Fitch: Brazilian Steelmakers Well Positioned for Iron Ore Price Increase in 2008

Business Wire,  March 13, 2008  

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NEW YORK -- Against a backdrop of rising iron ore prices, Brazilian steel producers should maintain high profit margins relative to their global peers during 2008, according to Fitch Ratings. Brazilian steel companies enjoy important competitive advantages, including modern production facilities, close proximity to sources of iron ore and a highly concentrated domestic market, which limits competition based upon prices. Additionally, the Brazilian steel industry benefits from barriers to entry from imported steel due to the logistical challenges of transporting steel to and within Brazil, as Brazilian steel producers own or have privileged access to large steel distributors.

According to Anita Saha, Director in Fitch's Latin America Corporates Group, "The strategic sourcing of raw material inputs serves as a competitive advantage for steelmakers in the current environment of unusually high commodity prices, and Brazilian steel producers are particularly well-positioned in this regard."

Producers that are not backwards-integrated into either coal or iron ore are facing margin pressure in 2008 as coal and iron ore prices are expected to increase by nearly 100% and 65%, respectively. Iron ore and coking coal account for more than one-third of a typical integrated steelmakers' cost of goods sold. Non-integrated producers of steel are also under cost pressure due to high prices for energy and metallic inputs, such as scrap and direct reduction pellets. Globally, steel producers are counting on high demand for steel products and low inventory levels to enable them to pass price increases on to customers in order to maintain profit margins.

According to the Brazilian Steel Institute, steel consumption in Brazil is expected to increase about 10%-15% in 2008 to reach 23 million tons, supported by strong demand from the civil construction, automobile and domestic appliance sectors. This level of growth is consistent with Fitch's expectation that economic growth in Brazil will be in excess of 4% during 2008 and 2009. Additionally, steel producers in Brazil have already obtained or are currently negotiating price increases of about 10% for domestic sales.

If steel demand in Brazil meets expectations, producers may be able to obtain further price increases later on in the year. However, should global prices slide and trade become more difficult, Brazilian companies could be challenged to match 2007 profit margins as about one-third of the country's total steel sales volume comes from exports.

CSN

Relative to other steel producers within Brazil and throughout the world, Brazilian flat steel producer Companhia Siderurgica Nacional (CSN) is poised to have a record year due to continued high steel prices and incremental earnings from iron ore sales. CSN is self-sufficient in iron ore due to its ownership of the Casa de Pedra mine, one of the world's largest high-quality iron ore bodies.

CSN is investing approximately US$2.8 billion to expand its iron ore mining capacity to 75 million tons in 2012 and 85 million tons in 2013 from about 20 million tons currently, making it one of the largest iron ore producers. Beginning in 2008, the company's iron ore sales are expected to increase to more than 30 million tons, resulting in annual incremental EBITDA of about US$1.2 billion in 2008 and US$1.7 billion in 2009.

Usiminas

Usiminas, a flat steel producer that is owned by a group of Brazilian and Japanese industrial and financial entities, has followed CSN's lead into iron ore. The company reached an agreement in February 2008 to purchase J. Mendes, a group of Brazilian iron ore mining companies, for up to US$1.9 billion, depending on the size and quality of the mines' reserves. In the short-term, Usiminas will still incur iron ore cost increases for much of its consumption. However, in the more intermediate-term, Usiminas stands to benefit from higher iron ore prices as the J. Mendes acquisition will allow the company to become self-sufficient in iron ore within several years and thus less reliant on higher cost, third-party sources. Additionally, J. Mendes produces about 6.0 million tons of iron ore which will continue to be sold under existing contracts to third parties, providing Usiminas with a partial hedge against the iron ore cost increase.

Usiminas plans to invest approximately US$750 million to develop transportation infrastructure and increase production at the J. Mendes mines to 29 million tons of iron ore by 2013, essentially providing Usiminas with all of its iron ore needs on a hedged basis, as Usiminas' Ipatinga steel mill will continue to purchase iron ore from Companhia Vale do Rio Doce (Vale) due to its location in Minas Gerais and transportation constraints. Usiminas' iron ore export sales will offset the cost of the ore purchased from this local source. With efficient and modern production facilities and proximity to iron ore supplies, Usiminas is expected to continue to enjoy high EBITDA margins relative to global steel producers of about 33% as it expands its steel production capacity to 12.7 million tons by 2012, from 9.0 million tons currently.