Recently-released financial results from Europe’s stainless steelmakers painted a predictably grim picture. With nickel prices, and thus stainless steel prices, falling, large-volume buyers have had little appetite to restock, instead waiting for a clear bottom in prices. The pernicious effects of deflation in action.
That said, Aperam appears to be outperforming its peers this year. Why is this?
Up until 2015, Acerinox had generally occupied the position of best-performing (or least-worst performing) stainless steel company in Europe. Aperam has outperformed in every quarter during 2015, however, and was the only European stainless steelmaker to post positive net earnings during Q3.
So what is behind this recent improvement?
As ever with European stainless steelmakers, this relative success does not stem from their European operations. Instead, Aperam’s decent performance this year has largely been a result of the earnings generated by their operations in Brazil.
But this is not because of surging growth in the emerging Brazilian market. Brazilian consumption of stainless steel has in fact shown barely any growth since 2008, remaining at around 400-450kt per year of finished products. Furthermore, the local economy is shrinking, with GDP expected to fall by around 3% this year.
Instead, Aperam’s Brazilian operations have seen improved performance recently due to increased market share. This improvement has come in both the domestic Brazilian market and the wider South American and global markets and in turn is a result of sharp currency movements and favourable trade policies.
Firstly, taking a look at the currency factor, we can see from the chart below that the Brazilian real has weakened significantly against other major currencies in recent years, having fallen by some 45-50% against the Euro, US dollar, and Chinese yuan.
This has meant that imports of stainless steel from these regions have become 45-50% more expensive for Brazilian buyers, all other things being equal. Likewise, Brazilian exports of stainless steel now appear a lot cheaper for buyers in Europe, the USA, and China.
Recent trade statistics bear out the consequences of this sharp movement in currency values. Imports have fallen toward levels not seen consistently since 2009/10. Meanwhile exports have increased to levels last seen in 2007. Such has been the movement in trade patterns that Brazil has now been a net exporter of stainless steels for two consecutive quarters, something that has not happened since 2009.
Aside from the currency factor though, Aperam (Brazil’s sole producer of flat stainless steel products) has also benefitted from increasingly stringent trade policies.
While European stainless steel producers have only recently begun to benefit from the imposition of anti-dumping duties against certain imports, following the confirmation of duties against Chinese and Taiwanese producers back in September, Brazil has had anti-dumping duties in force on the most common stainless steel products since late 2013.
Brazil’s duties (detailed below) are also particularly severe, given that they are imposed as nominal amounts rather than percentages. Thus, while Chinese exporters to the EU face duties of around 25%, those same exports attract a duty of just more than $850/tonne in Brazil (TISCO faces a lower duty, see here).
With stainless steel prices having fallen sharply over the past year, duties have thus become ever more prohibitive, accounting for a larger share of the final transaction price. At current prices of stainless steel, those imports into Brazil affected by anti-dumping duties carry an effective duty of around 35%.
Aperam’s Brazil operations also benefits from further protection when compared to European sites.
Firstly, the anti-dumping duties in Brazil cover a wider number of countries than just China and Taiwan, as is the case in the EU. Producers from Finland, Germany, South Korea, and Vietnam are also affected in Brazil’s case.
Secondly, there are also normal import duties of 14% applied to all imports of stainless steel flat products, regardless of origin. It is perhaps a wonder that Brazil imports any stainless steel at all.
Thus with currency weakness and trade policies designed to protect the domestic industry, particularly when global markets and prices fall, Aperam is clearly benefiting from its Brazilian exposure.
With growth in Brazil likely to continue stagnating over the coming year, and commodity prices likely to remain low, the Brazilian Real will remain relatively weak, particularly against the US dollar. Aperam may thus continue to benefit for a while yet.
This article was also published for Metal Bulletin Research in December 2015