In this post, we highlight the following: Gerdau (GGB), Gerdau Ameristeel (GNA) and CSN (SID).

Political Marketing and Protectionist Measures Won't Help Brazilian Steel Industry

Yesterday the Brazilian Government announced an increase of 26% in the investments of the so-called PAC, a Government sponsored investment plan in infrastructure, to BRL636 billion or US$280 billion until 2010.

We understand this announcement as pure marketing. In fact, the PAC itself has a lot of marketing in it, as most of the investments announced are expected to be made by private and state companies that are already revising their investment plans down.

The increase announced yesterday is even stranger as it incorporates in the PAC investments that are already underway, thus it is by no means new investment. We believe it is just political propaganda in order to keep the popularity of the Government up during a difficult period. We really do not believe the increase in the PAC will have a meaningful impact in the demand for steel in Brazil.

This week, the U.S. Senate approved a change in the protectionist measures for steel imports in order to comply with international treaties, it means that U.S. commercial partners as Mexico, Canada and European Union will not be affected by any protectionist measures, but that does not include Brazil.

In 2008, Brazil exported US$1 billion in steel for the U.S. Thus, this is not good news for the Brazilian steel producers, even though Brazil is one of the lowest-cost steel producers in the world. The country will benefit indirectly from this development, as many countries will export its production to the U.S. and buy cheaper steel from Brazil, but that is not what we were hoping for.

Gerdau (GGB) will be less affected by the protectionist measures as it produces in the U.S. through its subsidiary Gerdau Ameristeel (GNA). CSN (SID) will be more affected; however, it has more room for growth in the medium term as it has a growing mining operation.

The business environment is getting better for the steel sector, but there are still many problems out there. We are keeping our Hold recommendations on Gerdau and CSN.