Steel resilience: Latin America’s response to global overcapacity

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In Latin America, Chile, Brazil and Mexico have now applied tariffs on Chinese steel imports to defend their industries from the impact of imported products below market prices.

China, by far the largest steel producer in the world, raised its share of global output from 15% in 2000 to 54% in 2023, representing growth of 693%, while Latin America was only able to increase its production by 4%.

At the beginning of this decade, the Asian country was exporting around 80,500t/y of steel to Latin America, but that figure has now jumped to around 10Mt/y, according to data from Latin American steel group Alacero.

Producers in the region have been forced to adopt measures such as halting operations and closing plants due to dropping sales and the ensuing financial difficulties caused by China's alleged dumping practices, as well as other reasons.

BNamericas speaks to Thais Terzian, principal steel analyst for consultancy CRU Chile, to discuss the current situation in the region's steel industry, market trends and the progress towards green steel.

BNamericas: How have imports of Chinese steel at below market prices impacted the Latin American industry?

Terzian: The region's markets generally take the import parity price as the basis for the formation of local prices. With the availability of imported steel at low prices, there has been downward pressure on regional prices, which began in mid-2022 when China's export prices began to fall.

BNamericas: What is the situation in Latin American steel production with respect to the international market?

Terzian: The region, including Mexico, produced approximately 58Mt of crude steel in 2023, which represents only 3% of global steel production. The main challenge for the industry at present is related to the low growth of local demand, which has suffered from high interest rates, the low level of investment, and low growth of GDP and industrial production in general in the last two years in particular. At the same time, more imports have arrived, putting additional pressure on already-shrinking markets.

BNamericas: What effect does steel overcapacity in the world have on prices and what commercial solutions are being adopted in Latin America to ensure the sustainability of the local industry?

Terzian: An imbalance between supply and demand tends to cause a drop in prices and production cuts among producers whose costs are above prices. These production cuts have occurred in several global markets, including in Latin America and China.

In recent years and months, we've also seen an increase in trade barriers, such as anti-dumping measures, import taxes and others, to contain trade practices considered unfair. Import duties were implemented in Mexico, Brazil imposed quotas and increased import tariffs for some products and Chile applied anti-dumping tariffs on certain Chinese products.

At the same time, the industry has to improve its cost competitiveness and modernize its production park so that, in periods of low demand and prices, it can be protected against external competition.

BNamericas: What do you project for steel prices after last year's declines?

Terzian: We expect steel prices to continue on a downward trend this year, but we also believe that the prices of the main raw materials such as iron ore, coal and scrap, will also fall, so we don't expect a drop in margins.

Weak demand, mainly from the construction sector, will continue to limit steel consumption volumes globally, while geopolitical tensions add risks to demand levels and could increase production costs if it's necessary to change the transportation routes of raw materials.

BNamericas: India plans to triple its steel production capacity by 2047. What consequences would that have for the Latin American steel industry?

Terzian: The expansion of the industry in India is focused on the growth of its domestic market. However, we expect India to increase its flat steel exports, mostly to other emerging Asian countries. We don't expect those exports to reach Latin America in any significant volume due to margin issues. Unlike several producers in China, Indian producers are private companies that seek to maximize their income and margins, and by focusing on exports to neighboring countries they would achieve this objective, while exports to Latin America would be more expensive, mainly in terms of transportation.

BNamericas: Are changes expected in Latin American steel exports?

Terzian: In South America, most of the finished steel exports remain in the region, but there are also exports to the US and Europe. In 2023, more than 55% of Brazil's exports went to other Latin American countries, while 19% were exported to Europe and 16% to the US.

In other countries, exports within the Latin American region were even greater: more than 60% of exports from Argentina, more than 90% from Colombia, and 99% from Chile stayed within the region.

Mexico is more focused on the US market, with almost 75% of its exports to the neighboring country.

BNamericas: What are the challenges for steel producers within the framework of the global transition towards decarbonization?

Terzian: Decarbonizing the industry will require efforts from across the supply chain, with changing demands in terms of raw materials, energy, technology and other issues. Coordinating various actors so that they're ready at the same time is one of the great challenges, along with the scale of investments that will be necessary to enable decarbonization.

In Latin America, there isn't just a single trend. While there are countries that have green taxes, such as Chile, most haven't yet defined their decarbonization policy, which leaves definitions at the company level. Some have already announced their emissions reduction targets and there's a large variation in emission levels that relates to the type of technology they use in steel production. But, in general, the region's steel mills are somewhere within the first and second quartiles of emissions, that is, their emissions are lower than half of the mills covered by CRU's Emissions Analysis Tool.

BNamericas: What is the technological priority in the advance towards green operations?

Terzian: The global trend indicates that the industry will migrate from integrated steel production that uses coal and blast furnaces in production towards greater use of electric arc furnaces [EAFs] fed with direct reduced iron and hot briquetted iron, produced with green hydrogen. It would be necessary to accelerate investment in the hydrogen production chain in the region, and convert part of the blast furnaces and basic oxygen furnaces into EAFs.

In the region we have iron ore and renewable energies, which leaves us in an interesting competitive position versus other regions.

BNamericas: Is the Latin American steel industry still a competitive market and attractive to investors?

Terzian: The region's steel industry has a fairly local profile, with national companies dominating the markets of each country, with the exception of ArcelorMittal, which is in several Latin American countries and has increased its exposure in both Brazil and Mexico with new acquisitions and investments.

The region has high growth potential in terms of steel demand and is rich in natural resources and renewable energy, which could attract investors.

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Source link : https://www.bnamericas.com/en/interviews/steel-resilience-latin-americas-response-to-global-overcapacity Author : Publish date : 2024-05-08 03:00:00 Copyright for syndicated content belongs to the linked Source .

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