Brazil & Southern Cone - March 2009 (ISSN 1741-4431)

Output in Brazil's steel industry fell 45.6% year-on-year in January.  In 2008, Brazil was the world's ninth biggest steel maker, producing 30.7m t. In 2008, China became the first country to produce more than 500m t of steel, with output of 502m t. Brazil is by far the biggest steel producer in South America.

Argentina, the next biggest steelmaker, produced 5.5m t in 2008, followed byVenezuela, with 4.2m t. Chile is the only other South American country to feature in the world's top 45 producers: its output was 1.6m t in 2008. 

The worry for the Brazilian steel industry is that the overall global decline in steel output in January was only 24%.  The slump in US production was higher (52%), but China's steel production was down by just 2.4% annually. Cuba, Ecuador and Morocco were the only countries claiming to have produced more steel in January 2009 than 12 months earlier. 

Both of Brazil's biggest steel makers expect the next few months to be difficult, but they expect demand to pick up in the second half of the year, largely because of government initiatives to boost the economy.  Brazil's biggest steelmaker Gerdau, also the largest steelmaker in Latin America, had a poor final quarter in 2008, when it shipped 24% less steel than 12 months earlier.  Usinas Siderurgicas de Minas Gerais SA (Usiminas), Brazil's second biggest steelmaker, also expects domestic steel demand to recover in the second half of the year. The more optimistic believe that the recovery could come even more quickly than that. 

The Brazilian steel industry is coming off a strong year, when rising demand in the first part of the year allowed it to increase prices by about 45%. Usiminas, which is based in Belo Horizonte, reported that net sales rose 7% in 2008 to R$3.73bn (US$1.7bn).  The general gloom about the world economy and the steel industry in particular has hit Brazilian producers hard. Over the past 12 months, Usiminas's shares have fallen by 57%, worse than the overall Brazilian Bovespa index, which was down by 36%.

One problem for both Gerdau and Usiminas is that they have substantial dollar debts. The fall in the Real has meant that the cost of servicing these debts has increased substantially. In the fourth quarter of 2008, Usiminas's debt service jumped more than 10-fold (in Reais terms) from R$89m to R$822m. 

The bull point for both companies is that business confidence in Brazil has finally stopped falling. Indeed in February, the Getulio Vargas Foundation (FGV) reported that confidence rose by a full percentage point to 76.3.  This is still a very low level historically, but notably, the index of future expectations recovered slightly in February, suggesting that local businesses may believe the worst will soon be over. In August 2008, the FGV index stood at 119.2, while a year ago (February 2008) it was at 113.7.

• Mitsubishi -  On 26 February Mitsubishi announced that it was moving some of its production to Brazil from Japan in order to improve its competitiveness, which has been damaged by the strong Yen. Mitsubishi's Brazilian plant is MMC Automoveis do Brasil, located in São Paulo. Mitsubishi was already planning to increase production at the plant to 50,000 units a year, but had intended to use Japanese inputs. More of these are now likely to come from Brazilian suppliers instead.