The leading global ratings agency Fitch Ratings has stated that in 2010 the Latin American metal and mining industry is expected to stabilize, as compared to their international peers, the companies in this region have been better able to weather the global downturn and have benefited from the demand in their domestic markets.
Accordingly, the metals and mining companies in Latin America, which have also enjoyed support provided by their relationship banks and government development banks, such as Banco Nacional de Desenvolvimento Economico e Social (BNDES) in Brazil, and the Inter-American Development Bank (IADB) across the Latin American region, exhibit solid capital structures and low cash costs of operations, enabling them to remain cash generative during troughs in the cycle.
Moreover, Fitch states that with absent high merger and acquisition activity, it is expected that rating actions will be minimal during 2010, and that leverage levels will begin to return to pre-crisis levels. The recovery should be driven by an improvement in the economic climate in the region. During 2010, Fitch expects GDP to grow by 3.8 percent in Brazil and Chile, by 3.0 percent in Mexico, and by 2.5 percent in Colombia. A portion of this growth is being driven by government stimulus programs, which have increased construction activity, industrial production, and infrastructure projects.
Heading into 2010, domestic demand for steel is expected to rebound from the subdued levels seen during the first half of 2009. Brazil in particular has announced major infrastructure projects due to begin in 2010, including new power generation plants, subways, and an affordable housing initiative that aims to build one million homes. In addition, Brazil will be hosting the World Cup in 2014 and the Olympic Games in 2016, which will require significant infrastructure spending.
In addition, Fitch notes that the Brazilian steel companies benefit from a high level of raw materials self-sufficiency, vertical integration, and have very concentrated domestic markets, which helped them to swiftly return to profitability by the second half of 2009.
According to data from the World Steel Association, Brazil ranked as the ninth largest crude steel producer in the world in 2008 with 34 million mt of output. However, when ranked on profitability, the Brazilian steel companies are in the top tier of steel producers in the world. The cost of iron ore in Brazil is significantly less than in other steel producing regions and countries such as Western Europe, Japan, South Korea, and China, due to the transportation costs associated with importing iron ore into those countries. In addition, the iron content of Brazilian iron ore is extremely high. As a result, Brazilian producers enjoy a cash cost of a production for slabs of approximately $300 per ton on average, significantly less when compared with the per-ton cash cost of many European producers. This cost advantage ensures that the steel companies in Brazil remain profitable even through the troughs in the industry cycle, and it should help them begin to recover their eroded operating margins further in 2010 as the contraction phase of the cycle comes to an end, Fitch states.