Investor's Business Daily
Brazilian Steel Maker Banks On Booming Local Economy
Monday February 4, 5:59 pm ET
Kevin Harlin


China is urbanizing. Oil platforms are going up in the world's oceans. And Brazilian automakers are ramping up for a growing middle class.

The world's steel producers are trying to keep up.

Companhia Siderurgica Nacional (NYSE:SID - News), Brazil's third-largest steel producer, is stepping up to the challenge.

The Rio de Janeiro company expects to spend $6 billion over the next six years to add new steel mills. The new mills will add 9 million tons to its current crude steel capacity of 5.6 million tons a year.

It's also investing in its mines and ports to increase its iron ore export capacity.

But even as global demand rises, CSN is looking first to its expanding domestic market. About three-quarters of sales are within Brazil.

In addition to expanding its core steel and mining business, CSN is building a cement plant to supply booming Brazilian construction markets.

"The middle class is growing, and the consumption is growing as well," said Jose Marcos Treiger, head of investor relations at CSN.

Global steel output increased by 7.5% in 2007, according to the International Iron and Steel Institute. Brazil's output grew by 9.3%.

U.S. steel production fell 1.4% in 2007, due in part to cheaper imports.

A slowing market in the U.S. could ripple through global markets, pinching infrastructure investments and hurting steel demand. But Treiger says CSN thinks it will ride out the current economic malaise in the U.S.

The company expects 6% to 7% global demand growth in coming years, led by China, India, the Middle East and, of course, Brazil.

Brazil is the 9th largest steel-producing country in the world, and the largest in Latin America, according to the institute.

That nation's aging infrastructure and fast economic growth keep demand high. The country is running at a 5% growth rate in GDP, and the government has signaled it will make major investments in highways and other public infrastructure in the coming years.

Good Location

Treiger said the company's location near Brazil's industrial heartland means it can serve the home market more efficiently.

Seventy-two percent of CSN's output went to the domestic market in the third quarter, up from about 63% a year earlier. The home market accounted for 74% of revenue in the quarter.

CSN dominates the Brazilian market for tin-plated steel used for food cans, supplying about 98% of the market. It supplies about 42% of Brazil's galvanized steel, a corrosion-resistant metal used by industry.

It also supplies the nation's auto sector, which produced a record 3 million cars, buses and trucks in 2007, an almost 14% jump from the year before. The trade group representing Brazilian auto manufacturers predicts 17.5% growth this year.

W.R. Eric Ollom, an analyst with ING, said the company's strong performance in the third quarter and global outlook for steel and iron ore prices boosted confidence that it will be able to pull off the promised expansions.

"The company has exceeded our expectations regarding operating performance in 2007, resulting in improved debt ratios," Ollom wrote. He estimates the company's net debt to EBITDA ratio to be 1.3 in 2007 vs. 2.2 in 2006.

CSN posted $1.48 earnings per American depositary receipt in the third quarter, up 147% from a year ago.

Still, that was 4 cents per share less than analysts surveyed by Thomson Financial had expected.

Those analysts expect $6.25 per ADR when CSN reports full-year 2007 results in a few weeks, up from $2.68 in 2006.

CSN formed in 1941 to supply steel to the U.S. and its World War II allies.

After the war, it supplied raw materials for Brazil's industrialization. It became one of the first major companies privatized in 1993. Since then, it's invested more than $4 billion in capacity expansion and environmental controls.

Its name, Siderurgica, comes from the word sideros, Greek for iron.

The company says its vertical integration gives it an edge over competitors around the globe. It owns its own iron ore deposits. It has its own dolomite and limestone mines.

The rail lines that transport its ore and other materials to the mill are owned or controlled by CSN. It ships iron ore out of its own ports. It even produces all of its own energy, thanks to a power plant at one of its facilities and its investments in hydro plants in Brazil.

The company says that integration makes it among the lowest-cost steel producers in the world. About the only major raw material it must buy is coal, which comes from China and the U.S.

Analysts say steel prices will rise in 2008 as global freight costs increase, raising the price for iron ore. But CSN says rising ore prices will only help its margins since it mines its own ore and sells the excess to other steel companies.

Outbid For Tata

CSN was frustrated in its global expansion plans last year when it was outbid by India's Tata Steel for the British-Dutch company Corus Group. Corus and CSN combined would have been the world's fifth-largest steel producer.

"It was a pity. We regret that we lost this opportunity to Tata," Treiger said.

But he said CSN is now focused on the large opportunities in Brazil.

While the market in Brazil looks strong, some economists worry about a potential U.S. recession.

China has been absorbing raw materials from Latin America to make and ship finished goods to the U.S. A slowdown in America could ricochet through Asia back to the mines and plants in Brazil.

Brazil also seems to have inflation in check, though it has suffered in the past from high inflation and rapid currency devaluations.

"We are preparing ourselves for the future," Treiger said. "We strongly believe that Brazil is going to grow."