Gerdau Hails U.S. Foothold as Brazilian ‘Cash Cow’ Withers

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Gerdau SA, Latin America’s largest steelmaker, is compensating slumping Brazilian demand with exports and a more resilient business in the U.S.

The Porto Alegre, Brazil-based producer has profited from having operations in the U.S. at a time demand in its home market has been declining since the second quarter of last year, Chief Executive Officer Andre Gerdau Johannpeter said in an interview. The company is boosting shipments from Brazil to offset the local demand weakness, he said.

“It works fine for Gerdau’s portfolio because right after the crisis, Brazil recovered quite fast and it took a long time here,” Gerdau Johannpeter, 52, said Friday in New York before a meeting with investors. “Now Brazil is down, and here is up.”

Shares of Gerdau have underperformed global peers as Brazil’s economy stagnates and industries from manufacturing to construction contract. The company, which traces its roots back to 1901 when members of the family started operations in southern Brazil, has trimmed investments, put a mining expansion on hold and sold assets as it pledges to cut leverage.

Annual crude steel output in Brazil, the world’s ninth-largest producer, has fallen for the past three years as demand wanes and higher costs boost competition from imports. Sales of long steel, used in building construction and infrastructure, dropped 11 percent in April from a year earlier, according to the Brazil Steel Institute, a Rio de Janeiro-based industry group.

Ailing Economy

While the austerity measures taken by the government to cut the budget gap are the “necessary approach,” a recovery of the Brazilian economy will take time, Gerdau Johannpeter said.

“Because of the measures the government is taking, we’re going to face for this year this negative GDP, and maybe for next year it may change,” he said. “It might take a while.”

The growing significance of the U.S. unit is not changing the day-to-day operations of the steelmaker, Chief Financial Officer Andre Pires said during the same interview.

“The U.S. has always been important in our portfolio,” he said. “Now, we’re in a moment where Brazil, which has always been our cash cow, is going through an economic slowdown at the same time that the U.S. is recovering consistently.”

Gerdau’s North American operations, including the U.S., accounted for 33 percent of total net sales in the first quarter, up from 30 percent a year earlier, overtaking Brazil as the company’s main source of revenue.

Gerdau declined 1.3 percent to 8.60 reais at the close in Sao Paulo on Friday, trading close to a six-month low. The stock lost 38 percent in the past 12 months, undeperforming the 29 percent gain of the 77-member Bloomberg Intelligence Global Iron & Steel index.

Deals Pause

The Brazilian steelmaker, which has been buying out rivals since 1980 to expand abroad, is not looking to add more assets as it focuses on improving operations, Gerdau Johannpeter said. Possible divestments will depend on “market developments.”

“We are not looking for specific acquisitions or growth at the moment,” he said. “At this moment our goal is to optimize what we have and get the most out of the assets and the positions we have in the world.”