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Can Brazil live up to its steel powerhouse billing?


Tough competition, environmental pressures and rising costs are posing some hard questions for steel producers about where to site new greenfield projects. Mills looking for a favorable economic and political environment and, crucially, access to raw materials are increasingly turning their attention to Brazil.

The steel sector in Brazil looks set to surge on the back of strong domestic and international demand. The Instituto Brasileiro de Siderurgia (IBS), Brazil's steel institute, said in May that consumption of steel products in the country is expected to nearly double to 40 million tonnes by 2015 from 22 million tonnes in 2007. IBS also estimated that investments of about $32.9 billion should increase the country's steelmaking capacity to 63 million tonnes by 2013 from 41 million tonnes last year.

But can Brazil take on all of the new projects being planned within its territory? The answer is most likely yes. The country's major advantage is access to plentiful, high-grade iron ore reserves, something which few other steelmaking nations can boast. Brazil also has an extensive coastline, making export business much easier.

State governments are holding out carrots to attract new projects—such as the fiscal incentives recently offered by Santa Catarina state to Spanish steel group Cía. Española de Laminación SL (Celsa), which is considering building a long-products mill there—while Brazil's national development bank, Banco Nacional de Desenvolvimento Econômico e Social, has shown that it's willing to fund new mills, as it did recently for Brazilian metals producer Votorantim Metais Ltda.

The country is home to the world's largest iron ore producer, Rio de Janeiro-based miner Vale, which is facing tough challenges to expand production to keep up with the increasing appetite from the global steelmaking industry. Obstacles include securing environmental licensing to expand iron ore output, periods of heavy rains and protests at its operations.

But so far Vale has easily been attracting major steelmakers to build new mills in Brazil, such as Germany's ThyssenKrupp Steel AG, which has set up a joint venture with Vale for a 5-million-tonne-per-year slab mill in Rio de Janeiro, due to start operating next year. Another large steelmaker, China's Baosteel Group Corp. Ltd., has a joint venture with the miner to build a 5-million-tonne-per-year slab mill in Espírito Santo state.

With prices of iron ore surging, steelmakers have an obvious motive to secure captive resources of the material. This is the model followed by Brazilian steelmaker Usinas Siderurgicas de Minas Gerais SA (Usiminas), which earlier this year acquired four mines in Minas Gerais state previously owned by local mining group J. Mendes Ltda. Usiminas recently announced plans to build a 5-million-tonne-per-year slab project due to start operating in 2011 at a capacity of 2.5 million tonnes per year and ramping up to full capacity the following year. Around 60 percent of production from the new plant will be earmarked for export.

It's not the only Brazilian mill planning to expand. Flat steel producer Cia. Siderúrgica Nacional (CSN) will be busy in the future with as many as three new steel projects. It plans to set up new facilities in Rio de Janeiro and Minas Gerais states, and recently disclosed plans to build yet another plant in northeast Pernambuco state. The steelmaker owns a valuable asset, the Casa de Pedra iron ore mine, which is expected to feed its new projects and also the blast furnaces of steelmakers around the world.

Meanwhile, Grupo Gerdau SA—known for its many acquisitions over the past few years—also is studying plans to install a new plant in the state of Pernambuco. And still on the new projects list, Votorantim Metais is developing a 1-million-tonne-per-year long-products steel mill in Rio de Janeiro, due to begin operating in 2009.

Of course, there are challenges, too. A weak U.S. dollar, in addition to the rising prices of steelmaking and mining equipment—as well as uncertainties about its availability—could affect the viability of some of the new projects. But this is something that only time will tell. For now, things are moving forward in the Land of Carnival.

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