Steel: LatAm Growth To Surpass North


BMI View: Steel producers in Brazil and Mexico , the two largest producers in Latin America, should outperform their northern peers in our 2013 to 2017 forecast period in output growth. While Brazilian steel makers fared poorly in 2012, we see strong upside potential throughout 2013. Strong demand growth in Mexico should drive steel output for domestic producers. US and Canadian steel demand will grow, albeit more slowly.

Maj or Latin American steel producers in Brazil and Mexico should see strong steel demand growth as infrastructure and construction real growth rates exceed those of their northern neighbours. Both countries will also see strong automotive production growth rates, particularly Mexico. The US and Canada meanwhile will see tepid demand, though we still expect positive real growth this year and next. Performance among US steel makers has diverged in recent years, with some firms hurt more by higher input c osts and cheap Chinese imports than others. We expect this gap to continue during our forecast period.

Infrastructure, Construction, & Automotive To Drive Steel Consumption

The steel sectors of Brazil and Mexico will benefit greatly from their respective country's high real growth in sectors driving steel demand. Construction and infrastructure remain the largest drivers of steel demand, with automotive production second.

Drivers Of Steel Demand To Grow
Brazil & Mexico - Construction & Infrastructure Industry Value & Automotive Production Growth (%)

After a disappointing 2012, in which overall economic growth slowed and fixed asset investment stalled in Brazil, we see stronger activity throughout 2013. We believe the government will maintain fiscal stimulus policies, namely tax cuts and spending, in the run up to the 2014 elections. Brazil will consume increasingly more of its domestically produced metals given these trends, providing an opportunity for companies to increase revenues and profits in the domestic market. Brazil continues to see spending outlays as part of its multiyear PACII infrastructure plan implemented by the government. The plan will expire in 2014, though we expect continued growth mid-decade. We forecast average annual growth in Brazil's infrastructure industry value to be 5.4% through 2017. Construction industry value growth will be heady as well at 5.0% through the same period.

Mexico will also see strong steel demand on account for similarly high growth rates in construction, infrastructure, and auto production. Mexican automotive production in particular is expected to see strong growth, averaging 8.4% per year through 2017. Combined with average yearly GDP growth forecasted at 3.7% during this period and solid growth in industrial production, we expect Mexican domestic steel demand to outpace production capacity, leading to increasing imports.

Mexican Steelmakers Best Brazilian Peers
Select Indices, Rebased

Despite our positive outlook for both steel consumption and production in Brazil, Brazilian steel firms continue to face challenges. Rising inflation in Brazil is likely to increase costs for wages and raw materials . Though we have not seen a significant increase in the former, we expect Brazilian workers will pressure firms for wage increases in the coming quarters. Excess global capacity has furthermore resulted in fierce import competition, reducing the competitiveness of Brazilian steelmakers . While we expect the Mexican peso to continue to appreciate in the coming years, it will be doing so from a relatively low base. Therefore, we do not expect such appreciation to put undue pressure on input costs.

US Steel Producers To Face Challenging Environment

US Steel makers will remain challenged by both supply - and demand-side factors. Integrated mills, such as US Steel , will suffer from higher labour costs and other input costs. Nucor , which utilizes electric arc furnaces that have lower costs and higher margins, will fare better than other major producers. The US will also see falling metal consumption intensity per unit of GDP. We forecast real GDP growth to average just 2.4% per year through 2017. The US growth pictures underpins our weak outlook for construction, infrastructure, and automotive production. While we forecast growth in residential construction on the back of an improving US housing outlook, housing construction accounts for one third of our overall construction figures. Therefore improvements in homebuilding will not significantly boost overall steel demand growth. Our outlook for the US infrastructure sector is particularly weak , with average annual growth of just 0.2% through 2017 . We see further gridlock for government spending plans , indicating limited infrastructure investment over the medium term. Transport will definitely be the hardest hit, as it is the most reliant on government spending. We therefore steel intensity to decline over the coming years as modest economic growth outpaces growth in metals consumption.

US Capacity Utilization Lags World Average
US & Global - Steel Capacity Utilization Rates

We forecast both Canadian steel production and consumption to experience stronger growth than in the US due to the country's stronger construction and infrastructure industry value growth. We forecast these industry values to grow an average of 3.7% and 4.2%, respectively, over 2013-2017 . Canada's investment in its energy and utilities infrastructure will also prove a boon to steel use. We expect the industry value to increase an average of 4.5% per year through 2017 as Canada expands capacity of such infrastructure.

US Steel Corp Lags
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Americas - Major Steel Producers, Financial Data, 2012
Company Country Market Cap (US$mn) Revenue (US$mn) Net Income (US$mn) Profit Margin (%) PE Ratio
Source: BMI, Bloomberg
Gerdau SA Brazil 12,318 19,520 733 3.8 17.9
Cia Siderurgica Nacional SA Brazil 6,412 8,683 -216 -2.5 na
Usinas Siderurgicas de Minas Gerais SA Brazil 5,458 6,531 -329 -5 na
MMX Mineracao e Metalicos SA Brazil 1,005 414 -407 -98.3 na
Altos Hornos de Mexico SA de CV Mexico na 2,984 -30.7 -1 na
Industrias CH SAB de CV Mexico 3,727 2,470 153 6.2 22.1
Grupo Simec SAB de CV Mexico 2,341 2,265 184 8.1 11.6
Nucor Corp United States 13,763 19,429 505 2.6 23.4
Reliance Steel & Aluminum Co United States 4,973 8,442 404 4.8 12.3
Steel Dynamics Inc United States 3,185 7,290 164 2.2 21.3
United States Steel Corp United States 2,493 19,328 -124 -0.6 13.6

Brazil: Vertical Integration Poorly Timed

Steelmakers in Brazil will continue to seek control of their own iron ore assets, particularly given the country's abundance of the mineral. Gerdau, CSN, and Usiminas have all invested in their own iron ore mines. Mine output is either used for in-house steel production or sold to foreign buyers. CSN expects 2013 iron ore output of 29mnt, while Gerdau expects to export between 1-1.5mnt of iron ore in 2013. Given our below consensus forecasts for a moderation in iron ore prices to US$118/tonne in 2013 and US$105/tonne in 2014, Brazilian steelmakers may be burdened with mining assets that fall in value . Various iron ore projects around the world will come online in the coming years and demand growth from China will slow, potentially leading to decreased demand for Brazilian exports.

Stagnant Output Costs, Easing Input Costs
MEPS Steel & China 62% Iron Ore Import Price, US$/tonne
Americas - Steel Production & Consumption Forecasts (kt)
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Source: BMI, WSA
Brazil
Production 25,506 32,928 35,162 34,682 36,104 38,552 40,673 42,828 45,141
% Change y-o-y -24.4 29.1 6.8 -1.4 4.1 6.8 5.5 5.3 5.4
Consumption 20,640 29,532 28,912 29,201 31,537 33,871 36,276 38,742 41,261
% Change y-o-y -28.3 43.1 -2.1 1.0 8.0 7.4 7.1 6.8 6.5
Canada
Production 9,285 13,226 13,090 13,627 14,063 14,344 14,631 14,850 15,073
% Change y-o-y -37.5 42.4 -1.0 4.1 3.2 2.0 2.0 1.5 1.5
Consumption 10,591 15,685 16,463 16,809 17,045 17,266 17,473 17,561 17,648
% Change y-o-y -37.0 48.1 5.0 2.1 1.4 1.3 1.2 0.5 0.5
Mexico
Production 14,132 16,710 18,145 18,177 19,195 20,347 21,364 22,518 23,756
% Change y-o-y -17.9 18.2 8.6 0.2 5.6 6.0 5.0 5.4 5.5
Consumption 17,098 20,034 20,869 21,266 22,775 24,151 25,564 27,233 28,786
% Change y-o-y -28.7 17.2 4.2 1.9 7.1 6.0 5.8 6.5 5.7
United States
Production 58,196 80,494 86,247 88,598 89,218 89,397 88,503 88,060 87,620
% Change y-o-y -36.4 38.3 7.1 2.5 0.7 0.2 -1.0 -0.5 -0.5
Consumption 62,412 90,453 91,000 94,185 95,598 96,745 96,261 95,299 94,346
% Change y-o-y -39.1 44.9 0.6 3.5 1.5 1.2 -0.5 -1.0 -1.0
This article is tagged to:
Sector: Metals
Geography: Brazil, Latin America, Brazil, Canada, Mexico, United States, Latin America, Latin America