Under pressure from the increasingly nationalistic government, Brazil’s steel companies have announced plans to increase capacity, writes Patrick Knight. Under intense pressure from the government in a year when crucial presidential elections are to be held, and threatened with a reduction of taxes on import, steel companies in Brazil have undertaken to invest about $40 billion to increase capacity from the present 42mt (million tonnes) to 77mt by 2016. Until recently, the Brazilian Steel Institute argued that the present capacity is quite sufficient in a country where only about 20–23mt of steel are now consumed each year, with about 10mt normally exported. Companies have said that the relatively modest expansions already in the pipeline would be sufficient to keep pace with growth.
But the increasingly nationalistic Brazilian government believes that Brazil’s steel industry should be much larger than it is, and the steel companies have obviously decided they should go along with this. The discovery of very large fields of high quality crude oil under deep waters and beneath a 2,000 metres layer of salt, which may contain as much as 100 billion barrels, would catapult Brazil into being the world’s fourth-largest oil producer, rather than the 14th, as at present. Many millions of tonnes of steel will be used to make the equipment needed to extract the oil, process it and take it to a variety of destinations, in the next few years. Up to 50 deep sea ships and hundreds of supply vessels will be needed to get the oil ashore and to service rigs stationed 300km from the shore.
The government is anxious that most of the 60 new drilling rigs and large production platforms which will be needed, should be made in Brazil. It wants them to incorporate a steadily increasing percentage of Brazilian-made components. Millions of tonnes of various types of pipe will be needed to bring the oil and gas ashore and to carry it to the five or six new refineries to be built to process it, in the next few years, or in the case of gas, direct to customers. As well as oil and gas, demand for many of the commodities produced in Brazil, notably iron ore, soya beans, meal and oil, sugar and ethanol, pulp and paper, and many other mainly basic goods, continues to grow extremely fast, largely spurred by continuing fast growth in China. To cope, the time has come for major investments to be made in upgrading the creaking infrastructure. Billions of dollars are to be spent on improving ports, railways, roads and airports, as well as on building new power stations and transmission lines.
With the football World Cup to be held in Brazil in 2014, and the Olympics Games just two years later, new stadiums and other facilities will have to be built to cope. The government has started making low cost finance available for up to a million new houses to be built and it hoped that more steel as well as the more traditional cement, will be needed to build them. In July this year the ‘South Atlantic’ mill, being built by Thyssen-Krupp and the Vale company, which in recent months has been pressured by the government into moving into steel in a big way, is to start up in Rio de Janeiro state. When at full capacity, the South Atlantic mill will produce 5mt of slabs, most of them to be exported to Thyssen-Krupp mills in the United States and Germany fir further processing.
As soon as Arcelor-Mittal gives the go ahead and company officials say Brazil is the best place in the world for a new mill, work will also start on building another 5mt-capacity slab plant in Espirito Santo state. Vale will also participate in this project, and the company has been pressured to start work on mills in Ceara and Para states, the latter without any partner as yet. The government is a major shareholder in Vale and would really like it to be renationalized.
Manufacturers of agricultural machinery, which export a large proportion of their output to neighbouring countries are amongst industries pressing the government to allow them to import 50,000 tonnes of steel from China. They claim Chinese steel would cost about 20% less than the same quality product made in Brazil. But the Brazilian steelmakers argue that the purchase of any steel coming in now, was negotiated last year, when large discounts were being given. Following the sharp increase in demand, and the subsequent rise in the price of all inputs for making steel, notably iron ore, coke and coal, prices have risen. The Brazilian steel makers argue that at current prices, imports would only cost about 5% less than the Brazilian equivalent. By the time transport costs and taxes are taken into consideration, there would be little or no advantage in importing steel at all, they claim.
If the Brazilian economy continues to perform as expected and growth of 5–6% is predicted for this year compared with no growth at all in 2009, demand for steel will grow very fast for the next few years. About 10% less steel was produced last year than in 2008 and exports fell by that much as well. Output has recovered well in the past few months.
The volatility of the price of iron ore is encouraging all the steel companies in Brazil to seek to become self sufficient on ore rather than relying on deliveries from Vale, as they do now.
Vale is now unable to meet all the demand and ore prices have risen sharply. One reason why some companies have been reluctant to expand too much, is that if the Chinese economy were to slow, China might switch from importing steel, to be a major exporter. Its prices would be unbeatable.
The Brazilian mills normally export between 30–40% of what they produce. But if China began to export steel in a big way, demand for Brazilian steel in its natural markets, to elsewhere in Latin America, as well as the United States, could fall.
Despite its large output, Brazil still import up to million tonnes a year of mainly higher quality steel of which much more will be needed in future by the oil industry in particular. With this in mind, the Usiminas company plans to set about improving the quality of much of the steel it makes, so that Brazil needs to import less high-value steel.