Usiminas (USIM5), CSN (CSNA3) and Gerdau (GGBR4) collapse with a possible zero tariff for steel imports: see the impact on the sector

According to various media outlets, the government is studying the total removal of import tariffs on steel and ten other items to help contain inflation. The announcement can be made as early as this Thursday (12). The steel import tariff is currently 10.8%.

In addition, the Government could also announce a 10% tariff cut in the Mercosur Common External Tariff (TEC) for several other products.

Market analysts highlighted the news as negative for steelmakers, which even impacts the performance of the sector’s shares in this Tuesday’s session (10). Usiminas (USIM5) is the bearish highlight, with a drop of 8.36%, at R$ 9.87, around 11:40 am (Brasilia time), while CSN (CSNA3) and Gerdau (GGBR4) also recorded strong declines, from 5.51% (R$ 18.02) and 5.19% (R$ 26.11), respectively.

As Morgan Stanley points out, the total elimination of the import tariff would put downward pressure on domestic steel prices. That said, this policy change would have a greater impact on local prices for hot rolled coil (HRC) – the benchmark material for the steel market – than rebar, given that the former trades at a 26% premium over the rebar level. of import parity versus the last one with a 12% discount.

Morgan analysts point out that they will continue to monitor the matter closely, but Usiminas would likely be the most negatively impacted, as the company has a much greater relative exposure to the domestic market on a consolidated basis. “We hope that the national steelmakers will oppose the initiative and try to negotiate a better result than suggested”, highlights Morgan.

Bradesco BBI also assesses the news as negative for steelmakers, as zeroing import tariffs impairs pricing power in the domestic market. The bank’s analysts recall that the government was already targeting the domestic steel industry in an attempt to contain inflation, announcing in November 2021 a cut in import tariffs to 10% (against 12% previously) by December 31, 2022.

“This new initiative, potentially reducing import tariffs to 0%, seems drastic and took us by surprise”, evaluates the BBI.

Analysts make some remarks. They point out that the premiums in the prices of flat steel – used mainly in the automotive and white goods industry – in relation to imported material would increase, while long steel – an important raw material in civil construction – would still continue at a discount.

“Assuming that the cuts in import tariffs are in fact reduced to zero, we calculate that the premium in relation to imported material in flat steel would jump from 25% to 38%, while the discount for long steel would reach 5%, against 14% currently (assuming exchange parity at R$ 5.16, Chinese prices at US$ 790 a ton and Turkish rebar at US$ 860/ton)”, they assess. So, if the cut is implemented, analysts see potential pressure on flat steel prices, as import premiums would be at much higher levels compared to the “normalized” premium of around 10%.

However, they consider, taking into account the relevant logistical bottlenecks around the world, it may take months for these imports to actually arrive in Brazil. Thus, the BBI assesses that steelmakers could still exercise above-average premiums in the short term, but premiums would invariably tend to fall to normal levels between the second half of 2022 and the first half of 2023 (either through lower domestic prices or through export prices
highest outside China, or a combination of both).

On the long steel side, analysts see room for gradual price increases, as domestic prices would still be negotiated at a discount to imported material. Gerdau, for example, has more exposure to long steel, while Usiminas has greater exposure to flat steel.

BBI analysts also highlighted some scenarios for the steel companies that are listed below, with respective impacts for the main steel companies listed on B3. In any of them, Usiminas would be proportionally more affected. Check it out below:

(i) If 0% import tariffs remain in effect until the end of 2023?

Assuming that import tariffs are reduced to 0% without countervailing measures in the second half of 2022 until 2023, analysts estimate that Usiminas’ earnings before interest, taxes, depreciation and amortization (EBITDA) would fall by R$ 610 million (or 7% of its last published estimate of BRL 8.9 billion) and that of 2023 would fall by BRL 1.4 billion (or 25% of the estimate of BRL 5.5 billion);

Gerdau’s 2022 Ebitda would fall by R$730 million (or 4% from its estimate of R$17.4 billion) and that of 2023 would fall by R$1.4 billion (or 11% from its estimate of R$12, 5 billion).

CSN’s 2022 Ebitda, in turn, would fall by R$475 million (or 3% of its estimate of R$16 billion) and that of 2023 would fall by R$1.4 billion (or 11% of its estimate of R$ 13 billion).

(ii) If the 0% import tariffs remain in effect “forever”?

Analysts have already incorporated a gradual tariff cut into the model, up to 7% by 2026. However, assuming steel import tariffs remain at 0% without countervailing measures forever (a low-probability scenario, in the analysts’ view) , the impact on Usiminas’ cash flow would be 37%, at Gerdau 18% and at CSN 10%.

(iv) But what if tariffs are reduced to 0% due to “extraordinary circumstances”?

BBI points out that, normally, tariff cuts for imports of Mercosur products need to be approved by all member countries, although Brazil has resorted to a device that allows adopting measures aimed at “protecting people’s lives and health”, following inflationary pressures after Covid-19 and the War between Russia and Ukraine.

“Given this extraordinary set of circumstances and protectionism in most steel markets around the world, we do not see tariffs remaining at 0% for a long period of time.” Given the scenario, analysts follow with a recommendation equivalent to buy for the shares of Gerdau, Usiminas and CSN, with preference for Gerdau at the moment, but recognize that the flow of news in question is negative for all shares in the sector.

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