Analysis: Brazil’s steel industry may experience “generational opportunity”

RIO DE JANEIRO, BRAZIL – The Brazilian steel industry is experiencing a fast production and demand pace. In May this year, crude steel production in the country reached 3.1 million tons, representing 40.1% growth compared to the same month in 2020 and the highest monthly production since October 2018, according to the Brazil Steel Institute.

Domestic sales climbed 73.9% year-on-year and totaled 2.1 million tons. Exports totaled 746,000 tons, equivalent to US$636 million.

From January to May, crude steel output grew 20.3% compared to the same period in 2020. Rolled steel production rose 29.7% to 11.1 million tons, while semi-finished for export grew 0.5% to 3.3 million tons.

Year-to-date domestic sales reached 10 million tons. Exports registered sales of US$ 3 billion, corresponding to 4.3 million tons.

According to BTG Pactual, the data are positive and suggest that the sector should not lose momentum in the coming quarters, considering that (i) the Brazilian economy will continue to grow; (ii) the orders schedule of steel manufacturers is still full, with a good outlook for at least the next three months; and (iii) the supply chain continues to have low inventory levels.

The investment bank also argued that now is a good time to buy steel companies’ shares, as they are heavily discounted.

“We understand investors’ skepticism about the current cycle’s sustainability, but we believe the steel industry is experiencing a generational opportunity with respect to rebalancing company values,” said Leonardo Correa and Caio Greiner, in charge of the report released on Thursday.

According to the analysts, the valuations of Gerdau (GGBR4), CSN (CSNA3) and Usiminas (USIM5), currently close to 3 times EV/Ebitda (company value over EBITDA) for 2022, accommodate an aggressive price and demand correction for steel company shares for the coming quarters – which seems unlikely to happen, considering the tight sales and distribution balance.

“Price implementation will be a key factor henceforth, and we believe the current tight sales and distribution backdrop will continue to favor trading,” Correa and Greiner commented. BTG believes that with higher revenues, investors will regain confidence with the sector.