--Brazil steel distributors' head sees mills' earnings could
weaken in 2Q
--Local market growth eroded by imports of steel-containing
goods - Inda president
--Mills' efforts to raise prices in second half seen barely
covering forex losses
By Diana Kinch
RIO DE JANEIRO--Brazil's flat steel product makers are set to
report "weak earnings in the second quarter, similar or worse than
in the first quarter," the head of the country's steel
distributors' institute said this week.
Continued high raw materials and energy costs, slowing domestic
demand, persistently high imports of steel-containing goods and a
record-high level of idle steelmaking capacity in Brazil have
further pressured profit margins at companies including Usinas
Siderurgicas de Minas Gerais SA (USIM5.BR, USZNY), Companhia
Siderurgica Nacional SA (CSNA3.BR, SID), or CSN, and the Brazilian
operations of ArcelorMittal (MT, MT.AE), the world's biggest
steelmaker, Carlos Loureiro, president of Brazil's steel
distributors' institute Inda, said in an interview.
"Profit margins at Brazilian flat steel mills are today less
than 10%, compared with 30-34% in 2007-8, before the crisis," Mr.
Loureiro told Dow Jones Newswires. Usiminas' margins are today
lower than those at CSN, which has the saving grace of a larger
iron ore business, which offers higher margins than steel, he
said.
Usiminas, Brazil's biggest flat steel producer, with more than
9.5 million metric tons annual crude steel capacity, registered a
net loss of 37 million Brazilian reais ($18.13 million) in the
first quarter, its first loss in two years, as costs surged and
revenue tumbled amid a challenging market environment. Chief
executive Julian Eguren told reporters in late June that Usiminas
will return to profit, following recent investments in
modernization and a cost-cutting drive, but not necessarily this
year.
CSN, Usiminas' main competitor, posted first-quarter net income
of BRL93 million, an 85% plunge from a year earlier.
ArcelorMittal, which has blast furnaces out of operation
worldwide, including in Brazil, reported net profit attributable to
shareholders dropped to $11 million in the first quarter from $1.07
billion a year earlier, largely due to pinched margins and because
of deferred taxes in the year-earlier quarter.
The problems facing Brazil's steel sector are deep-rooted and
long-term, relating to the so-called "Brazil Cost" of tax burdens
and infrastructure difficulties, and exacerbated by recent exchange
volatility, Mr. Loureiro said. The local market for flat rolled
steel products, including imports, has virtually ground to a
halt--by Inda's calculations it grew only 1.6% in the entire
2007-2011 period--due to massive imports during this period of
goods containing steel, which have more than doubled to the
equivalent of 5 million tons a year of steel during the same
period, he said.
These "indirect" steel imports are entering Brazil in the form
of cars and machinery--today one in four cars sold in Brazil is
imported--and have forced Brazilian mills to cut output and slow
down or cancel capacity expansion programs, Mr. Loureiro said.
"Around 25% of Brazilian flat steel production capacity is today
idle, and that goes up to 30% in some products including heavy
steel plates," the Inda president said.
Historically Brazil never had more than 5-6% idle capacity
because it always exported surplus output. Now it can't export so
easily because of the real's appreciation in recent years and
electrical energy costs which have quadrupled in the last decade,
according to Mr. Loureiro. The situation is further aggravated this
year by Brazil's slowing economy.
Looking into the third quarter, the mills' current efforts to
raise domestic flat product prices by 5%-8% in the second half
won't even cover currency-related losses arising from the weakening
of the real in recent weeks, and offers only a brief "breathing
space" for the mills to attempt to rebuild their margins, Mr.
Loureiro said. According to a report Thursday by Barclays Capital,
the steel price hikes proposed should barely offset the
steelmakers' recent higher U.S.-dollar denominated costs with raw
materials including imported coking coal, which are set to cut into
margins to the tune of $30 a ton of steel.
-Write to Diana Kinch at diana.kinch@dowjones.com