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"The worst is over, but we are still suffering"

Marcos Fonseca

President/Inesfa

Published  Friday, October 9, 2009

With the global financial crisis that kicked off last year, Brazil's scrap iron and steel sector witnessed local demand vanish almost entirely. As a result, domestic suppliers had little choice but to export their products to Far East nations, which meant taking on higher shipping costs that cut deeply into margins.

But in recent months Brazil's scrap suppliers have noticed a slight recovery and have gradually started redirecting their sales in-country.

For this week's interview BNamericas spoke with Marcos Fonseca, the president of Brazil's scrap iron and steel association Inesfa.

With 23 years of experience in the scrap business, Fonseca has kept up with current market trends and shares some of his insight on the latest developments and what is to come.

BNamericas: In general, how is the scrap metal sector in Brazil doing now?

Fonseca: In October and November last year it was clear that the steel sector was one of the most affected by the crisis. We hit bottom in March. No steelmaker was buying scrap metal at that time and that never happened before. We had seen sharp decreases in prices, but nothing like we saw earlier this year.

The scrap industry then found an alternative, which was to export. It was our only way to survive. Now the sector has been rebounding, but prices and demand remain sensitive because we have been operating with low stocks.

BNamericas: Has this been the worst crisis you have ever seen in the sector?

Fonseca: I’ve been in this business for 23 years and from what I have seen and heard, yes, this year was the worst. The crisis affected not just the scrap iron sector, but aluminum and plastic recyclers as well. The entire chain was affected. But thanks to exports we were able to survive.

We would also like to stress that some steel mills in Brazil did not like the fact that we were exporting. We suffered reprisals from steel mills in our country. For example, if we exported they wouldn't buy from us for local usage. Mills want abundant raw materials [scrap]. But the truth is exports for us were a salvation, not an option. If it weren’t for exports part of the supply chain that provides for steel mills wouldn’t even be around any longer.

BNamericas: Which steelmakers acted against you?

Fonseca: I can't say because it would just make matters worse. But Grupo Votorantim was extremely ethical and respectful. They did not have that kind of attitude with us.

BNamericas: Switching to prices, how are they today?

Fonseca: Local prices are roughly at international levels, since steel mills have resumed their buying. The worst is over, but we are still suffering.

In the beginning of 2008 prices were somewhat surreal. In August 2008, they were almost double what they are today. But now we are now selling at about 400 reais/t [US$225]. However, six months ago prices were at about 200 reais/t.

But what has been worse than low prices was the fact that months ago there wasn't even a market. We just weren’t selling. And to boot there were all kinds of different factors that came in to play such as poor exchange rates to the US dollar.

But summing up, price levels today are excellent, we cannot complain. Last week I was in Europe and I noticed they are still feeling the negative impacts of the crisis harder than we are here in Brazil.

BNamericas: What is your forecast for sales this year?

Fonseca: If we close 2009 with similar volumes to those before the crisis I believe we will be in good shape, and I think we can accomplish that. It’s a sign we are back on track. In 2009, Brazil will likely finish with sales volumes of about 7M-8Mt of scrap [roughly even with last year].

BNamericas: How about exports? Will they continue or have they given way to local sales again?

Fonseca: Even though exports did save the sector earlier in the year, there is no way we can continue exporting at current exchange rates.

Another problem is the cost of freight. Depending on the price and distance, this cost could amount to as much as 30-40% of total expenses, in the case of countries such as India, Pakistan, Vietnam and China.

BNamericas: Do you believe Brazil has the potential to become a net importer at some point?

Fonseca: I don’t want to sound like Nostradamus, but Brazil will be importing lots of scrap in 2010. We haven’t been importing now because prices in Brazil are similar to international prices. But as the market becomes unbalanced, prices could become more attractive for imports.

BNamericas: In addition to being the president of Inesfa, you are also the commercial director of scrap supplier RFR-Reciclagem. Can you provide details about the company?

Fonseca: RFR is a relatively new company. We have been in existence for five years. It's the result of three companies that merged. Today we sell 35,000-40,000t/m of scrap and we have about 6% of the local market of about 700,000t/m. We also have cutting edge technology.

Of course we felt the impact of the crisis, but we have been strengthening our position.

BNamericas: Are there any expansion plans for RFR, for instance outside Brazil?

Fonseca: In Argentina it’s a bit complicated because it is a very closed market; scrap is overtaxed. The Paraguayan market is weak. It’s difficult to talk about expanding to neighboring countries. We are more focused on the local market.

BNamericas: How would you describe this year’s Exposucata, Brazil’s most important scrap event? Was it marred by the crisis?

Fonseca: Exposucata was held in September and despite having taken place at a time in which we are still recovering from the crisis, it had numerous participants. In fact, I would say at the expo the crisis was almost unnoticeable, which was in stark contrast to this year's scrap event in Las Vegas. This is because the US is the world's largest scrap supplier and was hit hard by the crisis.

BNamericas: What are your expectations for 2010?

Fonseca: I believe that within Brazil the scrap sector will not have problems. The outlook is very positive.

We are expecting Votorantim's Barra Mansa operation to start consuming, in addition to CSN - which will start purchasing a line of long products - and the CSA project in Rio de Janeiro state by ThyssenKrupp and Vale will start.

ABOUT THE ORGANIZATION:

Inesfa is the main organization in Brazil representing the scrap industry.

Founded in 1975, the group researches, coordinates and protects the interests of scrap businesses in the country.

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