Why does Brazil's steel industry expect economic improvements this year?

Despite mixed quarterly figures released by Brazilian steel producers in the second quarter, the industry believes that the country's long-awaited economic recovery should start to show positive signs during the second half of the year.

Confident in Brazil's economic recovery, local steel association IABr has outlined US$9bn in investments for the steel industry over the next five years.

BNamericas takes a look at how the companies in the sector performed last quarter and examines the industry's outlook for 2H19.

CSN

After reporting a 132% jump in net revenue (US$820mn) from its iron ore operations in the second quarter, Brazilian steelmaker CSN is optimistic about results for the second half of 2019, according to the company's top executive.

"We're producing more iron ore at lower costs. Also, our commercial price policy for the material proved to be correct. Furthermore, we believe that iron ore prices will continue to climb over the next quarter," CEO Benjamin Steinbruch told an earnings call on Wednesday.

CSN's iron ore sales totaled 10.1Mt in the quarter, up 25% year-on-year, while iron ore output increased 23% to 8.32Mt, according to the company's latest earnings release.

"In steel we had better prices, which was very significant in a first half where the Brazilian economy didn't react," the CEO said.

CSN reported a profit of 1.89bn reais (US$500mn) for 2Q19 compared with 1.19bn reais in the same period of last year.

GERDAU

Porto Alegre-based Gerdau, the largest long steel producer in the Americas, reported a consolidated net profit of 373mn reais in Q2, compared with 698mn reais in the second quarter of last year.

However, the sluggish domestic economy prompted Gerdau to announce a 400mn-real cut to its capex guidance for this year, now estimated at 1.8bn reais.

"What we decided to reduce was the investments related to capacity expansion, those related to higher growth of some products and services related to the Brazilian market, such as the expansion of hot rolled coils in our Ouro Branco mill [pictured], as we understood that there would be no need to approve these investments at this time as the recovery in demand did not come at the speed we imagined," CEO Gustavo Werneck told a Q2 conference call.

"Should this demand return, we're ready to approve these investments on Gerdau's board, but we'll continue to look very carefully at recovery of the Brazilian market," Werneck told the call. "We'll approve investments at the right time as we identify that demand has translated into real steel consumption," he added.

While announcing the 2019 capex reduction, Gerdau said the company's planned disbursements for the next three years will be maintained.

"We're maintaining our investment program for 2019-21, estimated at 7.1bn reais, but have decided to redistribute this amount by reducing disbursement in 2019 due to a slower reaction from the Brazilian market," CFO Harley Scardoelli told the call.

ARCELORMITTAL BRASIL

ArcelorMittal Brasil, the Brazilian subsidiary of the world's largest steelmaker, ArcelorMittal, reported operating income of US$234mn for last quarter, compared with US$369mn in 2Q18.

Sales fell to US$2.13bn from US$2.19bn and Ebitda was US$313mn, down from US$443mn, the company said.

Crude steel output decreased to 2.83Mt from 3.11Mt, and shipments dropped to 2.79Mt from 2.83Mt.

Brazil's apparent steel consumption is expected to grow 1.5-2.5% this year, lower than the previous forecast of 3-4%, as domestic GDP has slowed, as well as because of the impacts of the Argentine recession and delayed growth in infrastructure spending until the pension reform is passed, the company said.

Commenting on ArcelorMittal's overall results, chairman and CEO Lakshmi Mittal stated: "After a strong 2018, market conditions in the first half of 2019 have been very tough, with the profitability of our steel segments suffering due to lower steel prices combined with higher raw material costs."

ArcelorMittal's Brazil segment includes the flat, long and tubular operations in Brazil and neighboring countries including Argentina, Costa Rica and Venezuela.

USIMINAS

Steelmaker Usiminas said that Brazil is preparing for economic growth to take off over the next 12 months, with the much-needed pension reform progressing well in congress and serious discussion of the tax reform now getting underway.

"Despite a first half below our expectations, with the economy practically flat compared to 2018, we expect things to start improving in the second half of the year," said Usiminas CEO Sérgio Leite, who is also the chairman of local steel association IABr, during a Q2 earnings call.

"Meanwhile we had positive behavior in the steel industry's main drivers, with higher production and sales, higher average prices for our steel products and lower production costs," the CEO underlined.

Usiminas reported net income of 171mn reais for the second quarter of 2019, reverting a net loss of 19mn reais in 2Q18. Net revenue increased to 3.69bn reais from 3.20bn reais in the same period, Usiminas stated.

Adjusted Ebitda reached 570mn reais in Q2 compared to 497mn reais in April-June 2018, but Ebitda margin was down to 15% from 16%. Steel sales volumes rose to 1.06Mt from 0.98Mt in 2Q18, while iron ore sales volumes increased to 1.77Mt from 1.39Mt.

OUTLOOK

IABr said in late July that it expects the country's apparent steel consumption to rise 2.1% in 2019.

The group also made upward adjustments to domestic sales and crude steel production forecasts for 2019.

On the macroeconomic front, the association believes that political and economic issues and measures being discussed in congress will improve conditions related to competitiveness for the manufacturing industry as a whole, generating investments in infrastructure, construction and oil and gas projects.

"Another major challenge for the Brazilian steel industry is the regularization of iron ore supply to the sector, in quantity and quality required by the companies' mills and ensuring minimum predictability," IABr said.

Domestic steel sales are expected to reach 19.4Mt, a 2.5% increase. Crude steel production is forecast to grow 0.4% to 35.6Mt.