ANALYSIS: Energy crisis and devaluation mean new problems for Sidor

- Tuesday, January 19, 2010

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On December 30, Venezuelan state steelmaker Sidor was not only preparing to close out the year, it was also readying changes to its production forecast for 2010 after shutting down four furnaces in the plating area and one in the billet area.

Production expectations have dropped considerably. In October, Sidor - the country's largest steelmaker - reduced the run time of its electric furnaces in the plating and billet areas to only five hours a day because of power rationing.

And now, once again complying with government implemented power rationing, Sidor is recalculating its production goals for the year. According to an official from the Sutiss workers union, the plating area - which normally produces 220t/m - is expected to report only 75t in output this month.

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The union expects total production to drop by 80%.

Although basic industries and mining (Mibam) minister Rodolfo Sanz said that the company is planning for a 35% drop in exports in 2010, in order to guarantee rebar supplies for the domestic market, things could get even more complicated since the furnace used to make the goods needed to produce rebar, such as billets, has been shut down.

According to data from Venezuela's central bank (BCV) under normal conditions Sidor provides 50% of the steel that the government uses in its housing projects.

It is likely that the government projects will be hurt by the company's situation since the material most used in these projects is rebar and other non-flat steel products.

It is also possible that Sidor will need to import these materials in order to keep up with domestic demand and meet the agreements it has made to supply housing projects.

YET ANOTHER INGREDIENT

On January 8, President Hugo Chávez announced that the country's currency, the bolívar, will now have two exchange rates. The first, of 4.3 bolívares to the dollar, will apply to the majority of goods and services, and the second, of 2.6 bolívares to the dollar, would be used for essential products, such as food, medicine and industrial machinery.

So even if Sidor can fulfill local demand, it will now have to sell its products at prices adjusted to the new exchange rate.

Sidor prices its products for domestic clients in dollars and now that the bolívar has been devalued by 50%, these prices will go up, which could lead to a major increase in the purchases made on foreign markets.

This change will also make companies downstream that purchase Sidor goods less competitive, since they will not be able to access less expensive products.

The impact of this price change will likely become more evident when Sidor starts to sell to countries like Iran, Russia or China, since unlike selling to Colombia just over the border, the company will now have to assume very high shipping charges, and products will become even more expensive.

So it looks like 2010 is not going to be any easier than last year, when Sidor dealt with a number of problems like the fire at the Midrex II plant and a stoppage in the plating area because of a fatal accident.

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