Brazilian Steel Sees 2020 As Turning Point For Demand
The Brazilian steel market heads into 2020 in a bullish mood, with the long-awaited recovery in demand from the construction industry seen as the engine of domestic steel consumption, in particular long steel.
External factors such as global trade wars, foreign exchange movements and raw material costs will continue challenging Brazilian steelmakers, but are not seen as determinant factors, industry sources said.
Meanwhile, a more solid expansion in flat steel depends on higher fixed capital investment, which could take longer to happen. A possible positive surprise could come from higher production volumes in the auto industry.
The construction industry — responsible for 34% of steel consumption in Brazil — was hit by a strong economic crisis in 2014 which carried on for a few years but that is now over, several analysts said, pointing to the improvement of economic indices and investor confidence as creators of a positive atmosphere for the sector, in particular for real estate.
The number of residential property launches grew 23% across the country in the third quarter of 2019, compared to the same period last year, according to the Brazilian Chamber for the Construction Industry, known as CBIC.
The industry still has a long way to go. Between 2006 and 2012, the GDP of the construction industry rose by 62%. Between 2013 and 2018, it fell 30%. In 2019, it grew 2% and it is expected to advance 3% in 2020, according to the Brazilian construction union Sinduscon.
STEEL OUTPUT TO RECOVER IN EARLY 2020
The recovery in the main steel-consuming sector should also push steel production and prices up in tandem.
Brazilian crude steel production will close 2019 with a fall of 8.2%, totaling 32.5 million mt, according to the national steel association Aco Brasil. For 2020, the sector expects to recover part of this retraction with a 5.3% increase in production to 34.2 million mt, Aco Brasil said.
The improvement in production is a big step, but still below 2017’s level at 34.4 million mt, and will only result in a capacity utilization of 67% from 60% currently, according to Aco Brasil President Marco Polo de Mello Lopes.
“A sustainable level [of capacity utilization] for the long term would be at 85%,” he said.
Carlos Jorge Loureiro, president of the Brazilian steel distributors association Inda, sees flat steel sales volumes growing about 4.0% in 2020, supported mainly by increased auto production and higher agricultural equipment output.
According to Luiz Carlos Moraes, president at national automobiles producers association Anfavea, total vehicle production this year will grow by 2% to 3% to 2.77 million units. This is well below the annual record high in 2017 of 3.71 million units.
RECOVERING PRICES AND MARGINS
From January onwards, Brazilian steelmakers put in place price hikes of 8%-15% for their long and flat steel products, aimed at recovering margins that were squeezed throughout 2019 due to increasing raw material costs, the steelmakers have said.
Margins compressed at least 30% from January to date, according to S&P Global Platts’ estimates, on the back of higher dollar-based iron ore and metallurgical coal costs.
Amid a 2019 of lower domestic and external sales, and strong competition for market share, prices for finished steel went down in consequence. According to Platts assessments, domestic hot-rolled coil and rebar prices in Brazil contracted in 2019 by 13% and 14%, respectively, despite several attempts by mills to hike prices.
Platts assessment for hot-rolled coil was at Real 2,410/mt ($589.24/mt), ex-works, taxes excluded, on December 20.
Platts assessed Brazilian domestic 10 mm rebar at Real 2,365/mt ($569.68/mt) ex-works, taxes excluded, on the same day.
Re-negotiations of annual contracts with automakers have been targeting a 7% adjustment, sources said, but buyers are battling to keep 2020 contracts flat.
Source: Platts