same period in 2009, it has to be said that if prices are that much above world prices the benefits to Brazilian steel consumers of lower prices far outweigh the perceived threat to Brazilian steel producers and on balance the economy would be much better off with lower steel prices.
Domestic producers have vigorously defended the import duty of 15%. Its legitimacy going forward comes down to how steel prices in Brazil compare with those abroad. If the above statement is correct that prices are significantly higher then you have to ask yourself why producers need an import tariff. Surely with all the advantages open to them, Brazilian steel producers should be some of the lowest cost in the world and be able to compete with anyone. Of course if producers consider one or two countries are dumping steel in their market then they have every right to lobby government for anti dumping duties on those mills or countries, a tactic used with considerable success in the US and Europe. The steel industry is a powerful lobby in Brazil, whether any change to the tariffs will take place remains to be seen, but meanwhile on the face of it defense of them has a hollow ring.