Two Tales of Brazil Steelmaking as Currency Collapse Lifts Debt

  • Top producer Gerdau boosts earnings, boosted by its U.S. unit
  • Usiminas shuts plant after posting worst loss in over 15 years

Brazil’s longest recession since the 1930s is exposing the differences between the nation’s largest steelmakers.

Gerdau SA rallied the most in three weeks on Thursday after reporting a surprise increase in third-quarter earnings before items. Shares in smaller rival Usinas Siderurgicas de Minas Gerais SA, or Usiminas, retreated after its quarterly losses deepened.

Brazil’s worsening economic slump is eroding demand for steel and fueling the worst rout among major currencies this year, pushing up the cost of servicing dollar debt. Gerdau is getting some relief thanks to sales growth at its North America business and expanding exports from Brazil. Usiminas doesn’t have that luxury, announcing plans to close one its plants after piling on debt earlier this decade to tap growing demand.

“North American operations reported stronger than expected 3Q results,” Bank of America Corp. analysts led by Thiago Lofiego said about the results of Latin America’s largest steelmaker. “Our key concern remains the continued weakening of the Brazilian steels market, but still prefer Gerdau versus other Brazilian steel names.”

Usiminas shares fell 2.1 percent to 2.85 reais at 2:28 p.m. in Sao Paulo, extending a decline this year to 44 percent. Gerdau advanced 1.6 percent to 5.59 reais, reducing its year-to-date loss to 42 percent, and gained as much as 7.5 percent.

Gerdau’s adjusted earnings before interest, taxes, depreciation and amortization rose 4 percent from a year earlier to 1.29 billion reais ($328 million), the Porto Alegre, Brazil-based company said Thursday in a statement. That compared with the 1.13 billion-real average estimate of three analysts tracked by Bloomberg.

On a net basis, Gerdau recorded a loss of 1.96 billion reais after an impairment of assets and tax credit write-offs. Sales rose 11 percent to 11.9 billion reais, above the average estimate of 11.8 billion reais.

Dollar Sales

Almost 29 percent of Gerdau’s Ebitda comes from North America. The steelmaker has trimmed investments, shut units and halted an iron-ore project expansion as it attempts to cut leverage, which rose to 3.8 times in the third quarter.

Leverage is set to come down in coming quarters as the company benefits from revenue generated in dollars in operations outside of Brazil, Chief Financial Officer Harley Scardoelli said in a call with reporters Thursday, without providing details. The company also removed covenants on its debt after a negotiation with banks last quarter, he said.

Usiminas, Latin America’s biggest producer of steel used by automakers, posted its largest net loss in at least 15 years, prompting the closure of one of its plants in Brazil. The Belo Horizonte, Brazil-based company’s negative Ebitda of 97 million reais compared with a 93.4 million average estimate of five analysts compiled by Bloomberg.

Even Weaker

“Although expectations have been lowered recently, third-quarter results came out even weaker than we had feared," Banco BTG Pactual SA analysts Leonardo Correa and Caio Ribeiro said in a research note about the Usiminas release. “Unfortunately, we feel that macro conditions will not improve much in the short term."

Usiminas said its net debt to Ebitda ratio, a measure of leverage, jumped to 6.8 times as of Sept. 30. About 85 percent of the company’s debt has covenants, forcing the company to seek an agreement with its creditors before the end of the year as those limits are infringed, CFO Ronald Seckelmann said in a call with investors Thursday.

Dim Outlook

Annual crude steel output in Brazil, the region’s largest producer, is heading for a fourth consecutive year of contraction as industrial demand slumps.

Steel consumption in Brazil probably will continue to fall next year and net debt for the country’s three main producers are expected to increase, Credit Suisse Group AG analysts led by Ivano Westin in Sao Paulo said in a research note Oct. 16.

“We expect investors to increasingly focus on companies’ ability to repay and lengthen debt, divestments, and prices," the analysts wrote. “All eyes are on balance sheets.”

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