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CONFERENCE REPORT
30.000 25.000
15 years 24.387
24.229
20.000
18.920
19.385
Aluminium Steel
Fig 3. Brazilian steel domestic sales, 2013-2028 (kt). Source: Brazilian Steel Institute
2028
2027
2025
2026
2024
2023
2022
2021
2019
Coal
2020
0 2018
Cement 2017
5.000 2016
Oil
2015
10.000
2014
Timber
2013
15.000
0
2000
4000
6000
8000
Mt
Fig 4. Global production of steel and other commodities, 2016 (Mt). Source: worldsteel, USGS, OECD, BP, FAOUN
products. In the same direction, the anti-dumping and safeguards have been focused on sectors characterised by high market concentration. Moreover, exports and imports as a proportion of GDP in Brazil are among the lowest values in the world. These factors combined for a conclusion that there is a need for a ‘competitiveness shock’. Ferres agrees with the diagnosis of new government for the economy as a whole. Nevertheless, for the mentioned proposed remedy to achieve its objective, three premises are required: a) the industry is less efficient than its international peers; b) the inefficiency is manageable by entrepreneurs; c) the openness would impose competitive pressure and allow the most efficient to integrate into the international market. Nonetheless, Ferres argued that these three assumptions are not true for the Brazilian steel industry. First, the Brazilian steel industry is efficient in terms of steel production. Fig. 1 shows that South America (in which Brazil is the key player, plotted in orange) is among the lowest cost curve positions for hot rolled coil (HRC) in 2016 Q4, according to McKinsey data. Second, what undermines the Brazilian steel industry’s competitiveness is the embedded State October 2019
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costs. Fig.2 demonstrates that Brazilian HRC costs are $350/t; while the cumulative taxes reach $40/t; the uncredited Value Added Tax (VAT) is $34/t; the capital, logistic and cross-subsidy costs achieve US$ 5/t; totalling $480/t. Thus, there is a 16.3% burden linked to the embedded State costs. Meanwhile, for China, the HRC costs are $420/t, whereas the total costs are equivalent to $458/t. Summing up, the competitive disadvantage of the Brazilian steel sector is mainly generated outside of the industry’s boundaries. Third, due to the extreme importance of commercial defence measures within the global steel industry, there is very limited market access. In other words, trade policies distort the market. Ferres analysed the effective protection too. The exercise was divided into two parts. First, China’s steel price was used as an initial reference (100 as basis). Then freights, harbour costs, import tariffs, antidumping rights, and all other internalisation costs were added, resulting in an effective protection of 18.4%. When the subsidies earned by the Chinese steelmakers were taken into consideration, the effective protection was reduced to 7.9%. The second part of the effective protection calculus paid attention to governmental costs and inefficiencies
abroad, achieving a 91.6 (in comparison with 100 for the China steel price), whereas the Chinese steel export price is 88.5. Ferres concluded that there was a gap of only 2.3%. Thus, from a business perspective, it means selling at a price lower than China and marginally higher than Chinese export prices. Of the initial industry protection level (18.4%), roughly 90% stems for State costs. Subsequently, only a slight difference is the manageable portion for the steel industry per se. Feres recommended three measures for the short-term period. First, the implementation of tax restructuring: this does not demand a broad tax reform (which requires a Constitutional amendment), but solely the removal of fees, tariffs and contributions on VAT. He also suggested the application of tax credits on 100% of corporate purchases. Second, the creation of a compensation mechanism for exporting companies: financial reimbursement on exports of costs such as royalties and fees. Third, investment exemptions and the correction of price distortions: commercial opening of the entire value chain should be synchronised with the above measures. Ferres advocates, therefore, that the commercial opening should be adopted after other measures to mitigate the competitive asymmetries that faced Brazilian manufacturing firms (including, of course, the steelmakers). Marco Polo de Mello Lopes, the Brazilian Steel Institute’s CEO, made a short speech. He observed that, under relatively optimistic assumptions (a 2.5% GDP growth from 2020 onwards), only in 2028, will domestic sales achieve the previous peak registered in 2013 (Fig.3). Therefore, it will only require a 15-year period to recover the lost market derived from the tough recession. Even in www.steeltimesint.com
09/10/2019 11:17:26