With the U.S. economic recovery in doubt, future demand for steel is uncertain. But a more immediate concern for Latin America's biggest steelmaker, Brazil’s Gerdau (GGB), is soaring prices for raw materials and the strength of the local currency against the dollar.
Gerdau’s second quarter profit fell 41 percent to $320 million compared to the same period of 2010, mainly due to higher costs for iron ore, coal, and ferrous scrap, the company reported in its earnings statement.
The news wasn’t all bad. Net revenue rose 9 percent to $5.63 billion and sales volumes grew 12 percent to 4.9 million metric tons, reflecting demand recovery in markets where Gerdau operates.
The positive impact of the economic recovery was shown throughout the company’s operations, said Gerdau’s CEO André Gerdau Johannpeter in an earnings conference call on Aug. 4.
Of Gerdau’s main business units, Latin America showed the strongest growth in steel production in the second quarter as higher construction sector activity drove sales. “The continued recovery and positive GDP performance in Latin America will drive the construction industry and growth in the steel business,” said Gerdau.
The company's Brazilian operations increased exports of semi-finished products to Asia, although domestic sales dipped slightly due to price reductions conceded to customers in 2010. The discounts, granted to compete with rising imports attracted by Brazil's strong real, have started to lift as imports have fallen.
In the United States, Gerdau’s mills benefited from higher orders from clients in the manufacturing and energy sectors, while specialty steel demand rose on a strong recovery in the U.S. automotive sector. However, U.S. demand for steel used in infrastructure remains weak.
Gerdau’s results were higher than expected by some analysts, given the recent surge in raw materials prices, but a slowdown in the U.S. recovery will continue to pressure the stock, said Leonardo Alves of Link Investimentos.
Lower investments in the United States as a result of measures to reduce the fiscal deficit could hurt demand for steel and reduce growth expectations worldwide, said Alves.
But Gerdau’s management believes the weakness in financial markets does not foretell a collapse in the steel industry. The company still sees shipments rising in the second half.
Barring another crisis, steel consumption in the United States is expected to grow 13 percent in 2011 to 91 million tons while Latin America minus Brazil should grow 8 percent to 38 million tons. Brazil is expected to grow 6 percent to 28 million tons, in line with the World Steel Association’s outlook for world demand growth this year.
Brazilian steelmakers, including rivals Companhia Siderurgica Nacional (SID) and Usinas Siderurgicas de Minas Gerais (USNZY), have lost competitiveness on higher costs for energy and coal as well as the appreciation of the real, but Gerdau does not believe that its long-term earnings potential is in jeopardy.
The company’s investment plan for 2011 to 2015 totals $6.62 billion, including plant maintenance and additional capacity in Brazil, the United States, Colombia, and Chile. Gerdau next reports on or about Nov. 4.
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