At the 53rd annual worldsteel (World Steel Association) meeting held in Monterrey, Mexico, on October 14-15, Gustavo Werneck Da Cunha, CEO and president of Brazilian steelmaker Gerdau S.A., shared his outlook for the Brazilian economy and how Brazilian steelmakers see the future of steel demand in their country.
He began his presentation by stating that in the post-2010 period Brazil was marked by a new economic matrix, with micro-intervention by the government in the economy, with negative implications for GDP growth. He added, however, that Brazil has recently embarked on a new shift in economic policy, which, even though slowly, has been producing some results. The economy has everything it needs to recover, he noted, but its equilibrium remains fragile. In addition to problems of a more structural nature, certain factors have weighed on the recovery. In 2018, the truck drivers’ strike and the uncertainty created by the presidential elections affected economic activity, he asserted. The slowdown in the global economy and in particular in Argentina, an important trade partner for Brazil, also contributed to undermine a more robust recovery. Although the performance of the Brazilian economy has not delivered the forecasts made at the start of the year, optimism remains, given that GDP has maintained an upward trend, and, most important, the risk of a new recession in Brazil has subsided. In the second quarter of 2019, for example, the Brazilian economy grew by one percent compared to the same period of 2018, the Gerdau CEO stated citing Brazilian central bank data. This reflects the cautious stance adopted by economic agents when making investment decisions in the light of political and economic uncertainties in the performance of the global economy. Looking to the future, the government’s most recent forecasts for economic growth remain moderately positive, with 0.9 percent foreseen for the current year and 1.1 percent for 2020. Meanwhile, interest rates are at their lowest historical level. The government has been implementing a robust agenda of structural economic reforms and privatizations to encourage investment and unleash economic growth. He said that it is necessary to move towards a more attractive business scenario, particularly in terms of tax reform, to reduce the so-called “Brazil cost” (increased operational costs associated with doing business in Brazil). In fact, the “Brazil cost” must be considered in any conversation on the openness of the country’s economy, Mr. Werneck Da Cunha stated. The outlook is optimistic. If the steps described are duly implemented, Brazil will have everything it needs to accelerate the pace of growth of its economy, he claimed.
He went on to say that the steel industry has a critical role to play in the recovery of Brazil’s economy. On steel consumption, in Brazil and the US, the two main markets where Gerdau has operations, the outlook is positive, although in Brazil, expectations for effective growth in steel demand have been facing headwinds. He noted that a contraction has been seen in the domestic steel market in recent years. In 2014, Gerdau’s domestic shipments of longs and flats peaked. Affected by the economic crisis Brazil has faced, steel shipments declined by around 30 percent in 2017. In 2018, some signs of recovery began to be seen, but there is still some way to go to return to the higher levels of before. Furthermore, apparent steel consumption per capita in Brazil still lags far behind the US and the world average. So there is still room to grow, he concluded. This will happen when the recovery of demand from infrastructural projects, energy and automotive starts to be seen. An emerging country like Brazil, especially considering the size of its economy, uses large volumes of steel to support its growth. Considering the versatility and the good cost-benefit relation of steel, the Gerdau official said he believes there is a strong potential for steel consumption growth.
In construction, improvements in key indicators of future demand growth are being witnessed, such as starts by real estate developers which have recently reached record levels compared to 2005 and should translate into stronger demand for long steel. In fact, he said, after contracting for five years, construction GDP has posted its first year of positive growth. He said he believed a virtual cycle had begun for the Brazilian real estate sector that could continue over the next 24 months. This positive momentum is mainly supported by sustainable funding conditions on low interest rates and new mortgage rates linked to inflation, lack of short-term bottlenecks with low inflation and no pressure on raw materials, which should cap a potential cost escalation as seen in past bull cycles in the sector. Furthermore, growing demand is supported by stabilization of interest rates at low levels and GDP growth expectations for the coming years. He said another highlight this year has been the solid performance of the construction retail segment, such as self-building and lower income homes, which should continue over the near future.
Another important market for Brazilian steelmakers is the automotive sector, for which indicators remain positive, as the Gerdau CEO pointed out. Despite a strong drop-off in the demand from Argentina, the largest auto importer from Brazil, in the January-September period this year, the numbers show that light and heavy vehicles production in Brazil grew by 2.9 percent and 13.2 percent respectively compared to the same period of the previous year, according to Brazil’s automotive association. The association estimates that its production will grow by 2.1 percent, which will mark the third straight year of growth of production, with a positive outlook for 2020.
Public sector investment in infrastructure remains at a record low. To significantly accelerate the growth of this important field in Brazil, the private sector will have to step up the role it plays in the economy. He said he expected this sector to recover only in 2020 and 2021. Also, growth has been seen in lending by the Brazilian Development Bank, mainly for energy and transportation projects. Mr. Werneck Da Cunha also finally noted that growth is also being seen in wind power projects in Brazil.