Brazil May Cut Steel Duties to Curb Inflation

Brazil Steel
Red hot steel is rolled into coils at the Arcelor Brasil SA steel factory in Vitoria, Brazil. Photographer: Rich Press/Bloomberg News

June 11 (Bloomberg) -- Brazil may reduce duties on steel imports in a bid to contain inflation after wholesale prices rose the most in two years, Finance Minister Guido Mantega said.

“If an industry exaggerates when increasing prices, it knows what will happen -- we will lower the import tariff,” Mantega, 61, said in an interview at the Bloomberg office in Sao Paulo yesterday. “What concerns us the most is steel, because it has an impact on the economy as a whole.”

Inflation has been running above the government’s 4.5 percent target since January, as the fastest growth in 15 years raises concern that Latin America’s biggest economy may be overheating. Brazil’s broadest measure of inflation, the IGP-M index, rose 2.21 percent from last month, the highest reading since 2003, led up by prices of iron-ore and wholesale goods, the national statistics agency reported today.

The index may end 2010 at 10 percent, Itau Unibanco Holding SA’s chief economist, Ilan Goldfajn, said at a conference in Sao Paulo sponsored by Bloomberg News Portuguese language service.

Mantega, speaking ahead of a today’s conference in Sao Paulo, downplayed concern that Brazil’s economy was growing too fast. Prices are exceeding the government’s target because of heavy rains that have raised the cost of food, he said.

Mantega didn’t provide details about the plans to cut the maximum 14 percent duty on steel imports. The final decision lies with the foreign trade chamber. Over the past year, the federal government commission has reduced tariffs on 16 products, including sardines, palm oil and beer cans, as local producers struggle to meet surging demand.

Cooling Down

Steel mills are resisting efforts by iron-ore suppliers including Rio de Janeiro-based Vale SA to raise third-quarter contract prices after steel prices fell 10 percent from an 18-month high on April 15.

Vale, the world’s biggest supplier of iron ore, won a 90 percent price increase for April quarter contracts after it dropped a 40-year custom of setting annual prices.

“Abrupt tax moves, either up or down, could have serious consequences mainly for competitiveness and for Brazil’s position in the world, and therefore should be analyzed with great caution,” Vale Chief Executive Agnelli told reporters in Brasilia when asked about the steel duties proposal after meeting Lula today.

Higher interest rates, the withdrawal of fiscal stimulus tax cuts and the financial crisis in the euro region will all help to cool the economy, said Mantega.

Mantega said gross domestic product will expand 6 percent to 6.5 percent this year. That’s below the median 6.6 percent estimate in a June 4 central bank survey of economists as well as the “Chinese-like rate” of 7.5 percent Itau Unibanco Holding SA, Brazil’s biggest bank by market value, forecast in a May report.

Interest Rates

The central bank, led by President Henrique Meirelles, raised the benchmark interest rate for a second straight meeting on June 9. Policy makers said in a one-sentence statement they lifted the overnight rate to 10.25 percent from 9.5 percent to bring inflation back to target. Economists expect the Selic to reach 12 percent by January, according to the bank survey.

Meirelles said June 4 policy makers were in a “tightening mood,” a month after vowing to take “vigorous action” to prevent the economy from overheating.

The government is cutting spending by 10 billion reais ($5.54 billion) to help cool the economy before the interest rates take hold.

GDP surged 9 percent in the first quarter from the year-earlier period, the most since 1995, the government said June 8. Faster economic growth has prompted analysts to forecast consumer prices will stay above the government’s target this year and next, according to the central bank survey.

Annual growth of 9 percent is not sustainable, even though Latin America’s No. 1 economy has the potential to grow faster than in the past, said Carlos Langoni, a former Brazilian central bank president at today’s conference in Sao Paulo sponsored Bloomberg News Portuguese language service.

Inflation-free Growth

The $1.6 trillion economy has the conditions to keep growing at an annual pace between 5 percent and 6 percent, said Guilherme Lacerda, president of pension fund Funcef, at today’s conference in Sao Paulo.

“The inflation we saw in the first quarter of this year didn’t stem from the pace of growth,” Mantega said. “I’m confident we can have a good economic performance and, at the same time, keep inflation under control.”

President Luiz Inacio Lula da Silva appointed Mantega to become his finance minister in 2006, after serving as budget minister and head of the National Development Bank. The former economics professor at Sao Paulo’s Getulio Vargas Foundation has been an adviser to Lula since 1993.

Supply, Demand

Across Brazil, companies are struggling to keep up with demand that’s been rising as unemployment hovers near a record low 6.8 percent, salaries rise and the 30 million Brazilians who have left poverty since Lula took office in 2003 increase spending.

Cia de Bebidas das Americas, Latin America’s largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted.

Acucar Guarani SA, the country’s third-biggest sugar producer by market value, left 10 percent of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February.

Retail sales rose 15.7 percent in March from a year earlier, the highest on record. Industrial production jumped 17 percent in April from a year ago, as manufacturers increase the use of installed capacity to 83 percent, the highest level since September 2008.

Annual inflation, as measured by the benchmark IPCA index, slowed to 5.22 percent in May from 5.26 percent in April -- the first deceleration in seven months, the national statistics agency said this week.

Spending, Rates, ‘Reasonable’ Currency

The government will need to cut spending and the central bank will have to raise interest rates more than the market expects to slow inflation, said former central bank chief Langoni said at today’s conference.

The real is leading major currencies this week as borrowing costs rise and state-controlled oil company Petroleo Brasileiro SA prepares to raise $25 billion in a public stock offering.

Brazil’s currency gained 3.4 percent this week, the biggest among the 16 most-traded currencies tracked by Bloomberg.

Mantega said the real has traded at a “reasonable” level since the government levied a 2 percent tax on capital inflows in October, and he sees no need for additional measures.

The real, whose 33 percent appreciation last year was the biggest among major currencies, will strengthen to 1.77 per dollar by the end of the third quarter from 1.8045 yesterday, according to the median estimate in a Bloomberg survey of 21 economists.

The currency has averaged 1.7789 per U.S. dollar since Oct. 19, ranging from 1.6989 to 1.8045.

“Since last October, when we took the measure, the exchange rate reduced its volatility,” Mantega said. “I don’t think additional measures are needed.”

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To contact the editor responsible for this story: Joshua Goodman at