BRAZIL - STEEL POLICIES; NAMA NEGOTIATIONS

UNCLAS SECTION 01 OF 03 BRASILIA 003162

SIPDIS

SENSITIVE

DEPT FOR WHA/BSC, WHA/EPSC AND EB/TPP
DEPT PLEASE PASS TO USTR SBOVIM, JKEMP AND MSULLIVAN
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD, KPARKHILL, SLANGKAMP
USDA FOR FFAS
NSC FOR SCRONIN

E.O. 12958: N/A
TAGS: ECON ETRD EIND BR WTO
SUBJECT: BRAZIL - STEEL POLICIES; NAMA NEGOTIATIONS

Refs: A) STATE 190684 B) Brasilia 1929
C) Sao Paulo 1185


1. SENSITIVE BUT UNCLASSIFIED - PLEASE TREAT ACCORDINGLY


2. (U) Introduction. The following information is provided
in response to ref A's request for information on the
Brazilian steel industry and related government policies.
See paras 12 and 14 regarding FIESP views on WTO NAMA
negotiations. End Introduction.


3. (U) The Brazilian steel industry is ranked eighth in the
world in terms of crude steel production. It contributes
3.1 percent of the world's total crude steel output and
accounts for more than half (51 percent) of the crude steel
production in Latin America. In 2004, gross revenues for
Brazilian steel companies totaled USD 50 billion, up 43
percent from the USD 35 billion for 2003 due principally to
increased steel prices in the international market.


4. (U) The 2004 production capacity for Brazil's steel
industry was 34 million tons, up 20 percent from a capacity
of 28 million tons in 1996. Current capacity utilization is
running at about 97 percent given high domestic and export
demand. The industry has plans to invest USD 13 billion
over the next 5 years to increase production capacity to
49.6 million tons, a 46 percent increase. Given the high
domestic interest rates in Brazil, the industry expects to
finance the expansion with foreign capital and through loans
from Brazil's national development bank, BNDES; according to
a BNDES analyst, the bank will likely provide around 30
percent of the industry's financing needs. The expansion
covers 27 plants owned by companies such as Usiminas/Cosipa,
Usinor/Arcelor-Acesita-CST, CSN, Gerdau, and Arbed/Arcelor-
Belgo-Mineira, which are the five largest groups controlling
94 percent of the production capacity in Brazil. These
steel plants are mainly located in the south (3),southeast
(20),and northeast (4) regions of Brazil.


5. (U) As part of Brazil's privatization process in the
1990s, there was an intense re-structuring of the steel
industry. When the process ended in 1997, there were 21
steel companies. In general, the companies do not compete
against each other in all market segments, but tend to
specialize in certain product areas. After the
privatization process, international and national companies
started to form strategic alliances. Although not yet
complete, Companhia Nacional de Siderurgia (CSN) and CORUS
the British-Dutch steel company started working on a
strategic alliance in 2002, which will have the capacity to
produce 25 million tons of steel. It is rumored that
Usiminas and Companhia Siderurgica de Tubarao, two of the
main steel producers in Brazil, may merge. According to the
Brazilian Steel Institute, there have not been any recent
firm closings and no other information is available on
future amalgamations.


6. (U) Brazil's production of steel products increased from
about 25.8 million tons in 2000 to 30.6 million tons in

2004. Between the years 2000 and 2003, domestic consumption
as a proportion of total production declined from 61 percent
to 54 percent while exports rose, reaching almost 13 million
tons. Domestic consumption once again accounted for around
60 percent of production in 2004 (an export tax was in
effect for part of the time) with exports dropping to 12
million tons. However, despite the drop in export volume,
strong steel prices pushed the value of exports up by 37
percent in 2004 to reach USD 5.3 billion. This trend has
continued in 2005 with a 1.6 percent increase in export
volume of steel products between January and September
yielding a 29 percent increase in the value of exports
(close to USD 5 billion) over the same period a year
earlier. Overall, export volumes grew from 9.6 million tons
to 12.0 million tons (24.8 percent) between 2000 and 2004;
the value of exports grew from USD 2.7 billion to USD 5.3
billion (94.5 percent) over the same period.


7. (U) Through September of this year, Latin America had
absorbed 29 percent of Brazil's steel exports, Asia 28
percent (China peaked as an export destination with a 18.9
percent share in 2003 and currently accounts for 6.7 percent
of Brazil's exports),North America 24.6 percent (of which
20.6 percent goes to the U.S),the European Union 12.1
percent, Africa 5.9 percent, and finally 0.5 percent has
been sold to other countries in Europe.


8. (U) Import levels of steel into Brazil are typically low
and declined by 49 percent from a high of 1.1 million tons
in 2001 to 0.5 million tons in 2004. However, due to high
domestic demand for steel, imports from January to September
2005 increased by 31.4 percent by volume and 60.7 percent by
value compared to the same period in 2004. Between January
and September this year, the European Union supplied 36.1
percent of Brazil's imports of steel products. Latin
America accounted for 30.2 percent, Asia for 14.5 percent,
Africa for 4.8 percent, North America for 4.5 percent (of
which the United States is responsible for 4.1 percent),and
finally other countries in Europe such as Ukraine, Russia,
Turkey, etc. supplied 9.9 percent of Brazil steel imports.


9. (U) The GoB does not have export promotion policies in
place specifically for the steel industry. Furthermore,
currently there are no government imposed export
restrictions on key inputs for steel production or final
products. The GoB does, however, offer a variety of tax,
tariff, and financing incentives to encourage production for
export, and the use of Brazilian-made inputs in domestic
production. For instance, recently passed legislation
provides some tax relief for capital equipment investment by
companies for which exports account for 80 percent of gross
revenues (ref B). This so-called MP do Bem measure was
contained in law 11,196, which President Lula signed on
November 21, 2005.


10. (U) The steel industry also makes use of BNDES' FINAME
program, which provides capital financing to Brazilian
companies for, among other things, expansion and
modernization projects as well as acquisition or leasing of
new machinery and equipment. One goal of this program is to
support the purchase of domestic over imported equipment and
machinery. As noted above, the steel industry also makes
use of BNDES' long-term financing programs. The interest
rates charged on this financing are customarily lower than
the prevailing market interest rates for domestic financing.


11. (U) The federal government does not use VAT policies to
promote the domestic steel industry. The VAT-like ICMS tax
is a state rather than federal tax. States, at times,
manipulate the ICMS to attract individual investments, but
there is no policy specific to the steel industry.

NAMA Negotiations and Steel


12. (SBU) Ref A also posed questions regarding Sao Paulo
industry association's (FIESP) view of potential flexibility
in Brazil's position on tariff reductions within NAMA and
the possibility of Brazil's steel sector going to zero
tariffs. On October 14, FIESP's Director of International
Relations Roberto Gianetti da Fonseca informed visiting USTR
Director for Brazil and Southern Cone that the GoB was
considering moving off the ABI formula in NAMA to a Swiss
formula, perhaps with a coefficient of 30, providing a
glimpse of future Brazilian flexibility (ref C). As the
Hong Kong Ministerial has drawn closer, FIESP officials have
increasingly been "toeing the line" on the GoB's NAMA tariff
cut limits and the government's linkage of flexibility in
NAMA to additional concessions in agriculture.


13. (SBU) In a November 19 Estado de Sao Paulo article,
Rubens Barbosa, chairman of FIESP's Trade Council, claimed
FIESP would reject tariff cuts of over 50 percent (from
bound rates) in NAMA, reinforcing Foreign Minister Amorim's
earlier statements on the GoB position. Carlos Antonio
Cavalcanti, FIESP Assistant Director for International
Relations, reaffirmed FIESP's support for the GoB position
in a conversation with Econoff November 30. Cavalcanti said
additional flexibility is impossible without substantial
further movement in agriculture - the "payment" in
industrials would be commensurate with concessions received
in agriculture. While Cavalcanti linked the 50 percent
tariff cut limit to agricultural offers currently on the
table, he provided no insight on what might be possible with
further concessions in agriculture, in particular whether
Brazilian flexibility would be limited to engagement on
sectorals.


14. (SBU) Cavalcanti was unwilling to confirm the steel
sector's ability to "go to zero," but noted that it is an
extremely competitive sector in Brazil. While claiming
FIESP "is open" to sectorals, he cautioned that many
industries do not believe they are sufficiently competitive
to engage in such negotiations. With regard to Amorim's
statements on the weekend of November 26-27 suggesting a
possible opening to sectoral agreements, Cavalcanti claimed
that Brazil would only negotiate sectorals if very
substantial, additional concessions were made in
agriculture, principally by the European Union.

Linehan