Lower crude steel production in 33 months worries Latin American market
Internal pressures affect performance despite consumption stability
Alacero - Sao Paulo, Brazil, November 4, 2019. World capacity growth has intensified, making it the most challenging scenario for the steel industry. Ulf Zumkley, chairman of the OECD Steel Committee, has recently expressed serious concerns about the unexpected growth in steel production capacities in 2019, which has exacerbated overcapacity and contributed to increased trade tensions.
Faced with this issue, Alacero has joined 15 other industry associations in North and South America, Europe, Africa and Asia to demand that governments of steel producing countries step up efforts to eliminate persistent overcapacity in production, including negotiation forums such as the G20's "Global Steel Overcapacity Forum (GFSEC)" to seek immediate implementation of effective rules and solutions that reduce overcapacity, its impact and its causes.
Amid the political and economic crises that have been impacting domestic markets and external competitiveness, the regional trade deficit widened in September. Crude steel production totaled 4.692 million tons (Mt), the worst indicator in 33 months since December 2016, when the result reached 4.651 Mt. The figure fluctuated down, 5% behind the 4.922 Mt observed in August. In addition, it slowed: fell 16% compared to September 2018, 7% year to date through September, and was 9% below the average of the first 8 months. The 5% drop in the negative regional balance was driven by Brazil (48%), Mexico (24%) and Argentina (12%).
One of the reasons for the reduction in production was the increase in iron ore costs, which impacted companies' margins. Given the low price of steel and the jump in the cost of raw materials, some producers have optimized their production. Another factor was the shutdown of three major blast furnaces in Brazil, the largest steel producer in the region. The downward prospects for the three largest regional producers do not favor a regional recovery for the year.
Consumption of finished products reached 5,615 Mt in August, an increase of 2% over July and the best indicator in 5 months. However, the result was 6% lower than in August 2018, when 5,977 Mt were registered. Although it was 4% higher than the average of the first 7 months of the year, the total accumulated until August fell 5% over the previous year. The regional balance was positive at 135 thousand tons, an increase of 2% compared to July. The increase was driven by Argentina (40%), Brazil (36%), Chile (36%) and Mexico (20%). On the other hand, Costa Rica saw its demand fall by 50% from July to August, accompanying other countries that also registered a drop, such as Colombia and Ecuador (-9 thousand tons).
Finished steel production also declined and ended September at 4,177 Mt, down 8% from September 2018, reaching the lowest level in 7 months. The result was 2% below the average of the first 8 months and retreated 7% in the year to September until 2018, although it decreased 0.9% compared to August. The 0.9% drop in the negative regional balance of 39 thousand tons was led by Mexico and Argentina, which, in addition to adding negatively to the deficit, had larger negative individual balances than the regional one. Brazil recovered with the best production since May, with 1,932 Mt. The Brazilian result hit 82% of the impact of Argentina and Mexico. Even so, the remaining deficit, albeit minimal, points to an economic stagnation that shows fragility in the fourth quarter.
“The external factors that impacted the Latin American steel market numbers at the beginning of the year are giving rise to internal pressures. As part of the economic stagnation in the face of trade wars and internal conflicts, increased consumption - resulting from stagnation in production, falling exports and rising imports - points to a domestic market lacking of infrastructure and competitiveness. In this context, the increase in the regional trade deficit indicates that Latin America is becoming an important consumer for foreign markets that take advantage of this fragility.”, says Francisco Leal, General Director of Alacero.
External and Internal Factors
In addition to the global slowdown aggravated by the Brexit crises in Germany, Italy and the United Kingdom and consequently in China, there are also external pressures that hit Latin America with the trade wars between the United States and China and between the United States and the European Union (EU). Internal factors, on the other hand, are affecting exchange rates, inflation and unemployment, with political issues in Argentina, Uruguay, Bolivia and Colombia, as well as ongoing reforms in Colombia, Brazil, Chile and Ecuador; and economic and social issues with the crises in Argentina and Venezuela, and the rules imposed by the IMF, which also created a number of problems. Other internal factors include the trading blocks between Argentina and Paraguay, Argentina and Brazil, and between Mexico, the United States, and Canada (T-MEC).
Imports back off
The share of imports in consumption remains relatively stable, representing 36% of cumulative consumption until August 2019, for the third consecutive month. In the first 8 months of 2018 they accounted 35%. In August, imports totaled 1,987 Mt, 1% more than in July and the best indicator in 3 months, remaining 3% above the average of the first 7 months of the year. On the other hand, the result showed a decrease of 7% compared to the same month of 2018, besides a 3% decrease in the accumulated compared to last year.
The largest declines occurred in Costa Rica (-40,000 t), Brazil (-15,000 t) and El Salvador (-14,000 t). The main increases in imports were observed in Mexico (48 thousand tons), Chile (26 thousand tons), Panama (25 thousand tons) and Argentina (11 thousand tons). Mexico and Argentina point to a replacement of production by imports to meet domestic demand, which weakens their exports.
Exports slow down
In August, exports totaled 615,000 tons, down 10% from July and 29% from the same month last year - the worst indicator in 11 months. In addition to being 21% below the average of the first 7 months, the result of exports accumulated until August showed that there was a 9% decrease compared to the same period of 2018. The largest casualties occurred in Brazil (-25 thousand t), Chile. (-24 thousand tons) and Argentina (-17 thousand tons), while the main increases were registered in Guatemala (4 thousand tons) and Peru (3 thousand tons).
Even with the decline in imports in Brazil, the drop in exports - which fell 7% year-on-year compared to 2018 - accompanied by an increase in production and consumption, although brief, indicate a stagnation of the domestic market.
Increased trade deficit
In August, the trade balance was negative, totaling 1,370 Mt, the worst indicator in 5 months. The deficit was 7% higher than in July and 8% higher than in the same month of 2018, with the accumulated year to August advancing 0.6% compared to last year. Brazil and Argentina stood out for their positive balances from January to August, which grew by 1,399 Mt and 163 Mt, respectively.
The largest negative balances in the same accumulated period were observed in Mexico, Chile, Peru and Ecuador, which represented 50%, 16%, 13%, 11% and 7% of the deficit, in that order. Despite trade liberalization policies, the political crises in Colombia, Chile, Peru and Ecuador were aggravating factors in this scenario, while Mexico continues to suffer from the economic slowdown. ••
Alacero – the Latin American Steel Association – is the organization that brings together the Steel Value Chain of Latin America to promote the values of regional integration, technological innovation, corporate responsibility, excellence in human resources, safe working environments, and social and environmental sustainability. Founded in 1959, Alacero is formed by 40 companies in 12 countries of Latin America, whose production is of about 62 million annual tons.
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