Brazil's machinery and equipment industry defends Chinese steel imports

Brazil's machinery and equipment industry has criticized lobbying efforts by Latin American steel companies to restrict steel imports from China.

The industry says additional tariffs on Chinese steel could increase prices in the domestic market, causing a series of economic distortions.

At the same time, the machinery and equipment sector applauded a bill approved by Brazil's lower house to grant local industries tax benefits for the renewal of machinery and equipment using accelerated depreciation. 

José Velloso, president of machinery and equipment industry association Abimaq, spoke with BNamericas about these issues.

BNamericas: When do you expect final approval of the bill now being analyzed by the senate?

Velloso: I think it will be a quick process because this is a bill that has the full support of the federal government and the leaders of congress, both the president of the lower house and the president of the senate. I believe that in two weeks, the senate will approve this bill and it will be ready for presidential promulgation.

BNamericas: What will be the real impact of this bill for the machinery and equipment industry?

Velloso: This bill is related to accelerated depreciation and as a result the government expects to waive tax of around 3.4bn reais [US$680mn] over two years, in 2024 and 2025.

According to our calculations, this tax waiver will mean an increase in the consumption of machinery and equipment of around 20bn reais in 2024 and 2025.

The apparent consumption of machinery and equipment in Brazil, which is the acquisition of locally produced goods plus imported ones [and less exports], totaled 356.9bn reais last year, so this measure has a limited impact.

However, it’s a bill that goes in the right direction and we support it, because countries such as the US, Germany and England are adopting similar measures to support their industries.

Machines and equipment used in industries involve more and more technology, which also means the machinery becomes obsolete more quickly.

BNamericas: What other measures could Brazil adopt to encourage the renewal of industrial machinery?

Velloso: Gross fixed capital formation in Brazil, which is the country's investment rate, is very low, at 16.5% of GDP last year. Around 40% of this investment comes from civil construction, 40% comes from the machinery and equipment sector, while 20% comes from the purchase of trucks and buses, software, etc.

Between 2015 and 2023, with the exception of 2021, the investment rate in Brazil was lower than the depreciation rate, that is, we’ve been seeing a depreciation of assets in the country in recent years. This bill alone will not reverse that situation.

Even with the investment rate likely to increase this year, to something like 17.3%, we’re still only at the level of depreciation in our industry.

The biggest problem today is the cost of capital. When equipment is purchased, if it involves financing, it costs a company between 18% and 24% in interest per year, based on loans from [development bank] BNDES. If we consider annual inflation of 4.5%, it’s a very high rate in real terms.

Given this, around 80% of machinery purchases are made with companies' own capital, and this is a problem because it limits the number of companies capable of renewing their equipment.

BNamericas: Which industrial segments are likely to benefit most from accelerated depreciation, once it is approved?

Velloso: The sectors that will benefit most are those that are aiming for industrial automation, industry 4.0, those companies in durable and non-durable consumer goods segments.

BNamericas: Last year the machinery and equipment sector saw a drop in revenue. What is the forecast for this year?

Velloso: The apparent consumption of machinery and equipment fell from revenue of 403.4bn reais in 2022 to 356.9bn reais last year.

This year, we already have the figures for January and they’re bad, with a drop compared to January last year.

But for this year we’re expecting revenue growth of 3.5%, with domestic revenue growing 5.5% and exports by around 0.6%.

Despite growth of only 0.6%, we have to remember that for exports we’re experiencing a very favorable scenario, as we had a record last year. In other words, export growth this year will be low because the basis for comparison is high.

We’re seeing an increase in exports to the US, Latin America and Europe, and we’re competitive in exports of agricultural machinery, roadworks machinery, among others.

BNamericas: Steel companies in Brazil and Latin America have criticized imports of Chinese steel at low prices, and asked governments to adopt protective measures. What is Abimaq’s view in this regard?

Velloso: These criticisms are incorrect. The invasion of Chinese products occurs in several sectors, not just steel.

In our machinery and equipment sector, 15 years ago the share of imported products was around 20% of the local market, today this is close to 50%. In the steel sector, the share of imported steel is much smaller, around 18%.

In addition to the machinery and equipment sector, clothing and footwear are sectors that have also suffered for years from the invasion of Chinese products, and these sectors employ many more people than the steel industry.

Furthermore, if the government were to meet the demands of the steel sector and impose barriers, this will cause an increase in the prices of inputs for various products, from industry to construction, impacting even the government's plans to increase investments in infrastructure.

The government cannot simply meet the demands of one sector, which is steel, and impact several others.

BNamericas: Why do the complaints of steel companies sometimes seem to resonate more than other segments?

Velloso: The steel sector is highly concentrated, with a few large companies, which end up having a strong lobbying force. Here in my sector, Abimaq represents around 8,000 companies, mostly small and medium-sized ones, which end up not having much influence.