Cheapest Brazil Steelmakers in Year Lure Top Funds on Rousseff

Brazilian steelmakers trading at the cheapest level in a year are luring the nation’s top-performing stock funds on prospects President-elect Dilma Rousseff will take steps to protect the industry from foreign competition.

Maxima Asset Management and GAP Asset Management bought shares of Gerdau SA this month on speculation that Rousseff will raise taxes on imports. A pick-up in construction as Brazil prepares to host the 2014 World Cup and 2016 Olympics will boost demand, lifting “massacred” steel shares, Felipe Casotti, who helps manage 1 billion reais ($576.1 million) at Maxima, said in a Nov. 11 phone interview from Rio de Janeiro.

“These are very large investment programs that generate optimism on the sector,” Casotti said. The firm’s Maxima Participacoes Institucional FIA fund has returned 39 percent this year, the sixth-best performer among the 381 stocks-only funds with at least 100 million reais in assets tracked by Bloomberg. “Higher import taxes are without a doubt very positive for the industry.”

Rousseff may pursue “protectionist” measures to shore up steelmakers when she takes office Jan. 1 after rising competition and costs cut profits, Barclays Plc and Bank of America Corp. said in notes to clients this month. Gerdau, Latin America’s largest steelmaker, reported a 3.1 percent decline in third-quarter net income after prices surged for iron-ore and coal, the biggest inputs in the alloy used for making cars, oil platforms and soccer stadiums.

Left Behind

Gerdau and Usinas Siderurgicas de Minas Gerais SA, Brazil’s second-biggest steelmaker known as Usiminas, have been left behind in the benchmark Bovespa index’s 14 percent second-half rally through yesterday on concern margins are shrinking.

Gerdau has dropped 11 percent since June 30 and trades at 11.8 times reported earnings after touching 11.5 last month, the least expensive since June 2009. Usiminas lost 14 percent in that period and trades at 11.6 times reported profit after falling to 11.2 times last month, the lowest since September 2009. The Bovespa trades at 14 times reported earnings and traded at 12.8 in May, the least since March 2009.

Steelmakers followed other Brazilian stocks lower today as metals prices declined on concern demand may weaken from China, the world’s biggest consumer of metals. Gerdau fell as much as 2.8 percent, while Usiminas dropped as much as 4.2 percent.

“The shares had fallen a lot,” Marcelo Mollica, who helps manage about $2 billion at GAP, said in a Nov. 11 interview. The Rio de Janeiro-based firm’s Gap Acoes FIA fund is up 23 percent this year, beating about 92 percent of peers. “The market tends to overreact. There’s a very positive outlook for demand in the domestic market for years to come,” he said.

‘Combat Irregularities’

Rousseff also may pressure state governments to help the industry, Mollica said. Steel workers on Nov. 16 sued the southern states of Parana and Santa Catarina, saying they’re hurting employment by failing to tax some imports, according to a statement on the union website.

A press official in Rousseff’s transition team, who asked not to be named because of internal policy, declined to comment.

Gerdau and Usiminas have rebounded in the past month after Brazil’s tax agency said on Oct. 22 that it would seek to “combat irregularities” that allow the declared value of steel imports to be less than the cost of raw materials. Taxes on imports will be based on pre-determined prices whenever the declared value is lower, the agency said.

“Under-owned” Latin American steelmakers may rebound as an “inflection point nears,” Credit Suisse Group AG said in an Oct. 31 note.

‘Overweight’ Rating

Morgan Stanley raised its rating on Gerdau to “overweight,” saying in a Nov. 8 note to clients that the stock’s underperformance is excessive given the company’s earnings growth potential. Gerdau, whose biggest export market is North America, may benefit from quickening U.S. growth, Carlos De Alba, an analyst at Morgan Stanley, wrote in the note. Gerdau gets 39 percent of its sales in Brazil and 31 percent from North America, according to data compiled by Bloomberg.

Gerdau and Usiminas last year reported their biggest annual declines in net income since at least 2000, with profit falling 72 percent and 65 percent respectively, compared to an average of 27 percent for companies in the Bovespa.

This year, Gerdau may more than double profit to 2.5 billion reais and increase net income another 17 percent in 2011, according to average estimates of analysts surveyed by Bloomberg. Usiminas’s net income may jump 23 percent this year to 1.5 billion reais and rise 43 percent in 2011. That compares to an average earnings growth forecast for the Bovespa of 59 percent this year and 26 percent next year, according to data compiled by Bloomberg.

‘Long-Term Sense’

Olympics spending will help boost infrastructure investments in Brazil to 274 billion reais through 2013, the games’ organizing committee said in February, citing a study by the national development bank, known as BNDES. Rousseff has pledged to rebuild roads, ports, railways and power plants to bolster growth in Latin America’s biggest economy.

Brazilian steelmakers remain vulnerable because international rivals will trim margins, said Arthur Byrnes, who helps manage about $750 million at Deltec Asset Management in New York. Deltec has cut holdings of Gerdau since last month and doesn’t hold Usiminas shares.

Rising Values?

“I don’t think they’re about to turn,” Byrnes said in a phone interview. “Steel’s something that anyone can make and it’s made all over the world. To artificially protect Usiminas and Gerdau I don’t think makes long-term sense.”

A Gerdau press officer declined to comment, asking not to be identified due to company policy. A press officer at an outside agency representing Usiminas, who asked not to be named because of internal policy, also declined to comment.

Steelmakers “are interesting at this price” and may rebound next year, said Eduardo Favrin, who oversees about $2.5 billion as head of equities for HSBC Global Asset Management’s Brazil unit in Sao Paulo. Favrin declined to say whether he was buying.

“The fourth quarter isn’t going to bring any good news, but that’s already in the price,” Favrin said in a phone interview. “You have to look ahead to 2011. If you have a developmentalist government, that defends the national economy, it doesn’t make sense to allow such strong competition.”

To contact the reporter on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulous@bloomberg.net

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