Brazilian steelmakers criticize Mercosur-EU agreement

The Brazilian steel industry criticized the preliminary free trade agreement signed between the South American trading bloc Mercosur and the European Union Tuesday, saying the pact would not benefit the sector.

“The agreement does not bring gains to the Brazilian steel industry, which currently faces a 34% idle capacity capacity due to the country’s economic crisis and global oversupply,” national steel institute Aco Brasil said in a statement.

On Sunday, Brazil’s President Jair Bolsonaro said that the Mercosur agreement with the EU should come into force in about three years, after almost 20 years of negotiations.

Aco Brasil predicts that local industry will “lose its preference” within Mercosur and “run the risk of receiving” EU products, but with components manufactured outside the European bloc.

The industry currently has an average import tariff on steel products of 12%, which will be zeroed after the transition period of the agreement. This protection, according to the statement, is justified by the “numerous asymmetries” between the two blocs.

For competitive asymmetries, the institute refers to the high tax costs and deficit infrastructure in Brazil that makes logistics more expensive, among other factors are considered competitive asymmetries, the institute said.

The potential elimination of the import tariffs over steel goods is worrisome for the Brazilian industry because it has been for years trying to work with a premium of 8%-10% of domestic goods over foreign material, which is considered a “healthy” parity. 

“With the elimination of the import tariff, the local material will become much more expensive than any imported steel, not just the Chinese … and it is possible that we will witness a flood of imports as we have seen in 2010,” one market participant said.

In 2010, steel imports totaled around 3.8 million mt, nearly triple the 1.34 million mt imported the previous year. In 2018, steel imports totaled 2.4 million mt, according to custom data.

Another source said that pressure from imports with zero import tariff may be strongly detrimental to an industry that is already struggling to keep production amid rising costs, tepid domestic and external demand.

According to Platts calculations, Brazilian HRC sold domestically at Real 2,625/mt, ex-works, taxes excluded, is currently at a premium of 7% over Chinese HRC delivered price to Brazilian customers, after customs clearance – including import tariff of 12% – at $635.32/mt.

— Adriana Carvalho