Steel: LatAm Growth To Surpass North
BMI View: Steel producers in Brazil and Mexico , the two largest producers in Latin America, should outperform their northern peers in our 2013 to 2017 forecast period in output growth. While Brazilian steel makers fared poorly in 2012, we see strong upside potential throughout 2013. Strong demand growth in Mexico should drive steel output for domestic producers. US and Canadian steel demand will grow, albeit more slowly.
Maj or Latin American steel producers in Brazil and Mexico should see strong steel demand growth as infrastructure and construction real growth rates exceed those of their northern neighbours. Both countries will also see strong automotive production growth rates, particularly Mexico. The US and Canada meanwhile will see tepid demand, though we still expect positive real growth this year and next. Performance among US steel makers has diverged in recent years, with some firms hurt more by higher input c osts and cheap Chinese imports than others. We expect this gap to continue during our forecast period.
Infrastructure, Construction, & Automotive To Drive Steel Consumption
The steel sectors of Brazil and Mexico will benefit greatly from their respective country's high real growth in sectors driving steel demand. Construction and infrastructure remain the largest drivers of steel demand, with automotive production second.
|Drivers Of Steel Demand To Grow|
|Brazil & Mexico - Construction & Infrastructure Industry Value & Automotive Production Growth (%)|
After a disappointing 2012, in which overall economic growth slowed and fixed asset investment stalled in Brazil, we see stronger activity throughout 2013. We believe the government will maintain fiscal stimulus policies, namely tax cuts and spending, in the run up to the 2014 elections. Brazil will consume increasingly more of its domestically produced metals given these trends, providing an opportunity for companies to increase revenues and profits in the domestic market. Brazil continues to see spending outlays as part of its multiyear PACII infrastructure plan implemented by the government. The plan will expire in 2014, though we expect continued growth mid-decade. We forecast average annual growth in Brazil's infrastructure industry value to be 5.4% through 2017. Construction industry value growth will be heady as well at 5.0% through the same period.
Mexico will also see strong steel demand on account for similarly high growth rates in construction, infrastructure, and auto production. Mexican automotive production in particular is expected to see strong growth, averaging 8.4% per year through 2017. Combined with average yearly GDP growth forecasted at 3.7% during this period and solid growth in industrial production, we expect Mexican domestic steel demand to outpace production capacity, leading to increasing imports.
|Mexican Steelmakers Best Brazilian Peers|
|Select Indices, Rebased|
Despite our positive outlook for both steel consumption and production in Brazil, Brazilian steel firms continue to face challenges. Rising inflation in Brazil is likely to increase costs for wages and raw materials . Though we have not seen a significant increase in the former, we expect Brazilian workers will pressure firms for wage increases in the coming quarters. Excess global capacity has furthermore resulted in fierce import competition, reducing the competitiveness of Brazilian steelmakers . While we expect the Mexican peso to continue to appreciate in the coming years, it will be doing so from a relatively low base. Therefore, we do not expect such appreciation to put undue pressure on input costs.
US Steel Producers To Face Challenging Environment
US Steel makers will remain challenged by both supply - and demand-side factors. Integrated mills, such as US Steel , will suffer from higher labour costs and other input costs. Nucor , which utilizes electric arc furnaces that have lower costs and higher margins, will fare better than other major producers. The US will also see falling metal consumption intensity per unit of GDP. We forecast real GDP growth to average just 2.4% per year through 2017. The US growth pictures underpins our weak outlook for construction, infrastructure, and automotive production. While we forecast growth in residential construction on the back of an improving US housing outlook, housing construction accounts for one third of our overall construction figures. Therefore improvements in homebuilding will not significantly boost overall steel demand growth. Our outlook for the US infrastructure sector is particularly weak , with average annual growth of just 0.2% through 2017 . We see further gridlock for government spending plans , indicating limited infrastructure investment over the medium term. Transport will definitely be the hardest hit, as it is the most reliant on government spending. We therefore steel intensity to decline over the coming years as modest economic growth outpaces growth in metals consumption.
|US Capacity Utilization Lags World Average|
|US & Global - Steel Capacity Utilization Rates|
We forecast both Canadian steel production and consumption to experience stronger growth than in the US due to the country's stronger construction and infrastructure industry value growth. We forecast these industry values to grow an average of 3.7% and 4.2%, respectively, over 2013-2017 . Canada's investment in its energy and utilities infrastructure will also prove a boon to steel use. We expect the industry value to increase an average of 4.5% per year through 2017 as Canada expands capacity of such infrastructure.
|US Steel Corp Lags|
|Select Indices, Rebased|
|Company||Country||Market Cap (US$mn)||Revenue (US$mn)||Net Income (US$mn)||Profit Margin (%)||PE Ratio|
|Source: BMI, Bloomberg|
|Cia Siderurgica Nacional SA||Brazil||6,412||8,683||-216||-2.5||na|
|Usinas Siderurgicas de Minas Gerais SA||Brazil||5,458||6,531||-329||-5||na|
|MMX Mineracao e Metalicos SA||Brazil||1,005||414||-407||-98.3||na|
|Altos Hornos de Mexico SA de CV||Mexico||na||2,984||-30.7||-1||na|
|Industrias CH SAB de CV||Mexico||3,727||2,470||153||6.2||22.1|
|Grupo Simec SAB de CV||Mexico||2,341||2,265||184||8.1||11.6|
|Nucor Corp||United States||13,763||19,429||505||2.6||23.4|
|Reliance Steel & Aluminum Co||United States||4,973||8,442||404||4.8||12.3|
|Steel Dynamics Inc||United States||3,185||7,290||164||2.2||21.3|
|United States Steel Corp||United States||2,493||19,328||-124||-0.6||13.6|
Brazil: Vertical Integration Poorly Timed
Steelmakers in Brazil will continue to seek control of their own iron ore assets, particularly given the country's abundance of the mineral. Gerdau, CSN, and Usiminas have all invested in their own iron ore mines. Mine output is either used for in-house steel production or sold to foreign buyers. CSN expects 2013 iron ore output of 29mnt, while Gerdau expects to export between 1-1.5mnt of iron ore in 2013. Given our below consensus forecasts for a moderation in iron ore prices to US$118/tonne in 2013 and US$105/tonne in 2014, Brazilian steelmakers may be burdened with mining assets that fall in value . Various iron ore projects around the world will come online in the coming years and demand growth from China will slow, potentially leading to decreased demand for Brazilian exports.
|Stagnant Output Costs, Easing Input Costs|
|MEPS Steel & China 62% Iron Ore Import Price, US$/tonne|
|Source: BMI, WSA|
|% Change y-o-y||-24.4||29.1||6.8||-1.4||4.1||6.8||5.5||5.3||5.4|
|% Change y-o-y||-28.3||43.1||-2.1||1.0||8.0||7.4||7.1||6.8||6.5|
|% Change y-o-y||-37.5||42.4||-1.0||4.1||3.2||2.0||2.0||1.5||1.5|
|% Change y-o-y||-37.0||48.1||5.0||2.1||1.4||1.3||1.2||0.5||0.5|
|% Change y-o-y||-17.9||18.2||8.6||0.2||5.6||6.0||5.0||5.4||5.5|
|% Change y-o-y||-28.7||17.2||4.2||1.9||7.1||6.0||5.8||6.5||5.7|
|% Change y-o-y||-36.4||38.3||7.1||2.5||0.7||0.2||-1.0||-0.5||-0.5|
|% Change y-o-y||-39.1||44.9||0.6||3.5||1.5||1.2||-0.5||-1.0||-1.0|