We recently posted a guest blog piece on why Indian steel firms are investing in established steel firms outside of their home country rather than domestically, in what is probably the second-fastest steel market after China. The main conclusion was that domestic red tape and planning delays drove the Indian steel firms to look for easier expansion opportunities abroad in spite of the growth prospects at home.
Well, no such reservations appear to prevail at Gerdau Steel, Latin America’s biggest steel company. According to the Financial Times Gerdau is planning to sell more than R$3.8 billion (US$2.2bn) of stock, fueling speculation that it may be about to buy part of a Brazilian rival to take advantage of the country’s civil construction boom. The cash generated would be on top of an internally generated cash surplus of R$2.2 billion the firm was sitting on at the end of last year. In spite of intense competition of cheap Asian steel imports fueled by the strong real and a booming domestic market (particularly in construction), analysts suspect that the company might be preparing to buy a stake in Usiminas, the country’s biggest producer of flat steel products.
Gerdau and Usimas’ specialty is in long products, specifically reinforcing bars, flatsÃ‚Â and general long products whereas the main imports are in flat rolled products used by the automotive and white goods markets. Long steel output increased 7 percent month-on-month in February, the paper said, while flat steel production was only 3 percent higher over the same period, according to figures from the Brazilian Steel Institute. As if to underline the strength of the Brazilian market data from IHS Global Insight, a US economics consultancy, in another article this week showed that Brazil has overtaken the UK in a league table of manufacturing economies. Brazil is now sixth, rising from eighth in 2009 on the back of a rise in manufacturing output last year of 9.9 percent, also putting it ahead of South Korea.
There is really no end in sight to Brazil’s construction boom, with the Soccer FIFA World Cup in 2014, the Olympics in 2016 and massive offshore oil construction projects in the pipeline for much of this decade. Taken in the longer term, should Gerdau decide to bid for part or all of Usiminas, one has to say it will probably prove to be a good investment looking at the trajectory of the Brazilian construction market.