Steel Maker Stokes Up for a Booming Argentina

Unfazed by warnings of an economic slowdown, Siderar Saic is convinced that Argentina is undergoing an industrial boom of historic proportions.

To stay on top, the country’s largest steelmaker plans to invest $800 million to nearly double its production capacity by 2001.

“We’re in the right business in the right country at the right time,” said Jorge Donoso, the company’s investor relations director, who likens Argentina’s industry-driven economy to that of the United States after World War II.

“In Argentina not everyone has two cars and a washing machine--that is just coming around,” he said.

Located on the Parana River north of Buenos Aires, Siderar’s primary mill in San Nicolas supplies 80% of the country’s flat steel market. Siderar has watched demand for its steel sheets surge as sales of automobiles, home appliances and other manufactured goods, penned up by a recession in 1995, were unleashed when the economy rebounded.

Its goals to maintain market position could soon be tested, however.

After two years of 20% growth, Siderar’s San Nicolas steel mill is nearing production capacity of 2.1 million tons, Donoso said. The domestic steel market is expected to grow by 9% to 10% annually over the medium term, according to company estimates.

Meanwhile, Siderar will produce 1.9 million tons of steel slab this year, just shy of its limit. With 80% of its product already sold domestically, there’s little room to maneuver.

The answer is a $500-million plan centered on a new steel casting machine, which would form steel into slabs at twice the pace, Donoso said. The company could then fire up its second blast furnace, a second coke furnace and its third steel converter, all currently sitting idle.

Production capacity would be lifted to between 3.5 to 4 million tons.

“That would put Siderar in the same size category as the big Brazilian mills,” said ABN Amro steel analyst Fernando Romero Carranza.

Siderar plans to invest another $300 million during the coming three years for equipment maintenance, which is essential to maintain Siderar’s current efficiency and pace, Donoso said.

Siderar plans to increase production next year even as economists predict that an economic slowdown in neighboring Brazil will spill into Argentina.

Ford Motor Co.’s Argentine plant already canceled one month’s worth of steel orders. Fiat SpA, which also depends on exports to Brazil, could reduce orders as well, Donoso said. In addition, increased pressure from Brazilian steelmakers may force Siderar to reduce prices by 3% to 4%, he said.

The company is prepared to handle a slowdown of orders in the same way it thrived when Mexico devaluated its peso and caused a recession in 1995: by increasing exports.

“Management of the company is superb. There’s only minimal concern about 1998,” Carranza said.

Carranza reduced his 1998 earnings projection by 15% to $90.9 million and the 12-month share target price to 5.8 pesos from 6.5 pesos. He has maintained a “buy” recommendation on the share, however.

“Without even tapping new markets, we can increase exports by 47%,” Donoso said. He points out that exports were increased by 60% in 1995, allowing production to increase even though the economy declined.

The auto industry accounts for just 10% of Siderar’s output. Other steel consuming industries are expected to be affected less.

The company projects that the domestic steel market will grow by 1.5 times what the economy does. It has been nearly double economic growth during the last two years. That would mean growth of 4.5% to 6% next year, based on projection of 3% to 4% growth for Argentina overall.

Since a group led by engineering firm Techint Corp. purchased the company from the Argentine government in 1993, Siderar has invested $550 million and revamped its organization.

At the heart of new investments was the complete rebuilding and computerization of the San Nicolas blast furnace. Christened “Evita” after the late Evita Peron, a former first lady who captivated Argentina’s poor, the furnace now spits out more than 5,000 pounds of molten pig iron per minute, double what it did when it was in the government’s hands.

The company has increased profits by focusing on value-added products. About 80% of Siderar’s steel coils are now pressed into custom ordered forms, such as for auto body panels, tin-plated for tin cans, galvanized for construction or pre-painted for home appliance manufacturers.

Siderar has increased its efficiency to 4.3 man hours per metric ton of steel produced from 11.3 man hours in 1993. As a result, the company made $90.9 million in profits in its fiscal year ended June 30. Under government control, it lost more than $300 million in 1992.

The company’s directors are expected to approve the $500 million investment plan by late next year.