Brazil Metals Report Q4 2011 - new market research report

The latest Brazil Metals Report doubts the country is able to justify an increase in steelmaking as large as planned and does not believe some of the larger projects will go ahead. A moderation in domestic demand growth, a high tax burden coupled with high interest rates, and a strong real will militate against sustained high rates of output growth.

 

 

Growth in the production of crude steel was strong at 7.8% in the first eight months of 2011, while rolled steel production fell 3.1% and domestic sales rose just 0.6%. The Brazilian steel industry managed to offset poor domestic performance with 43.5% growth in export volume while imports fell 35%. Much of the decrease was seen in the early months of the year with an acceleration in import growth from June.

 

 

As 2011 progressed, consumption rates came under pressure and we forecast crude steel output growth of 6% and hot-rolled output growth of 0.5% for the full year. Rises in raw material costs mean no improvement in earnings over the short-term, but on the upside prices should remain stable.

 

 

Over 2012, the strength of the currency will create more challenging conditions for Brazilian steelmakers. Some are pushing for more vertical integration with the mining sector to reduce costs, but mining is becoming more profitable as an export business in its own right. As such, steelmakers are not looking to ramp up output in the medium term, but rather increasing iron output to make up for reductions in steel margins. Lack of export opportunities will force steelmakers to rely on the domestic marking, thereby limiting opportunities for expansion. On current plans, by end-2015 Brazilian crude steel capacity could increase by up to 30mn tpa assisted by ThyssenKrupp's Rio de Janeiro slab mill joint venture (JV) with Vale that will raise output by 67% to 5mn tpa by 2012 following expansion to 3mn tpa in 2011. However, around 40% of its output is destined for Europe with the rest sold in the US, where markets are weakening.

 

 

The Brazilian aluminium industry is faring badly with output down 7.1% in the first eight months of 2011. This confirms our forecast of 1.45mn tonnes for the full year, a decline of 5.5% year-on-year (yo- y). Novelis's 47.6% decline in output is the result of the closure of its Aratu smelter, while its Ouro Preto smelter saw no change in production volumes. The Companhia Brasileira de Aluminio smelter also reported a 16.9% decline in output, which helped outweigh the increase in output reported by smelters owned by Albras, Alcoa and BHP Billiton. In addition to the value of the real, high energy prices are hampering future growth prospects in output and much of the projected increase in consumption will benefit imports. Smelter closures are related to the rising cost of electricity and an influx of cheaper imports from China, a situation that is likely to be sustained over the medium term.