Brazilian Steel Industry Recovers

Brazilian steelmakers, Gerdau S.A. (GGB - Analyst Report) and Companhia Siderurgica Nacional (SID - Analyst Report) have signed a memorandum of understanding with state-run oil giant Petroleo Brasileiro SA (PBR - Analyst Report or Petrobras), to build ports in the state of Rio de Janeiro. The construction is expected to begin in 2014 with a total investment of approx US$500 million.

The steel industry in the US is in distress, but it is on the road to recovery in Brazil. An increase in export price and new domestic projects are helping Brazilian steel industry. Moreover, government’s plan to cut labor costs in the country will in a way boost industrial productivity and growth.

Domestic steel prices are falling, which is likely to facilitate the Real Estate industry. Thus, Gafisa (GFA - Analyst Report), one of the largest builders and incorporators of Brazil, will stand to benefit in the medium- to long-term.

In June, General Motors Brazil car sales reached 55.629 vehicles, the highest monthly sales volume in the company's 84-year history in Brazil. While General Motors in the US is mixed in bankruptcy proceedings, its Brazilian subsidiary is doing better than ever.

An increase in sales of automobiles in the country has supported steel industry to a greater degree. Cars and trucks sales in June 2009 escalated by 17.2% over June 2008 and it increased by 3% in the first six months of 2009 over December 2008. Reduction in Tax on Industrialized Products (IPI) from June has helped increase automobile sales in June by 21.5% over May. Seeing this, the government extended the tax break from October to December 2009.

However, the international economic slowdown can lead to a stronger-than-expected decrease in international steel demand. The difficult economic environment in the U.S. remains a threat for the steel industry on a whole and GGB in particular, due to its exposure to the U.S. market. Thus, we are reiterating our Sell rating on GGB but have a neutral view on SID encouraged by the impressive Casa de Pedra project and the Namisa deal.