NOVEMBER 1983 - VOLUME 4 - NUMBER 11
Debt-Stalled Brazil Scrambles for Steel Markets
by Daniel Berman
SAO PAULO, BRAZIL-"The domestic market is dead, so the government is pushing exports. Our battle is to get the internal market on its feet again," says Uriel Vilas-Boas, secretary-general of the Metalworkers Union of Santos, in Brazil's Sao Paulo state. Uriel's bailiwick includes the 12,000 production workers at Cosipa, one of several steel subsidiaries of Siderbras, the government-owned steel holding company.
Cosipa's problems reflect the precarious state of the Brazilian economy, which is choking in the therapeutic noose of the IMF and other financial institutions trying to collect on a $90 billion Brazilian debt. Cosipa now operates at less than 80 percent of capacity and its workforce is down to 14,000 from 20,000 three years ago. Expansion plans have been shelved for the time being, and employment among Cosipa subcontractors, according to Uriel, has fallen from 25,000 to 4,000. Looming in the account books is a hard currency debt of over half a billion dollars, mainly to American and Japanese banks.
Cosipa has been forced to export to stay alive. From near zero in 1977 the firm's exports now account for a third of its annual production. The other subsidiaries of the Siderbras conglomerate owe more than $7 billion to foreign banks, with a billion dollars falling due this year. Without renegotiation of these debts, the companies are quite unlikely to meet payments.
The Brazilian steel industry also faces an overwhelming internal debt problem. Debt servicing costs for Siderbras companies rose from 14 percent to 44 percent of net income between 1979 and 1982, partly as a result of higher interest rates on the international and domestic capital markets, and partly from the company's tendency to overestimate the size of the potential steel market. In 1973, at the height of the "miracle" years, domestic demand for 1985 was projected at 25 million tons by Siderbras. In fact domestic consumption had reached only half that figure by 1982. But steel mills were built according to those inflated projections and financed at variable interest rates (which mostly varied up) by international banks awash in petrodollars.
The resulting overproduction is large and growing, despite a doubling of Brazilian steel exports to 2.5 million tons in the first seven months of this year. In October, the new Tuarao mill in Espirito Santa State will begin production with an annual capacity of 2.2 million tons. Of this total, half a million tons are supposed to be sold at home, and another half million are to be brought by Kawasaki Steel (Japan) and Finsider (Italy), which own 24.5 percent each of the mill. Two other steel mills with high production find themselves left in the lurch and are scrambling to find export markets. '
To further complicate the picture, the government has held steel price increases well below inflation. The average July price of Brazilian steel products was $253 per ton, compared to $570 for an equivalent mix of American steel products, reports Siderbras. True adjustment for inflation would raise the Brazilian price significantly, but it could fall to $150 if the official cruzeiro were allowed to sink to its black market value. Thus it is misleading to talk about a "true market price" of Brazilian steel. Perhaps the only factor that keeps costs up, despite production wages of only $40 to $80 a week, is the fact that Brazil's publically-owned steelmakers operate on a cost-plus basis. As with U.S. defense contractors, it's almost impossible to go broke: cost overruns are routinely covered by the government.
If the United Steelworkers of America want to "prove" that Brazilian steel receives government subsidies, in order (under the terms of the U.S. Trade Act of 1974) to prevent its importation, all they have to do is read the speeches of cabinet ministers in the financial press. In the
August 17 Gazeta Mercantil, Brazil's Wall Street Journal, Minister of Industry and Commerce Joao Camilo Pena was quoted as stating: "There is no chance that the government will allow this sector to fall into insurmountable difficulties - Siderbras, with a capital value of $30 billion, is just too important. The government will make sure that the company retains its competitiveness."
If this sounds like Chrysler or Lockheed, don't blame Brasilia. The political nature of the steel industry should be no surprise to anyone who remembers President Truman's seizure of the U.S. steel industry in 1946 to break a strike-or that Brazil's first steel mill was a "present" from the U.S. in partial payment for Brazil's entry into World War II on the side of the allies.
Dennis Carney, president of Wheeling-Pittsburgh, the eighth largest U.S. steelmaker, may have been the first steel executive to try and import large quantities of cheap Brazilian raw steel, but he certainly will not be the last. In his trip to Brazil in August, he tried to negotiate a deal with Siderbras for 30,000 to 40,000 tons a month, which would probably come from Tubarao. And he even asked the dollar-starved Brazilians to purchase $40 million worth of Wheeling-Pittsburgh stock. By early October the deal was not clinched, and there are hints from Brasilia that the $40 million was the sticking point. But if the Wheeling-Pittsburgh deal goes through, there will be other, more wellheeled buyers in line.
Daniel Berman is a free lance journalist travelling in Latin America. His most recent book, edited with Vincent Navarro, is Health and Work under Capitalism: An International Perspective.