2024 brings ominous outlook for Brazilian steel mills as Chinese imports show no signs of abating

The lingering question in the steel market is whether China will be able to maintain the current pace of steel exports in 2024. As January drew to a close, the Brazilian government, specifically the Foreign Trade Chamber (Camex), showed no signs of answering the pleas of local steel producers against what they view as a flood of imported steel, primarily from China.

China exported 90 million tonnes, and Brazil was the seventh-largest destination for these shipments. Out of 4.4 million tonnes, over 2.5 million tonnes of Chinese rolled steel entered the Brazilian market, challenging local producers like CSN, Usiminas, and Gerdau. If semi-finished products are included, Chinese mills dispatched nearly 3 million tonnes to Brazil—60% of the total imported.

During an event last week, the president of Usiminas, Marcelo Chara, mentioned the possibility of idling another blast furnace, furnace number 2, if the influx of foreign steel continues at the same pace. In December, the company had already idled furnace 1. This would leave Usiminas operating solely with the blast furnace that underwent a major overhaul costing R$2.7 billion last year.

Other steelmakers had previously announced production line stoppages in November and December until there was an improvement in domestic demand. Some spoke of postponing investments, including Gerdau, ArcelorMittal Long Steel, and specialty steel manufacturer Aperam.

Experts suggest that China’s continued dumping of steel globally hinges on its domestic market’s reaction. China’s real estate sector, responsible for approximately one-third of domestic steel consumption, has faced a profound crisis in recent years. Government stimuli have not been sufficient to revive demand. The expectation is now on broader economic stimuli, ranging from residential and commercial building construction to infrastructure and industry programs—major drivers of steel consumption.

See below the progression of steel imports (hs 72) from China to Brazil between Jan 2019 and Nov 2023. The data is from DataLiner.

Steel Imports from China | Jan 2019 – Nov 2023 | TEU

Source: DataLiner (click here to request a demo)

In December, local production slowed significantly, signaling weak domestic consumption. The volume of crude steel produced plummeted by 14.9% to 67.4 million tons compared to the same month a year ago, according to the World Steel Association (WSA) in Brussels, which collects data from 71 steel-producing countries.

According to the General Administration of Customs of China, the country’s exports rose 36.2% in 2023 compared to the previous year, reaching the highest level in the last seven years. However, this sharp increase in exports has heightened the risk of trade friction. Five countries initiated investigations into trade measures against Chinese steel in the past year, but Chinese authorities have shown no intention of slowing down exports.

An industry expert, speaking anonymously to IM Business, commented, “I believe the decision of Chinese mills is more about maintaining the 2023 level than experiencing an exponential increase in exports in 2024.” Analyst Daniel Sasson from Itaú BBA notes that China’s 90 million tonnes of exports are nearly three times the total exported by the Brazilian steel industry in 2023 (31.9 million tonnes). The exported volume represented 9% of China’s total crude steel production for the year, which was 1.019 billion tonnes.

Sasson observes that the 40% increase in Brazilian imports of rolled steel (4.4 million tonnes) last year is significant. However, he expects steel imports to ease in 2024 compared to 2023. “One reason is that the price of steel in the local market is not much higher than the international price to make this operation worthwhile. When the price is 30% or 40% higher, importing becomes justified, but today we see plans from Usiminas and CSN negotiated with a premium of 5% to 10% versus imported products [internalized], in line with historical averages,” notes Sasson. For long steel, it is more or less in line with the imported price.

Expectations for reduced imports in 2024 could bring some relief to local producers, with steel mills gaining more market share in domestic sales. Instituto Aço Brasil projects a 20% increase in imports over last year, representing about 20% of the total domestic consumption of all types of steel.

The steel sector approached the government in April and officially requested a 25% import duty in October, with China as the main target. However, Russia, South Korea, and other countries also dispatched significant volumes to Brazil. A decision deadline for the government is the end of this quarter, according to an industry source.

Among steelmakers, CSN acted first in seeking more effective measures while awaiting government action. In December, the company filed petitions with the Foreign Trade Department (Decom) to initiate anti-dumping proceedings against certain types of steel from China that gained strength in its markets through unfair price competition. Usiminas, Gerdau, and other manufacturers may take the same action in February, according to reports.

The general perception is that the federal government has wavered on the request, deeming the current 10.8% tariff sufficient. Authorities in Brasília face strong opposition from steel consumers against commercial barriers to imports. The machinery and equipment industry, through Abimaq, has the most stringent stance on protective measures, even if temporary. “It will only increase the profit margins of steel mills while reducing our competitiveness against imported machinery,” says José Velloso, executive president of the association. Aço Brasil contests the argument that producers will take advantage to raise prices in the domestic market.

In the 2024 scenario, Sasson indicates that he has no buy recommendations for Brazilian steel stocks. Usiminas and CSN have been downgraded to “neutral” (previously “sell”) because, he claims, to some extent, the worst has passed. However, Gerdau’s stock was downgraded from buy to neutral in December. “I am not optimistic about the sector at the moment for 2024. It will be a challenging year, with lukewarm demand and likely stagnant prices. That’s why we have a cautious view.”

The scenario could change with a potential increase in import tariffs to 25%, paving the way for price hikes. “However, it is not my baseline scenario because there are various issues involved between the two countries, and raising tariffs could create institutional discomfort in Brazil-China trade relations.”

Source: Infomoney

Click here to read the original news piece: https://www.infomoney.com.br/business/efeito-china-continua-pesando-sobre-mercado-global-de-aco-em-2024-analistas-esperam-que-nao/

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