'Latin American Steel: A retrospective in 101 essays' is a collection of reprints of pages from Steel Times International of articles authored by Dr Germano Mendes De Paula, Professor of Economics at the Federal University of Uberlandia (UFU), Brazil.
Comprising steel works in South, Central and part of North America,(Mexico) Latin American (LA) Steel has seen its share of global production slowly rise from 2.4% in 1971 to 6.6% in 2000. In the following years the extraordinarily rapid expansion of China's steel industry caused the shares of most of the world's other producers, including LA mills, to decline. But absent that factor – had China's output remained frozen at the year 2000 level – would the global share of LA steel output have continued on a rising path? By 2010, that share would have hardly moved up from 2000, namely from 6.6% to 6.7%. It would have exceeded 7% only in one year, 2011. However, even in 2011 production of the entire LA steel industry lagged behind that of South Korea.
Updates and conference reports
The LA steel industry's trade association, until recently known as ILAFA and now as Alacero, has maintained high standards regarding the speakers it invited to its annual conferences. It is therefore not surprising that Dr de Paula included in this volume ten of his ILAFA conference reports. For good measure he added nine reports of conferences held by the Brazilian Steel Institute and by two British steel-information companies, SBB and CRU. No less than 83 regular ‘Update’ articles comprise the main body of this compendium. Because most of these are densely packed with facts and technical information, many readers will no doubt welcome an occasional detour into the wider-ranging and often global topics discussed at the conferences.
In his Introduction Dr de Paula divides the Updates into broad categories in accordance with their principal contents. The majority of these articles deals with the fate and fortune of individual companies while many are devoted to regional problems, M&A activities and mill expansions. Dr de Paula's acknowledged that later events might have deviated from the expectations expressed in some articles or that questions remain about the final outcome of some stories. As an example one might name a 2006 Update concerning Ceará Steel (p64), an interesting project in northeastern Brazil. A short postscript might have informed readers about the outcome of this and a few similar stories.
There is of course more to LA Steel than the size of its output. As Professor de Paula shows, the industry's development is marked by plenty of surprises and turbulence. A few distinctive features of that development were traced in the following paragraphs.
LA Steel has a rich history of mergers and acquisitions. Initiative were not limited to national producers but also reached out to mills in other LA countries as well as other continents. A steady flow of funds and technology has moved into LA from Asia, Europe and North America while LA steel producers acquired operations in Canada, the USA and Europe and invested in Australian/African mining ventures. Successive waves of M&A activity led to (1) greater seller concentration in major LA markets, especially in flat rolled and tubular products, (2) full or partial control by producers in large LA countries of the long-product markets in smaller LA countries and of sheet and long-product mills outside the region, and (3) the formation of multi-continental steel conglomerates.
The LA steel industry produces and exports a large quantity of merchant slabs that has varied over the years. In one case, plans for the addition of rolling mills were abandoned long ago and slab production has been accepted as a permanent condition. In other cases, merchant slabs were produced with the knowledge that this was a temporary measure since at some point in the future those slabs would be needed to meet rising domestic demand for flat rolled products. A large new slab mill constructed in Brazil does not produce for the merchant market but instead supplies associated finishing operations in the USA and Europe (apparently the company undertaking this project greatly underestimated the cost of constructing and operating an integrated slab mill in Brazil).
This practice was initially viewed with suspicion by LA steel executives. In 2003 Daniel Novogil, VP of Techint and later CEO of Ternium, noted that “the USA and Canada were responsible for 50% of all steel trade restrictions in the world; 71% of these North American barriers were against Latin American steel firms” (p49). In a specific case, it was reported that US antidumping practice had severed the supply chain between a major Brazilian steel producer and the CR mill it had acquired in the USA (p137).
China and LA de-industrialisation
LA steel executives changed their view on trade restrictions in recent years when they began to feel threatened by an export flood of Chinese steel and ‘metal-mechanical products’. Concern then turned into a lobbying effort alerting the public that the consequence of this flood would be Latin American de-industrialisation, which would erode the steel industry's markets (p139). However, graphics showing the manufacturing share of LA GDP and exports declining (p140) are insufficient proof to corroborate this assertion. Declining shares do not rule out gains in the production of manufactured goods. The de-industrialisation thesis was also weakened by announcements of LA steel consumption rising in 2010 and 2011 (p140, p145) and the Mexican steel industry planning a 20% increase in capacity by 2015 (p141).
The iron-ore premium
As prices of traded iron ore began to soar, the presence of vast, not yet fully explored deposits of iron ore in the region helped attract investments into LA mining and integrated steelmaking. Brazilian steel mills with captive iron ore mines rank among the lowest-cost integrated producers in the world, although in some cases this advantage is partially offset by costly hauling logistics and a flawed infrastructure. However without the benefit of access to in-house resources, it is not certain that integrated LA producers can overcome the drawback of high energy costs and burdensome financial charges (p148) to keep their costs below the world average.
The low-cost/high-price conundrum
If indeed Brazil's integrated producers had such low costs, would taxes alone explain their high prices? For example, the shipbuilding subsidiary of the Brazilian government energy monopoly claimed it was compelled to purchase two-thirds of its plate requirements abroad ‘because steel prices in Brazil are higher than the international average’ (p122). The answer could lie in the industry's structure. A sufficiently concentrated industry is able to maintain prices at a high level by keeping supplies adjusted to market needs.
Interesting discussion topics in this collection of articles are furnished by bumps in the development of steel mills caused by governments intervening with markets and foreign trade, often in an attempt to keep their own inept policies from getting bogged down. One such policy is import substitution which in some countries, due to the limited size of domestic markets, has led to the construction of small-scale, high-cost mills whose survival then depended on protection from imports (p120). Measures to stimulate exports or discourage imports sometimes a had disruptive ‘beggar-thy-neighbour’ effect on the region's political harmony. Nevertheless, at their annual trade-association meetings steelmakers from different LA countries maintained the appearance of harmonious relations.
Of course, the publication of these essays does not mean that the author will now turn his back on Latin American Steel. He has shown himself to be a knowledgeable expert and skilled analyst of regional and global steel-industry events. He continues to provide readers of Steel Times International with detailed information and valuable insights about LA Steel. He might even revisit such topics as the Ceará project.
Reviewed by Dr Hans Mueller Former Professor of Economics Middle Tennessee State University, Murfreesboro USA.
'Latin American Steel: A retrospective in 101 essays'
ISSN 2049-7660, 160 pages A4
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