Brazil's slowly recovering steel industry is given a blow by coronavirus, as economy slows.
At the beginning of this year, the Brazilian government predicted that the economy, virtually stagnant for the past four years, would grow by two and a half percent in 2020. Unemployment was falling, inflation was under control, and exports, led by those of farm commodities, iron ore and crude oil, were doing well. This led the country's steel industry, the world's 11th largest, but the sixth largest in terms of the percentage of output exported, to predict a growth in consumption of steel of between 5 - 8% this year. Consumption of steel in Brazil had fallen by about 2% in 2019, when only about 60% of the industry's 50 million tonnes capacity was being utilised.
The country's five million units capacity motor industry only made two million units last year, mainly because exports to neighbouring Argentina, its main market, had fallen sharply. But it was hoped that the fall in unemployment and a rise in consumer confidence, would result in more steel being sold this year to an industry which is the second most important in terms of the amount of the metal used. It also appeared that the largest consumer of steel of all, notably of long products, which is the construction industry, stagnant for the past six years, was showing signs of life.
A huge stock of unsold new buildings had began to be sold, and the number of new starts were up. However, the impact of the outbreak of coronavirus, now spreading fast around the world, with the first cases in Brazil notified at the end of February, has now changed prospects for the worse, and predictions for growth have been revised down, in some cases, to less that 1.5%. The various restrictions in China, where many factories have been closed, and movement at ports has been halted, has led to a sharp fall in price of crude oil, of which China was Brazil's leading market, of iron ore, of soya products and of maize.
The only category of exports to hold up so far has been that of meat, beef, pork and chicken, with demand for pork up particularly strongly, because of the outbreak of swine fever in China, which has cut supply there.
Export revenues are now anticipated to fall sharply this year, as exports to China form such a high proportion of the total. Last year, about 18 million tonnes of steel was sold in Brazil, about two million tonnes of that imported, as the country does not make several types of special steels. There is now no rail making capacity, for example, even though the country is building several hundred kms. of new track each year. About 13 million tonnes of steel were exported in 2019, a large proportion of that slabs, which can be produced more cheaply than elsewhere, largely because most Brazil's steel companies use low cost ore from their own mines, and also because restrictions on pollution are less onerous in Brazil than in many other countries.
Many steel companies also exported record amounts of ore, following Vale's production difficulties in a year when ore prices were high, following the Brumadinho dam collapse. Ore prices have fallen sharply in the past few weeks, affecting the revenues of steel companies. Another serious blow is that The United States has decided to end Brazil's status as a developing country. This could mean that the rate of tax on a high proportion of the steel exported to the US, now taxed at 10%, could rise to 25%. This rise will be contested, not only by Brazil's steel industry, but also because US manufacturers, in a country which imports about 20 million tonnes of the 100 million tonnes used there each year, would have to pass the resulting cost increases to consumers.
The Trump administration would be extremely unhappy for the prices of consumer goods to rise, in a year when crucial presidential elections will be held and a buoyant economy is seen as essencial for his success. Between 2009 and 2014, an average of 28 million tonnes of steel were sold each year in Brazil, a significant proportion of that destined for industries associated with the country's booming oil industry. Following large finds of crude oil in very deep waters in the early years of the century, the government announced that a new phase in industry would now take place, to be financed by the profits from the booming oil industry. The extra oil resulted in Brazil, previously a significant importer of crude oil, as well as of refined products, becoming a major crude exporter. A new lease of life was given to a moribund shipbuilding industry, which had collapsed at the end of the previous century, when it was unable to compete on cost.
The country's state controlled oil company, Petrobras, announced major new orders for ships, both to carry the exported crude and to carry refined products and gas along the coast, as well as for the large numbers of new drilling rigs and production platforms which would also be required. New oil and gas pipelines both to bring the oil and gas ashore from production platforms and take it to refineries, as well as to distribute the increasing amount of natural gas coming on stream, were ordered. The boom came to a sudden end, when it came to light that a large proportion of Petrobras profits were being siphoned off to officials and politicians.
The scandal almost caused Petrobras to collapse. The scandal, nicknamed the "car wash" scandal, brought about the end of the period of government by the Workers Party, and heralded a period of confusion, which spread to the steel industry. Between 2010 and 2016, 80 mills and processing plants were forced to close, and about 50,000 workers were laid off. Companies profits collapsed, and companies such as Gerdau, which had bought numerous mills in the United States and other countries, were forced to sell assets to survive. The steel industry has only recently begun to recover from this turbulence, now coronavirus has brought new problems.
Source: Patrick Knight - Correspondent