Brazilian steelmakers expect better 2H

Brazilian steelmakers expect better results in the second half of the year, as they stand to benefit from higher tariffs on imported steel and a potentially improved economic situation.

The top producers have so far reported mixed results for the second quarter, with Gerdau, Usiminas and CSN posting higher sales volumes and production but also losses and lower revenues.

Yet there was a consensus that recently announced new tariffs on imported steel are likely to improve results in the coming quarters.

The Brazilian government announced in May it would impose a new quota and tariff system on imported steel to protect local production from unfair competition. The government outlined a 25pc tariff on the share of imports that exceeds volume quotas.

The move led some companies to notify clients of price increases, claiming much needed adjustments.

CSN said on an earnings call that it plans to raise prices for its steel products in the third quarter as a part of its "price realignment."

In late July, Usiminas said it plans to increase prices by 5-7pc in the coming months.

An expected price hike by Gerdau would improve the company's profitability for its Brazilian operations, XP analysts said in a report.

The recent hastening of the dollar appreciation against the Brazilian real — by over 12pc year-to-date — will also drive better results for companies in the coming months, according to analysts.

Although Usiminas suffered losses because of the dollar appreciation, as it is a major importer of slab, it — and other companies — might benefit from higher prices of other imported products.

A stronger dollar to the Brazilian real could "reduce the impetus for imports," MonteBravo brokerage analysts said in a report on Gerdau.

A third component for better results in the coming quarters could be stronger demand from Brazil, boosted by improving economic growth and aligned with the continuation of support from North American volumes, which the companies highlighted in their earnings.

"Brazil's steel demand is resilient and prices are showing signs of improvement," Goldman Sachs analysts said in a report about CSN. "We then expect steel earnings to improve."

Despite the optimism, the negative scenario for these companies could not be reversed this year, Genial analysts said, adding that Chinese steelmakers will keep prioritizing exports because of weakened domestic demand.

"Brazil, for its part, remains a market with a complex and potentially ineffective tariff protection system, due to the additional quota system," the analysts said.

By Carolina Pulice