Brazil Steel Capacity Growth May Be Capped By Uncertainty

Date : 06/09/2011 @ 6:10PM
Source : Dow Jones News
Stock : Gerdau S.A. (GGB)
Quote : 4.45  -0.2 (-4.30%) @ 4:01PM

Brazil Steel Capacity Growth May Be Capped By Uncertainty

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Brazilian crude steel capacity is slated to grow by as much as 30 million metric tons a year by 2016, but unfavorable business conditions could thwart those intentions, an international steel consultant said Thursday.

The amount of new capacity actually materializing could be anywhere between 10 million tons and 30 million tons, Hauke Moje, managing partner in Swiss-based Research & Consulting Group, or RCG, said in an interview.

"Not all [of the projects] will materialize, due to a moderate domestic steel demand growth, a squeeze on profitability and a high tax burden in Brazil," Moje said. If the government wishes to encourage steel investments it "should provide a level playing field by adapting tax burdens to global standards to stimulate industry investments and create jobs at home," he said.

An added burden are Brazil's interest rates, which are the highest by far among major economies. Late Wednesday, the Brazilian Central Bank late raised its key rate again, to 12.25% per year, with investors seeing more rates down the line.

Much of the planned new steel capacity would produce steel slabs, an intermediate steel product which could end up being processed abroad due to insufficient local steel rolling capacity, Moje said. Further projects may be developed along the lines of Companhia Siderurgica do Atlantico, or CSA, the new joint venture between miner Vale SA (VALE, VALE5.BR) and Germany's biggest steelmaker ThyssenKrupp (TKA.XE), which will process the slabs in the U.S. and Germany.

Companies from emerging markets including India are looking to buy steel slabs from South America, he said.

Information from company plans indicates that most of the planned new crude steel capacity, about 24 million tons a year, would come from brand new plants, while around 6 million tons a year would come from expanding existing plants, according to Moje's studies.

On top of that, there are plans to add more rolling capacity to turn the slabs into higher-value products aimed primarily at Brazil's domestic market, according to the consultant. Companies plan to add up to 14 million tons a year of rolling capacity, through a combination of new plants and expansions, he said.

Brazil steel plants currently have the capacity to produce 47.4 million tons of crude steel a year, and actual output this year should reach 39.4 million tons, nearly 20% up on 2010, Brazilian Steel Institute IABr reported last week. Last year, imported steel accounted for 23% of sales in Brazil, it said.

Brazil's mining giant Vale SA (VALE, VALE5.BR) is the main driver of the steel investments, while others with plans include Ternium (TX), Vallourec & Mannesmann, Usinas Siderurgicas de Minas Gerais (USIM5.BR), or Usiminas, and Companhia Siderurgica Nacional (SID, CSNA3.BR), or CSN.

-By Diana Kinch, Dow Jones Newswires; 55-21-2586-6086;

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