Brazil walks sideways. We don’t have sustained growth
During this interview of just over an hour, Marco Polo de Mello Lopes, chief executive of Steel Institute, was interrupted three times with phone calls from members of the federal government and businessmen. It is a small demonstration of how troubled the Brazilian steel industry has been in the last two years, a period in which it faced its worst productive moment, with only 45% of active capacity in April 2020, and has been gradually returning to growth. Today, it works at more than 70% of its capacity. Historically, however, the chain goes sideways in Brazil. “We haven’t had sustained growth for a long time,” said Mello Lopes, from the organization that has giants such as Arcelor Mittal, Gerdau and Usiminas as associates. He advocates tax reform to reduce the Brazil Cost.
DINHEIRO – How did the steel sector face the last two years in Brazil?
MARCO POLO DE MELLO LOPES — Three segments represent more than 80% of steel consumption: civil construction (41.2%), automotive (21.3%) and capital goods (machinery and equipment, 19.6%). These are two atypical years, which we will remember for a long time. The Brazilian steel industry comes from a period of strong decline, from 2013 to 2019. We dropped 22.9% in this period. The expectation was for recovery in 2020.
That’s not what happened…
We started the year operating with 64% of the installed capacity. The steel industry, to be able to present a reasonable level of production, must be above 80%. With the pandemic came the demand crisis. Social isolation has brought many sectors to a standstill, especially the three main ones in our base. The steel industry began operating at 45% of capacity, the worst level in history, in April 2020. The demand crisis was very dramatic. We closed 13 blast furnaces.
What was done to minimize the damage?
If you ask the president of any company, the priority is to protect the cash. Among other measures, the cashier is protected by eliminating stock. And then there was a resumption in intense V. We went from a demand crisis to a supply crisis. Unbalanced the production chain. Demand picked up along with replenishment of stocks. And the third phenomenon, which nobody talks about, was the so-called defensive stock in relation to price volatility. And the value of steel has gone up a lot.
Buyers say there was speculation.
There wasn’t. What happened was the mirroring of another phenomenon: the boom in commodities from 2020. All our raw materials suffered gigantic increases. Iron ore went from US$ 75 a ton in the beginning of 2020 and reached US$ 220. Coal reached US$ 400 in November. See how much drastic changes we had from an economic perspective. There was a war of narratives. We sat down with all sectors and said that the increase in steel is not a Brazilian peculiarity, it has increased worldwide.
And how does the sector close 2021?
An important year, very positive. In November 2020 we made an estimated apparent consumption growth of 5.8% in 2021. In March we revised it to 15%. In July, new revision, to 24%. While there are people talking about a GDP of 4% or below for this year, our expectation is above 5%. Our perception is based on data. Since 1972, the evolution of GDP and the apparent consumption of steel have been correlated. Economic growth mirrors that of steel consumption. And when we say that the GDP of 2022 will be around 1%, we say that it will be above 2%. Everything we exported was returned to the domestic market to meet this recovery. We now have 73% of our operating capacity, with sales at 1.9 million tons per month, on an annualized average, above the level before the pandemic and at the same level as in 2013, when the sector was booming.
Some market agents have been putting pressure on the government to reduce steel import taxes. Is this justified?
The domestic market is now fully supplied. Prices have stabilized. 3.3 million tonnes of finished steel entered Brazil, that is, 17% of the total domestic market. Which proves that you don’t need to reduce import costs to enter the amount of product as significant as it entered. Inventory levels are replenished, distribution normalized. And prices are stable.
From January to October, exports reached 9.1 million tons, down 2% compared to the same period in 2020, and revenues of US$ 7.5 billion, an increase of 65.6%. This is due to the rise of the dollar. Isn’t it worth exporting more than selling on the domestic market?
We always have to look at the whole forest. The real depreciated a lot. But it is not just a Brazilian phenomenon. Our main competitors had a greater degree of currency depreciation than ours. The real depreciated 23% against the dollar. In China it was 38.8%. Ukraine, 57.7%. Turkey, 58.7%. And Russia 59.9%. With that dollar, 3.3 million tons were imported. It is a market that is upside down and has predatory practices and protectionist escalation. The United States has protective measures, the Asian world and Europe too. The only region discovered is ours.
So the Brazilian government has to implement more protectionist measures for the sector?
It’s not that. In fact, we cannot have outbursts from segments that want to reduce the steel import tax to zero. We cannot have anti-dumping work done against Russia and China, for example, and then retreat, with damage to our sector, in favor of a certain public interest. We don’t want any exceptional measures. We want the rules kept.
Is production capacity resumed? What does the market ask for, does the steel chain deliver?
We have 30% idle capacity. The per capita consumption of steel in the country shows that in 1980 China had 32 kilograms per inhabitant and Brazil had 100 kilograms per inhabitant. In 2020, China had 691 kilos per inhabitant and Brazil maintained the house of 100 kilos per inhabitant. Today, China produces in 11 days what Brazil produces in a year. Brazil is walking sideways. We have not had sustained growth for a long time. We’ll close 2021 with 123.6 kilos. It went up a little. To increase our production capacity, we need to export. But we are optimistic, we have advances in sanitation, the oil and gas sector, highways.
The companies that imported are then losing money…
Whoever imported at a time when the curve was high, with the market fully heated, will lose money on resale.
Industry production in general dropped 0.6% in October, compared to September, and comes from successive retractions, according to the IBGE. What has to be done for a balanced recovery?
We need structural reforms. An important fact is that of the Brazil Cost, which is R$ 1.5 trillion per year, according to a study by the federal government with Coalizão Indústria, the Movimento Brasil Competitivo and the Boston Consulting Group. This has to be reduced. The important thing, for the steel industry and the industry as a whole, is the tax reform. We have to stop having an anachronistic regime of the tax collection system, with the accumulation of taxes, which affects competitiveness. The Brazilian steel industry has a tax residue accumulation of 7%. We defend a tax reform on consumption that does away with the list of ICMS, IPI, ISS… End it and have a gradual value-added tax, which is what we have in the world.
Will Inflation, the Retracting Economy and the Election Derail the Steel Industry in 2022?
That 1% GDP assessment is already tainted. Inflation is above 10%, but the whole world felt an increase in inflation because everyone went through what we went through. It is not a Brazilian catastrophe. We have to separate what is political in this process.
Water crisis and electricity tariff scare?
If you take the country of 2009, when there was rationing, that was one thing. Today we have a completely different country. A fantastic distribution network that allows you to relocate if necessary. As there was a water crisis, with low reservoirs, the government activated the thermoelectric plants and the tariff went up.
Doesn’t affect the sector?
In the steel industry, 50% of energy consumption comes from its own production, fueled by gases generated in the production system. We need to work to reduce energy burdens, because we have the cheapest energy from hydroelectric plants and the most expensive tariff, with a series of bills in the composition.
In an industry as traditional as steel, how complicated is it to meet societal and market demands regarding ESG, diversity and racial?
It’s not complicated, as the mills haven’t started this process now. Instituto Aço Brasil has a management committee with three directors, without men. In an activity that has production processes with high temperatures and gases, there are fewer women in this area. For years, the sector’s main priority has been sustainability. The only beautiful name, with the acronym ESG, is fashion. When it comes to sustainability, there are economic and social aspects. And companies are very concerned about diversity in general.
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