Brazil Steel Firms Defy Doomsday Outlook

Call it the Brazilian steel industry’s dirty little secret: Exports to the United States are booming, despite the surcharges and quotas President Bush imposed earlier this year that were designed to limit their flow.

Manufacturers and government officials here complained bitterly when U.S. tariffs of as much as 30% were imposed on imports in March. They accused the United States of unfair tactics on the global playing field and warned that U.S. protectionism threatened Brazil’s tenuous economic recovery.

But instead of shrinking, Brazil’s steel exports to the U.S. so far this year are running 45% ahead of last year and are on track to shatter the full-year record set in 1999 of 3.37 million tons, a flood that prodded Bush and Congress to impose the trade barriers.

Overall, the U.S. imported 8% more steel from across the globe in the first nine months of 2002 than it did during the same period a year ago -- before the tariffs went into effect.

The bulk of Brazilian steel exports are semi-finished slabs and not the higher-value finished products such as hot- and cold-rolled steel that are the most profitable and are largely kept off the U.S. market by tariffs and U.S. anti-dumping claims. The slabs are coming in at such a volume because U.S. factories cannot satisfy domestic demand.

Still, the export boom has been good for Brazil’s two largest steel companies, Gerdau Group of Porto Alegre and Companhia Siderugica Nacionale (CSN) of Rio. Each has made investments in U.S. steel plants in recent years, in part as a defensive move to counter U.S. protectionism. And each has reported that exports have doubled so far this year over 2001. Their biggest market: the United States.

Gerdau, the hemisphere’s biggest manufacturer of “long” steel products, including I-beams and corners used in heavy construction, has bought three steel plants in North America since 1995 and in August merged them all into one entity called Gerdau Ameristeel Corp., based in Tampa, Fla.

“It’s important to own steel capacity in the United States, to diversify in different areas of the world with different products,” said the steel giant’s chief executive, Jorge Gerdau Johannpeter. He declined to talk about the issue of U.S. tariffs.

Brazil’s exports are fueling job growth in the mills and are helping to widen the country’s total trade surplus, which is expected to reach a record $10 billion this year, a welcome bright spot in a clouded economy.

So, what went wrong with Brazilians’ doomsday scenario that portrayed steel tariffs as an economic disaster?

Much of the steel exporters’ success has to do with factors not in their control. Brazil’s devalued currency -- it has lost one-third of its value against the dollar this year -- has made all its commodities, especially steel, more competitive on global markets.

Plus, recent U.S. steel prices of $350 a ton are high enough that Brazilian steel still can compete even after import duties are paid.

“As there is a shortage of steel in the U.S. market since the last six months, the local prices have gone up to levels above international steel prices, which make it possible to sell, even paying the 30% surcharge,” said CSN’s export director, Luiz Ernesto Migliora.

Prices have skyrocketed this year mainly because shutdowns at major steel companies LTV Corp. and Acme Metals Inc. eliminated 20% of supplies in some categories of domestically produced steel, said Christopher Plummer of Metal Strategies, a steel industry consulting firm in West Chester, Pa.

Brazilians also are reaping the rewards of high-quality iron ore, low labor costs and investments in high technology that have made their steel industry one of the most advanced in the world, said New York-based Bear, Stearns & Co. steel analyst Daniel Altman. These factors also have helped push down the cost of production to about half that of a typical U.S. steel plant.

Brazilian companies also have decided that if they can’t beat U.S. companies on the protection issue, they’ll join them by buying U.S. steel plants.

The acquisitions mirror those of Brazilian orange juice concentrate processors, which, frozen out of U.S. markets, have snapped up several Florida juice companies in recent years to circumvent trade barriers.

With its purchase last year of Heartland Steel in Terre Haute, Ind., CSN essentially bought a customer for its slab or bulk steel made at its factories in Brazil. Heartland then takes the bulk steel and produces finished steel products that are sold at much higher prices. But CSN is restricted on how much slab it can ship to its Indiana plant for finishing. And because there is a shortage of U.S.-produced bulk steel, the plant is operating at only one-third capacity, Migliora said. CSN also has expressed interest in taking over Bethlehem Steel Corp., which last year filed for Chapter 11 bankruptcy protection.

Gerdau has purchased five plants in Canada, Florida and New Jersey since the late 1980s, enabling it to expand its network of regionally autonomous operations from those in Brazil, Uruguay and Argentina.

The ongoing problems in the U.S. steel industry also have helped Brazil’s competitiveness. The huge U.S. integrated steel companies that survive after decades of bankruptcies and mergers are saddled with high “legacy” costs -- the pension and health benefits of about 1 million retired steel workers.

Meanwhile, the pool of active steel workers whose wages they can tap for pension and health fund contributions has shrunk to about 100,000, said Clyde Prestowitz, president of the Washington-based Economic Strategy Institute and a former trade negotiator during the Reagan administration.

To make up for the legacy cost shortfall, domestic producers must raise prices for customers, charging as much as $100 a ton more than producers in other parts of the world, according to David Phelps, president of the American Institute for International Steel in Washington. That inflated U.S. cost is why steel makers say they need tariffs and quotas to survive.

Whether the Brazilians can maintain their export momentum is open to question. Optimists here note that the U.S. tariffs on foreign steel imports will slowly recede over the next two years, thereby easing the entry of Brazilian steel products.

Prestowitz said Brazil’s hand in trade matters, including steel, may have been strengthened by the victory of leftist Luiz Inacio Lula da Silva in the recent presidential election.

“Given the angst in the U.S. government over the Brazilian economy, and with the new president in there, there is an incentive here to make sure the Brazilian economy works, and that means letting steel products in,” Prestowitz said.

But the shortage of U.S. steel manufacturing capacity that helped drive up prices this year could evaporate in 2003 as other North American companies ramp up production to fill the void.

Lower prices would mean a smaller competitive window for tariff-laden Brazilian imports.

Peter Morici, a professor of international business at the University of Maryland and chief economist of the International Trade Commission during the Clinton administration, said the surcharges have worked well so far, saving U.S. jobs with no apparent harm done to consumers.

“We are seeing the reorganization of the U.S. steel industry,” Morici said. “Consumers have seen no appreciable rise in prices of cars or appliances or other products that are heavy users of steel.”

But Jose Augusto de Castro, director of the Brazilian Exporters Assn. in Rio, disagrees. He says surcharges and quotas are affecting producers around the world, skewing prices and production “without any advantage to the United States.”