THE MODERN BRAZILIAN INDUSTRY

By Professor Celso Lafer*

*Minister of Foreign Relations Notwithstanding the importance of pioneer initiatives by the first generation of Brazilian industrialists, the foundation and growth of the modern steel industry in was made, in great part, by the state. Steel symbolized industrialization which, for many decades, was synonymous with progress. The government realized, correctly, that having vast reserves of ore, Brazil could aspire to a significant steel industry. And it acted on this belief, creating the industry during the Getúlio Vargas administration and promoting its growth during the decades of 1960 and 1970. The predominantly state model that was necessary at the industry’s inception had some success cases. Without the government’s action in the 1930s and 1940s, Brazil would probably not have developed a robust steel-producing base. During the following decades Brazil positioned itself among the main producers and exporters of steel in the world. The state model came to an end, as happened in other sectors, when the government management crisis brought to the surface unsustainable inefficiencies and weaknesses of the productive segment. During the 1990s the steel sector experienced a great transformation. In three years, between 1991 and 1993, all of the state steel industry was privatized through public bidding, and massive investment began to modernize it. In 1998 alone more funds were invested than the sum of monies invested during the 5-year period 1989-1994. In total, between 1994 and 2000, the new steel mill owners invested US$ 10.2 billion in modernization, upgrading, cost reduction and environmental protection works. I will not dwell on details, but I believe it is important to establish some data that demonstrate the transformation the Brazilian steel industry underwent: - After the consolidation process, of the 34 steel companies that existed in the 1980s, only 12 remain; português (p. 7) español (p. 37) Coleção Temas Brasileiros - A Indústria do Aço < p. 68 > - Inefficient installations were systematically closed; - Approximately 60 percent of the workforce were dismissed – which on the one hand reveals the social cost of that transformation, but on the other shows the high levels of productivity gained. Some results of this transformation are worth mentioning in this analysis. The first of them is that, according to independent international analysts, the Brazilian industry became one of those with the lowest production costs in the world. Another interesting fact is that, since investment was made essentially in modernization and productivity growth, production capacity itself increased very modestly: from 28 million tons in 1989 to 30 million tons in 2000. That, combined with the increase in domestic demand, especially since the Real Plan, created an important inversion in the destination of domestic steel production. Domestic sales became dominant, where sales to the external market had been the rule. Between 60 and 65 percent of the Brazilian steel production is currently targeted to the domestic industrial market. Finally, it is important to note that as a consequence of the distribution of product between domestic and external markets and in part as strategy for gaining entry into global markets, the Brazilian steel industry changed its mix of export products. Semi-manufactured goods became prevalent in the sector’s list of export products, at more than 70 percent in volume, while finished products declined in the export roll (having been largely redirected to the domestic market). Total Brazilian exports, by value, show finished products still in the leading position, but the semi-, last year, amounted to 45 percent of that value. In exports to the U.S., the share of semi-manufactured, as will be seen later, reaches a volume close to 80 percent. We should keep this number in mind, as it will prove important in examining how Brazil is affected by American protectionist measures. This is the status of Brazilian steel at the turn of the millenium: a privatized industry, modern and highly competitive in global terms. Brazil is the eighth largest producer of steel in the world (with production at approximately 28 million tons) and the fifth largest exporter. The numbers for both production and exports have been stable for the last few years, but the trend towards growth in exports of semi-finished goods to large markets, such as the U.S. and the European Union, is strengthening. In that there is a strategic wager on the high level of competitiveness of the Brazilian product and in the growing demand for semi-manufactured goods by the American steel industry, which, in its slow and tumultuous restructuring process, is following a model that requires some mills to abandon the steel-making phase of production – in which they are notoriously inefficient – and, using imported semi- finished, concentrate on value-added product lines. Brazil’s confidence on this trend is such that some Brazilian companies are acquiring mills in the U.S. to operate essentially with semi-manufactured product imported from Brazil. These are the brave steps of an industry in the process of globalization. The Brazilian steel sector “ did its homework” and prepared for global competition, but the same cannot be said of all other big producers of steel. The international steel market is in turmoil. At the root of this crisis are various factors, some structural, others situational. Among the first type of problem is an excess of installed capacity. It is estimated that installed capacity in the whole world is between 1 and 1.1 billion tons, with a current production that, in the year 2000, reached < p. 69 > approximately 850 million tons. If examined separately we will see that the world’s production capacity presents quite distinct situations from country to country. There are those, as Brazil, that have restructured their industries completely in the last ten years and that are competitive. The European Union restructured their industry in depth – by privatizing, mergers and acquisitions, closing old mills and installing a high degree of technological innovation. Today, it is accountable for almost 20 percent of world production. And, it is still working to achieve even more ambitious consolidation goals, as seen in the announced merger of , Arbed and Aceralia, to form the largest steel company in the world, with a production volume of 45 million tons. Among the structural problems there are those specific to the American steel industry. Despite producing approximately 100 million tons of steel per year, the United States consumes more than it produces and is the main import market for the world. The entry of imported steel into the US market has been marked, in the last three decades, by all manner of obstacles riding on protectionist waves. In the 1980s there were the so-called “ voluntary restraint agreements” , through which exporting countries, Brazil included therein, selfimposed limits on their sales to the American market. In the 1990s, antidumping and countervailing duties, imposed in a highly questionable manner, restricted the access of foreign steel – a situation that persists to this date. There is such a large number of antidumping and countervailing duties imposed by trade protection agencies in the United States that in the year 2001 there was virtually no country in the world that did not have some product subject to a tariff there. It is estimated that 44 percent of all steel products imported by the U.S. last year from non-NAFTA countries were subject to antidumping or countervailing duties against alleged subsidies. The apparent contradiction between the need to import on one side, and the systematic imposition of impediments to imports on the other, lies in the struggle between the more dynamic sectors of the American economy and the political clout of its more traditional steel sector. It is this sector — represented by the integrated mills – that has not been restructured, lost its competitiveness, and continues to resist change, but which is always able to push through Congress and the Executive measure after protectionist measure. The sector’s political mobilization power derives from the industry’s physical concentration in a small number of states and in the strong union participation in these resistance efforts, with important electoral implications. It would be untruthful to say that the American steel industry, as a whole, has not restructured. It is estimated that approximately 50 percent of American steel production, nowadays, is made in so-called “ mini-mills” , modern and efficient. In another segment, that of the re-rollers, which work with imported semimanufactureds (including those from Brazil), there are also high productivity rates. The greatest protectionist resistance, however, comes from the less dynamic segment which is structurally incapable of competing. To this collection of structural elements (excessive installed capacity combined with the continued operation of mills which are outdated in management or technology) a series of conjuncture factors were added in the last few years, which aggravated tensions between production, consumption and trade. The Asian crisis of 1997 and the Russian crisis of 1998, coupled with the long economic stagnation in The modern Brazilian steel industry Coleção Temas Brasileiros - A Indústria do Aço < p. 70 > , were decisive. The crisis’ impact, in reducing consumption, generated an excess of production that was quickly dumped in the main markets for the products, that is, in Europe and especially in the United States. Data tables for imports of steel into the United States show sharp spikes in those years (1997 and 1998), with massive entry of Russian, Korean and Japanese steel products, for example, at a moment in which the American economy showed signs of vitality and capacity to absorb it. But, if that was the case for the economy as a whole, it was not necessarily so for the less competitive segment of the American steel industry. There was a succession of antidumping suits brought by the industry against all and any imported product. Brazilian, as well as products originating elsewhere, were hit by the protective measures at the borders. In many cases, still dissatisfied with the antidumping measures, the investigations carried out by the American Department of Commerce resulted in measures to compensate for alleged subsidies. Privatized companies saw their product being subjected to surtaxes, as a result of a clearly distorted interpretation of rules that identified residual subsidies, even in cases in which the company was sold at public tender. Bent on affording even more radical protection to its steel industry, the American Congress passed an amendment to its trade law, the Byrd Amendment, by which taxes collected under antidumping regulations revert to the petitioning companies. This is a clear subsidy for the industry and led to the filing by a number of countries, including Brazil, of a joint complaint against the amendment before the World Trade Organization (WTO). In 1999, under the weight of high antidumping and countervailing duties imposed on their hot rolled steel, the Brazilian industry suggested the government should negotiate a specific agreement with the United States for that product. It is a type of instrument called “ suspension agreement” , in which the Brazilian government imposes limits on the volume it exports and, at the same time, exporting companies agree not to sell the product below a certain price; the counterpart to this is that the American government “ suspends” (and this is from where the title derives) the taxation. Negotiations were carried out successfully and an agreement was reached, but it was only partially effective the first year it came into force, in 2000. To summarize, as of 1998, the crisis in the U.S. steel industry worsened gradually, as the arrival of imported product made evident the structural weakness of the industry. Antidumping measures seemed insufficient and the sector sought more protection. It is interesting to observe that, despite his strong ties to unions, the Democratic administration of President Clinton was able to resist the pressure. Less than six months later, however, President George W. Bush announced, in June 2001, an investigation that led to the imposition of safeguards on the import of several steel products. In the four years between 1998 and 2001, 24 American steel companies filed Chapter 11 bankruptcy protection, among them two of the sector’s biggest: Bethlehem Steel and LTV. These, in general lines, are the elements that make up the domestic and international context and which, I believe, we must keep in sight. In the domestic arena we have a revitalized and competitive industry created by the courageous privatization process and substantial investment made by the new owners of these companies. In the global arena there is an excess of installed capacity, with pockets of cost-inefficient < p. 71 > production. In the American market, particularly, a surge in imports caused by the crisis in Asia and in Russia brings to light the known difficulties of a segment that bypassed modernization and grabs on for dear life to protectionist measures. The American Congress mobilizes and the Executive accedes to the pressure from members of Congress, businessmen and unions: on March 5, 2002 the imposition of surtaxes and quotas was made public, virtually closing the American market to the majority of steel products. I will now concentrate on the actions and reactions that have been setting the scene in the international steel market. It would be tiresome to describe the various stages and procedures taken by the American administration between June 2001, when President Bush announced his plan, and March of 2002, when the protectionist measures were made public. I will only recall that the International Trade Commission (ITC), an independent agency of the U.S. government, was directed by the President to carry out a comprehensive investigation. The objective, as determined by the American trade legislation and WTO rules, was to verify if steel imports were “ causing damage or threatening damage” to the domestic industry. That is a required criterion for the imposition of protective measures. At the end of the investigation the ITC decided that 16 out of 33 examined steel products suffered damage due to competition with the imported product. The ITC then recommended that the President impose safeguards, which was done after consultation with the cabinet. In short, consequences for Brazil may be summarized in three wide product categories: - In semi-finished products (especially slabs), which account for approximately 75 percent of Brazilian exports to the U.S. market, Brazil was awarded a quota of 2.5 million metric tons. Our sales of these products to the U.S. totaled 2.4 million metric tons in 2000 and 2.1 million metric tons last year. At first sight, the allocated quota would seem sufficient for the surgepoint of Brazilian exports. But that is not the only parameter used in evaluation. Our steel industry had plans to exploit more deeply the complementary aspects of its production with the segment of U.S. industry that was interested in processing Brazilian semi-manufactured products. Among other projects, there was the concrete fact that Companhia Siderúrgica Nacional (CSN) acquired an American steel company, Heartland Steel, with the objective of supplying it, starting this year, with Brazilian steel slabs. If all possible export opportunities are considered, approximately another million metric tons would be required to fill that potential. - In the flat rolled segment there are different situations. Brazilian exports of hot rolled products, for example, had all but stopped. The antidumping suspension agreement negotiated with the U.S. government in 1999 had become non-operational, as I mentioned before. Brazilian industry, however, hoped to return to the U.S. market, by means of a possible reexamination of the dumping case or through a new exporter. That became impossible due to the 30 percent surtax imposed on those products. Brazilian presence in the American market for heavy plates, for instance, of which Brazil exported approximately $15 million last year, has also become impossible. In the The modern Brazilian steel industry Coleção Temas Brasileiros - A Indústria do Aço < p. 72 > cold rolled category Brazil exported $59 million to the U.S. last year — despite being in a vulnerable position, having just been subjected to countervailing duties and at that moment awaiting a decision on the dumping investigation. There was still some optimism in the industry, a belief that Brazil could reverse the finding of damage in the appropriate administrative forum, in September, thereby maintaining its presence in the U.S. market. That hope was dashed with the imposition of the 30 percent surcharge. The export of galvanized sheets, of which our exports amounted to $8.6 millions in 2201, will also be impracticable with the 30 percent levy. The remaining product, tin plate, was also subject to the 30 percent levy, though Brazil will be exempt owing to its condition of a developing country. - In the non-flat segment, the exemption awarded developing countries with a share of less than 3 percent of total U.S. imports benefited Brazilian exports of such products as steel rebar, bars and profiles. In other cases, Brazilian sales were not affected because the products involved were not covered by the safeguard action, as is the case of certain tubes and tool steel. Examining the safeguards under the light of commercial impact, there is no consensus on the losses incurred by Brazil. Brazilian steel exports to the U.S. in 2001 totaled $734 million, of which approximately $400 million were for semi-finished products. If we limit ourselves to a comparison with last year’s sales – supposing that Brazil would export this year the same volume it exported last year – the barriers now imposed would represent a market loss of $91 million, or approximately 13 percent. If we compare our situation with that of the European Union, Japan or Korea who lost, on average, 60 percent, we feel a little better. That, however, is not the way the safeguard action is seen by the Brazilian industry. Adding up what the sector expected to export, with the market share it expected to recover and the additional share it still legitimately expected to achieve in the U.S. market, losses could amount to $290 million this year. The sector’s position is understandable: in the dynamics of trade, the future is more important than the past, however subjective our vision of the future may be. Changing the rules causes disorder in international trade and creates uncertainty. Trade relations and production planning are based on the stability of the rules that govern it. Predictability is the essence of commercial exchange and one of the pillars of the multilateral trade system. The American safeguards are bad not just because they may have a debatable legal basis or because they expose the degree to which hardened protectionism exists in that country, but also because of the serious disruption they cause in trade relations and in the production system. Brazil is part of the solution, and not the problem, of the American steel industry. That is because the greater part of Brazilian sales to the U.S. is destined for re-processing within the American steel sector itself. More than that: the perception of complementary interests is so clear that Brazilian companies had started to invest in the U.S., certain of the inevitable growth in sales of Brazilian semi-finished products to feed the U.S. steel industry’s restructuring process. There is no reason for us to believe that the decision made by the U.S. government will remain an act in isolation. We can already see the “ domino effect” of that decision in the announcement of safeguards made by the European Union and in the preventive increase of import tariffs by some countries in our region (Mexico, Venezuela and Chile). We are risking an uncontrollable spreading of protectionist measures in the steel industry. It is regrettable that both the United States and Europe, on whom lays the greater responsibility of preserving the multilateral trade system, are taking measures that threaten to destabilize the world market and that put in check the strength of the rules on which the WTO operates. The modern Brazilian steel industry