Brazil's steel industry is currently facing problems including the strength of the domestic currency and soaring raw material costs, according to analysts and market players.
Although the companies including Vale SA, ArcelorMittal, Techint and Wuhan Iron and Steel Co. plan to increase their capacity and add a total of 19.2 million mt of extra steelmaking capacity in Brazil by 2016, they are faced with shortages of coking coal and iron ore. Coking coal demand in Brazil is set to double in four to five years, with the new projects adding an extra 23.6 million mt of demand. Accordingly, steelmakers have been hit by soaring prices for raw materials, prices for which reached record-high levels earlier this year as a result of high Chinese demand.
Meanwhile, amid steelmaking overcapacity, the weakness of China's RMB and the strength of Brazil's real is leading steel imports from China to surge. According to Marco Polo de Mello Lopes, chief executive of the Brazil Steel Instituten, in 2010 Brazil imported in total 10 million mt of finished steel and products with high steel content which is equal to the capacity of over two steel mills, or even the largest group in Brazil. In a market of declining steel prices, Chinese state-backed steel companies are at an advantage against privatized Brazilian mills. The appreciation of Brazil's real has made the country less competitive in labor and operating costs compared to other major emerging market steel producers.
As the price of domestic steel is too high, the country's tendency is the expected level of exports. Yet, according to analysts, Brazilian steelmakers may need to pool their resources to achieve new capacity expansions.