ANALYSIS: Brazilian steel industry has yet to adjust supply to demand

São Paulo — Monthly figures released by industry institute Aço Brasil show that domestic steel demand has been surpassing supply since mid-2020, substantiating buy-side complaints of difficult delivery processes during the second half of that year and 2021's first quarter.

Distributors and end-users started to note the extended lead times in July 2020, following that year's coronavirus pandemic peak in Brazil and then the resumption of economic activities.

Brazil rolled steel domestic apparent consumption surpassed production by 356,000 mt in March 2021, the highest differential since the beginning of Aço Brasil's monthly data releases in 2013. Total rolled steel production reached 2.09 million mt in March, while apparent consumption was 2.44 million mt, the data showed.

The second-highest differential was 255,000 mt in August 2013, when apparent consumption reached 2.18 million mt and rolled steel production was 2.26 million mt.

According to the group's data, steel consumption has been surpassing production every month since June 2020, with two relief periods, in October 2020 and December 2020, when rolled steel outputs reached 53,000 and 58,000 mt above apparent consumption, respectively.

From June 2020 to March, the accumulated deficit in production was 981,000 mt, as apparent consumption reached 20.41 million mt for 19.42 million mt outputs.

Before this 10-month trend of production deficit, only in 2013-2014 was it seen for such prolonged period.

Inventories adjusting

In a video available at Aço Brasil's website, its executive president, Marco Polo de Mello Lopes, said mills were focused on supplying Brazil's domestic market "with higher volumes than seen in a pre-pandemic period."

Steelmakers have said there is no shortage of material, with customers being served as expected.

Regarding flat steel, several buyers seemed to share that view.

"Deliveries are very close to normal already," a distributor said.

According to Brazilian independent flat steel distributors and service centers association Inda, inventories levels were at 2.2 months in March.

Although historical average inventory levels are at around three months, Inda's president, Carlos Loureiro, said distributors were working at lower levels, because of higher prices, aiming for 2.5-2.8 months as an inventory target.

However, in the long steel business, buyers claim that there are still delays on deliveries and lack of some rebar gauges, with partial deliveries.

Research by the Brazilian Chamber for the Construction Industry in March showed that 84% of 206 companies interviewed said that there was a lack of steel supply. Moreover, 170 companies, or 83% of the total, said steel is the material with the longest delivery time.

Out of the total, 14.2% reported lead times from mills within 30 days, while 38.3% reported receiving steel in between 30 and 60 days. The remaining 47.5% had registered lead times above 60 days.

"Major mills have not been able to deliver within the month, so I'm buying from CSN. It's about 15% more expensive but delivering," a construction company source said.

Prices at record highs

Amid such a scenario, Brazilian steel prices have continued to escalate in 2021, while local supply remained detached from demand and international reference prices were taking off.

The price for hot-rolled-coil produced in Brazil jumped 16.2% in the first week of May and was being sold at Real 6,855/mt, ex-works, excluding taxes, according to the S&P Global Platts assessment May 7. The product accumulated a 46% increase on the year and 130% increase in the last 12 months.

In addition to the higher cost and prolonged lead times, limited volumes available by region have intensified negotiations and competition, expanding the price spread -- or differential -- by plants by more than 20%, according to industry sources.

For steel rebar it was still uncertain whether a further increase would emerge in May, given that large construction companies continued bringing significant volumes from Turkey.

Brazilian rebar prices have climbed about 23% year to date and over 100% in the last 12 months.

In this year alone until March, more than 70,000 mt of rebar arrived at Brazilian ports, higher than the volume of recent years, according to customs data. The total imported in 2020 was 15,000 mt, against 46,000 mt in 2019 and 35,000 mt in 2018.

Mills do not comment on their pricing policies, but they have said inflation in raw materials prices and increasing international prices have put upward pressure on costs, so domestic prices would have to increase or their margins would be harmed.

According to Platts calculations, Brazilian HRC was at a premium of 11.5% to the Chinese HRC delivered price at Brazilian ports, after customs clearance, at $1,177.48/mt on May 7.

In turn, Brazilian 10 mm rebar was at a premium of 3.8% to the Turkish rebar delivered price at Brazilian ports after customs clearance at $876.70/mt, also according to Platts calculations.

Because of the bullish global market seen since the second half of 2020, and Brazilian currency depreciation compared with the US dollar, it is unlikely the import parity would remain at around the 10% level, considered ideal by local steelmakers.

If import parity bounces back below the 10% level, it would inevitably open additional room for price increases domestically, unless buyers showed resistance.

Additional price increases on steel were likely to hamper the feasibility of contracts and projects, sources said.

Still, despite 62% Fe iron ore prices rallying to record highs, Brazilian steelmakers were still seeing widening spreads between their finished products prices and raw materials prices.

According to Platts calculations, Brazil HRC domestic price versus raw materials spread reached $587.33/mt on May 7, from $277.94/mt on May 8, 2020. Rebar domestic price versus raw material price spread reached Real 3,075 ($587.34/mt) on May 7, compared with Real 1,780 ($339.99) on May 8, 2020.

Import tax reduction

To ease the supply-demand struggle, steel-consuming sectors would like to see a temporary reduction in the current 12% import tax.

So far there are at least two proposals along those lines.

One is prominent within Aço Brasil and is favored among the mills, to the point of being mentioned by Brazilian integrated steelmaker Companhia Siderúrgica Nacional (CSN) in a call with analysts to present its Q1 results.

According to company executive director Luis Martinez, the Brazilian government is proposing a 10% reduction in the current 12% import tariff, "which would be 1.2 [percentage points] for the first year. It's not something that is of concern at present. We are obviously concerned with the Brazilian industrial policy and the opportunities for exporting."

A handful of sources mentioned this proposal, but no documents were provided or could be found.

The second proposal is a law change developed by Senator Jader Barbalho that would exempt import taxes on products used in civil construction and in the manufacture of machinery, parts and implements for the agricultural sector.

"There is at least 200,000 mt of imported HRC to be delivered until June," a trader said, adding that the current trend of soaring imports would remain at least until the end of the year's first half.

In the year's second half, demand was expected to ease a bit but still remain firm.

"It might be just a bit below the levels seen in H1," the trader said.