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Some opportunities still exist in so-called BRIC markets

Jan 30, 2017 | 11:39 AM | David Roknic

Tags  BRIC, Brazil, Russia, India, China, trade, steel, aluminum U.S. Department of Commerce


Once lumped together as a group of high-potential emerging markets, the so-called BRIC markets of Brazil, Russia, India and China have each evolved their own unique sets of trade circumstances.

U.S. firms seeking trade in Brazil and Russia face bureaucratic and economic challenges, while economic experts agree that China’s once fledgling economy “emerged” long ago. Ripe for huge infrastructure expansion, India may offer U.S. companies, including the steel industry, great potential, but along with that opportunity come challenges.

Brazil holds its own as one of the top U.S. export markets, with the U.S. exporting 48,431 metric tons of all steel mill products as of November 2016 to the South American nation, according to the U.S. Department of Commerce. In turn, the U.S. imported more than half of its semi-finished steel products from Brazil in 2016, a total of 2.4 million metric tons through the end of September 2016, according to an International Trade Administration report. Overall, Brazil was the second largest importer of steel as of September, according to IHS Global Trade Atlas data.

The U.S.-Brazil relationship is not without its complications. According to the World Trade Organization, the U.S. has four anti-dumping and countervailing measures complaints pending against Brazil, and last November Brazil filed its own complaint with the WTO against the U.S. over countervailing measures on imports of Brazilian cold- and hot-rolled steel flat products. Brazil “seems to be looking a little better,” according to Charles Bradford, market analyst and president of Bradford Research Inc. in New York. But, he noted the nation has a “huge corruption problem,” in addition to current economic troubles.

An ITA Metals Team statement noted that “Brazil ranked 116 out of 189 countries in the World Bank’s 2016 Doing Business Report. U.S. exporters to Brazil face challenges. U.S. companies cite high tariffs, an uncertain customs system, high and unpredictable tax burdens, and an overburdened legal system as major hurdles they must overcome to do business in Brazil.”

A June commercial guide from the ITA’s export.gov group confirms Brazil’s woes, but noted that the U.S. was the second largest exporter to Brazil in 2015, and its population of 202 million makes it “an excellent export partner for experienced U.S. exporters.”

Steel producers may find opportunities in certain growing Brazilian sectors such as aerospace and aviation, airport expansion and mining equipment. American firms such as Caterpillar Inc., Cummins Inc. and 3M Co. already have a foothold in the mining sector, according to export.gov. In the aviation sector, demand for replacement parts is expected to remain strong.

A May 2016 ITA report on building products and sustainable construction also cites Brazil as the world’s seventh best export market for HVACR equipment and 24th for plumbing equipment opportunities.

Following Brazil, Russia is the second largest exporter of semi-finished steel products to the U.S., delivering just over 1.2 million metric tons through September 2016, according to the ITA. On the other hand, Russia imported 6,012 metric tons of all steel mill products as of November 2016 from the U.S., significantly less than the other three BRIC nations, according to Commerce Department figures.

Doing business in Russia comes with political complications stemming from a variety of sources. “The United States has suspended government-to-government economic cooperation with Russia on many fronts,” said a June 2016 report from export.gov. “Within these parameters, U.S. companies can still export their goods and services to Russia and continue working with their Russian partners to sustain their position in this market. However, companies should continuously monitor any developments concerning the United States’ political and economic relationship with Russia.”

In fact, President Donald Trump said in January that current sanctions will remain in place for the time being. Bradford isn’t convinced that relations will warm anytime soon, and he’s skeptical that Trump will be soft on Russia: “What I heard (Trump) say is that Putin has a strong position in Russia. That’s not necessarily supporting the guy.”

The ITA Metals Team statement said U.S. firms face both tariff and non-tariff trade barriers when exporting to Russia.

For example, “Russian authorities require product testing and certification as a key element of the product approval process for a variety of products, and only an entity registered and residing in Russia can apply for the necessary documentation for those product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. For example, U.S. companies have observed that the procedures associated with Russia’s requirement to have a ‘supplier’s declaration of conformity’ are unnecessarily burdensome. ... Manufacturers of telecommunications equipment, oil and gas equipment, and construction materials and equipment (i.e., metals), in particular, have reported serious difficulties in obtaining product approvals within Russia,” the statement said

Export.gov finds little opportunity for manufacturers in Russia but notes that a growing aviation industry holds some promise. The group reports that Western made aircraft are estimated at 70 percent of the entire fleet, and a Boeing Co. forecast “predicts that 1,330 new aircraft will be needed for this region between 2014 and 2033.” It cites “significant potential for ... western aircraft replacement parts and cabin interior components.”

Although the U.S. may have difficult access to Russian markets, Russia remains a “massive exporter” of steel products, according to Phillip Englin, CEO of World Steel Dynamics in Englewood Cliffs, New Jersey.

Both Russia and Brazil have also been affected by the dominance of China in worldwide markets. “China’s half the industry nowadays and really drives the markets,” Englin said. He noted that Chinese competition has led to an increase in trade restrictions and protectionism, which have had a subsequent impact on Brazil and Russia.

Despite its reputation of closed markets, Commerce Department figures show that through November 2016, China had imported 65,796 metric tons of all steel mill products from the U.S.

Export.gov estimated in a June 2016 market report that the U.S. has exported $116.2 billion in goods to China in 2015. “Despite significant market access barriers for foreign firms, U.S. foreign direct investment in China was $65.8 billion in 2014 (the latest data available), a 9.8 percent increase from 2013,” the report states “The United States and China continue to negotiate a Bilateral Investment Treaty, which, if implemented, would provide a more level playing field for foreign investment in China.”

Although a Chinese goal is “to upgrade China’s machinery industry to be capable of manufacturing major machine goods with their own innovation and intellectual property rights, as well as meeting the country’s needs in the energy, transportation, new material and agriculture equipment sectors,” export.gov cites a glimmer of hope for the U.S. metals industry.

“As China is trying to improve the country’s manufacturing industry, U.S. firms, known for being innovative and producing high quality products, will be offered an unprecedented opportunity to export their high quality and endurable industrial products and components/parts to Chinese manufacturers in different sectors, die and mold, robotics, and CNC machinery sectors in particular,” the report said.

While China’s growth has been unprecedented, it is inevitably slowing.

“China built their infrastructure at an absolute incredible rate,” said World Steel Dynamics’ Englin. “They are struggling to maintain growth at a high rate.”

He said much of China’s growth was funded by debt and past growth rates can’t be maintained, which “has caused stress in the metals and mining industry.”

The world is waiting to see if the Chinese economy will be “a free fall or a slow gradual smooth downhill sled ride,” Englin said.

Bradford agrees that the Chinese economy has become so large that it can’t sustain past rates of growth despite ongoing infrastructure projects like high-speed rail and major airports.

“The Chinese government has done an amazing job bringing a half billion people out of poverty, but they have about a half a billion to go,” Bradford said.

Despite the size of China’s own steel industry, Bradford refuses to blame the Asian powerhouse for U.S. steel woes. He cites commerce department figures which show that about 3 percent of China’s steel exports go to the U.S., while 3 percent of the U.S. imports come from China.

“China just isn’t that big,” he said, as far as U.S. steel trade figures

In fact, IHS Global Trade Atlas figures show China was the source of only 1.9 percent of U.S. steel imports in 2015 and was ranked the 19th largest source of steel imported to the U.S.

“It’s easier to blame foreign steel for (U.S. steel industry) problems rather than recognize foreign competition,” Bradford said.

Even so, China outpaces all other nations with a total of 20 U.S. complaints pending with the WTO over anti-dumping and countervailing measures.

India is in the middle of the pack for U.S. complaints to the WTO with nine pending cases. While China’s boom is slowing, most observers agree India is ripe for an infrastructure boom, but obstacles remain.

Despite its size, export.gov lists India as the 18th largest export market for U.S. goods. According to Department of Commerce, Bureau of Census statistics, India was the only BRIC nation which posted an increase in imports of U.S. metals and ores in 2015, with $3.53 trillion in imports, a whopping 69 percent increase over 2014. By comparison, the other three BRIC nations’ imports from the U.S. fell an average of 32 percent each in the same period.

Department of Commerce figures also show India topping the other BRIC nations last year, importing 79,093 metric tons of all U.S. steel mill products as of November 2016.

“Problems with the country’s roads, railroads, ports, airports, education, power grid, and telecommunications are significant obstacles as the nation strives to achieve its full economic potential,” says the ITA Metals Team’s statement, recognizing further challenges of tariff and protectionist policies as well local government obstacles.

“Overall, many businesses find they simply cannot afford to ignore the potentially lucrative Indian market despite its well documented poor infrastructure, high tariffs, protectionist policies, corruption, bureaucratic inefficiency, and challenging intellectual property regime,” says a July report on India market conditions from export.gov. “India’s massive infrastructure requirements present trade and investment opportunities for U.S. companies seeking to compete against foreign bidders.”

Englin concurs: “You’ve got a vast population and a vastly underdeveloped infrastructure.”

Bradford has been doing business in India since the 1980s and agrees it holds promise, but “It was a mess then, and it’s still a mess.”

Although the BRIC nations may hold a handful of niche opportunities, neither Englin nor Bradford ultimately see them as holding promise for the U.S. steel industry.

BRIC offers “minimal opportunity” for U.S. manufacturers. “Nothing,” Englin said.

On the other hand, Bradford also sees no slowdown in foreign imports to the U.S. “The U.S. doesn’t have enough capacity to meet its own demand,” he said.



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