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Stronger-than-expected demand for Brazilian steel following the peak of the coronavirus pandemic, along with a massive temporary shutdown of crude steel capacities, forced a slower-than-expected supply response in the domestic market. The ongoing imbalance between supply and demand has prompted price hikes totaling about 20% since June.
As the pandemic drove apparent steel consumption to very low levels, major mills announced capacity shutdowns throughout April and May expecting an annual contraction of demand by at least 30%.
In view of this possibility, mills were also chasing the export market to allocate material in a time of favorable exchange rates and an uncertain outlook in the domestic market.
By that time, a quick recovery did not seem possible, as automakers halted production completely, while the construction sector – allowed to keep operating – did so at a slow pace, with limited staffing at project sites to achieve preventive health measures.
Brazil's overall gross domestic product (GDP) fell 2.5% during the first quarter of 2020 and dropped another 9.7% in the second quarter. Broken down by sectors, industry GDP fell 0.1% in Q1 and fell 12.7% in Q2, while the construction sector fell 1% in Q1 and 11.1% in Q2.
Game changer
"Some variables changed the game for steel demand in Brazil," one mill source said.
Even though the automotive sector remains in slow motion, the quick reactivation of other industries – construction, wind and solar energy, white goods, road and agricultural equipment – has boosted demand for steel.
Greater end-user demand in recent months has prompted distributors to restart material procurement from mills at a stronger pace than usual in order to boost low inventories.
Moreover, stay-at-home policies, low interest rates and government grants of emergency aid of $116 (Real 600) to informal workers and $232 (Real 1,200) to mothers responsible for supporting families, and other actions, have boosted real estate investment by the financial community and home improvement by citizens.
"The result: huge procurement for steel products by distributors looking to replenish stocks, and other construction materials in the retail market, emptying stocks down- and up-stream in a period of low production rates," the source added. "Demand has outpaced supply."
Delivery lead times have jumped from the usual two to three weeks to four to six weeks, sources said.
"It is worsening every day. There is no proper supply until December," said a distributor.
"It is very hard to get 4 mm, 5.5 mm and 6.5 mm rebar. I had to stop work on a project for two days because of the lack of material and was halted four days on another one," said a construction company source.
A flats maker source confirmed the struggle, defining it as a "virtual holiday" as there is no stock to supply prompt market needs.
A longs maker also noted a shortage of scrap supply limiting steelmakers' output ramp-up process.
Automakers, in turn, have desperately voiced complaints of lack of flat steel, fearing further impacts on their production plans.
A mill source said that with demand growing beyond expectations, his company has started to take several measures to guarantee supply to the domestic market, such as postponing maintenance stoppages and transferring export commitments to others plants of the group in other countries.
Prices rally
Amid this scenario, mills began to enforce price hikes to boost margins and achieve parity with import prices at Brazilian ports.
However, as Brazilian currency keeps declining against the US dollar and international prices are on an uptrend, mills are enjoying the opportunity to raise spot prices.
Since the beginning of the year, Brazilian domestic ex-works hot-rolled coil prices surged 28.2% to Real 3,090/mt ($583/mt) on Sept 4.
According to S&P Global Platts calculations, Brazilian HRC is currently at a discount of 12.6% to the Chinese HRC delivered price at Brazilian ports, after customs clearance, of $652.58/mt.
Brazilian domestic 10 mm rebar rallied 18% year-to-date to Real 2,805/mt ($529.10/mt). It was valued at a discount of 14.1% to the Turkish rebar delivered price at Brazilian ports, after customs clearance, of $615.96/mt.
Nevertheless, overall mill bookings for September have been completed, sources said, and orders for October shipment come with 10%-15% price increases in the pipeline.
Capacity utilization remains low
Despite the improvement in conditions in the domestic market, the utilization of installed capacity – 51.5 million mt/year of crude steel – remains very low at 60.5%, after dropping to as low as 42.2% in April, according to national steel institute Aço Brasil.
A sustainable level would be at 80% – a level not seen by Brazilian steelmakers since 2008.
The group said that 13 of the blast furnaces were shut down by Brazilian steelmakers during the peak of the pandemic. With the gradual resumption, four of them have returned to operation.
"Producers should not be misled by the current demand and need to be careful not to relaunch too much idled capacity," one observer said, depicting the outlook for Brazil as a bit foggy.
"With that in mind, the imbalance between supply and demand may take a while to adjust," he added.
From January to July, Brazilian crude steel production totaled 17.1 million mt, a 14% drop compared to the same period last year, Aço Brasil data showed.
Production of rolled products in the same period was 11.7 million mt, down 13% on year, while semi-finished output for sale totaled 4.8 million mt, 9.3% lower on year.
Domestic sales were 10 million mt from January to July, which represented a decrease of 7.6% on year.
The apparent national consumption of steel products was 11.2 million mt in the period, a decrease of 8.2% compared to the same period of 2019.
Imports reached 1.2 million mt, down 18.5% on year. Exports reached 7 million mt, a drop of 8.7% from 2019.
Source: S&P Global Platts
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