COMPETITIVENESS COMPETITIVENESS of the of the

BRAZILIAN BRAZILIAN FOUNDRY INDUSTRYFOUNDRY INDUSTRY

By By CassioCassio Machado, member of ABIFA and SIFUMGMachado, member of ABIFA and SIFUMGcassio@intercast.com.brcassio@intercast.com.br January 2005January 2005

COMPETITIVENESS of the COMPETITIVENESS of the BRAZILIAN FOUNDRY INDUSTRYBRAZILIAN FOUNDRY INDUSTRY

ContentsContents

�� KEY NUMBERS OF THE SECTORKEY NUMBERS OF THE SECTOR�� SWOT ANALYSISSWOT ANALYSIS�� CRITICAL SUCCESS FACTORSCRITICAL SUCCESS FACTORS�� MARKETSMARKETS�� PRODUCTIONPRODUCTION�� PRODUCTIVITYPRODUCTIVITY�� EXPORTS / IMPORTSEXPORTS / IMPORTS�� PROJECTED DEMAND x CAPACITYPROJECTED DEMAND x CAPACITY�� CONCLUSIONCONCLUSION

Brazilian Foundry Brazilian Foundry The Key Numbers The Key Numbers

�� Foundries Foundries 1 200 +1 200 +�� Revenue Revenue US$ 3.0 billion +US$ 3.0 billion +�� Direct LaborDirect Labor 54 000 jobs54 000 jobs�� Annual Production Annual Production 2.8 million t2.8 million t�� Installed Capacity Installed Capacity 3.10 million t/year3.10 million t/year�� Companies sizeCompanies size 95% Small/Medium95% Small/Medium

Brazilian Foundry Brazilian Foundry Strategic Analysis Strategic Analysis -- StrengthsStrengths

�� Labor force: abundant, low cost, receptive and trainedLabor force: abundant, low cost, receptive and trained�� Management: flexible, open mindedManagement: flexible, open minded�� Acquired and adapted know howAcquired and adapted know how�� Low production costLow production cost�� Good image (quality and delivery)Good image (quality and delivery)�� Solid economical profile of companiesSolid economical profile of companies�� Strong class entities (state and federal) Strong class entities (state and federal)

Brazilian Foundry Brazilian Foundry Strategic Analysis Strategic Analysis -- WeaknessesWeaknesses

�� Capital shortage for investmentCapital shortage for investment�� Environmental legislation complianceEnvironmental legislation compliance�� Low reference in international marketLow reference in international market�� Low knowledge about foreign competitorsLow knowledge about foreign competitors

Brazilian Foundry Brazilian Foundry Strategic Analysis Strategic Analysis -- OpportunitiesOpportunities

�� Good location Good location �� Near to foreign markets (Europe and USA)Near to foreign markets (Europe and USA)�� Nearby raw material suppliers (pig iron, steel Nearby raw material suppliers (pig iron, steel

scrap, scrap, ferroferro--alloys, resins, sand, tooling, etc.)alloys, resins, sand, tooling, etc.)�� Near to technical colleges and schoolsNear to technical colleges and schools�� Local concentrations of competitors and their Local concentrations of competitors and their

chain of supplierschain of suppliers�� Political and economical stability of the countryPolitical and economical stability of the country�� Demanding markets (domestic and foreign)Demanding markets (domestic and foreign)�� Chinese vulnerabilityChinese vulnerability�� New markets to be opened New markets to be opened

Brazilian Foundry Brazilian Foundry StrategicStrategic Analysis Analysis -- ThreatsThreats

�� Chinese production / price / subsidized costChinese production / price / subsidized cost�� Shortage of certain raw material (resin, Shortage of certain raw material (resin, ferroferro--alloys)alloys)�� Country’s logistics and infrastructureCountry’s logistics and infrastructure�� Foreign trade barriersForeign trade barriers�� High interest rates / cost of moneyHigh interest rates / cost of money�� Volatile exchange rateVolatile exchange rate�� Volatile federal policies (electrical power, tax law, etc.)Volatile federal policies (electrical power, tax law, etc.)�� BureaucracyBureaucracy

Brazilian Foundry Brazilian Foundry Strategic Analysis Strategic Analysis -- CFSCFS

CRITICAL SUCCESS FACTORSCRITICAL SUCCESS FACTORS

�� Increase production capacityIncrease production capacity�� Acquire funds for investment at reasonable Acquire funds for investment at reasonable

ratesrates�� Reduce production costsReduce production costs�� Implement marketing policies to penetrate new Implement marketing policies to penetrate new

markets and to sustain current onesmarkets and to sustain current ones

Brazilian FoundryBrazilian FoundryMarket Distribution Market Distribution (% of sales)(% of sales)

3,216,1

5,2

14,1

5,1

56,3

InfrastructureExportsOthersCapital GoodsSteelmakersAutomotive

Brazilian FoundryBrazilian FoundryDomestic Market AnalysisDomestic Market Analysis�� 67% of castings are for auto67% of castings are for auto--partsparts�� High ratio inhabitants x vehicle High ratio inhabitants x vehicle -- (2001)(2001)

�� Developed countriesDeveloped countries -- 1,2 1,2 -- 2,02,0�� Argentina Argentina -- 5,25,2�� Mexico Mexico -- 6,16,1�� BrazilBrazil -- 8,68,6

�� 99aa Largest Vehicle Fleet in the World Largest Vehicle Fleet in the World -- 20,1M (2001) 20,1M (2001) �� Capital Goods Industry Capital Goods Industry -- recoveringrecovering�� Steel Industry Steel Industry -- Brazil 9Brazil 9oo largest world producerlargest world producer�� Railway Segment Railway Segment –– recoveringrecovering

Brazilian Foundry Brazilian Foundry Annual Production Annual Production (1000 t)(1000 t)

2004 2004 -- estimatedestimated

0

500

1000

1500

2000

2500

3000

80 82 84 86 88 90 92 94 96 98 OO O2 O4

Brazilian FoundryBrazilian FoundryEvolution of Monthly Production Evolution of Monthly Production (1000 t)(1000 t)

0

50

100

150

200

250

jan/00 jan/01 jan/02 jan/03 jan/04

Brazilian FoundryBrazilian FoundryMetal DistributionMetal Distribution

by revenue (US$ - %)

57

13

30

iron steel non-ferrous

by production (t - %)

84,5

7,0

8,5

iron steel non-ferrous

Brazilian FoundryBrazilian FoundryProduction by Region Production by Region (%)(%)

South 28,1 %Rio de Janeiro 6,3 %

North/NE 2,3 %

São Paulo 34 %

Centre/MG 29,3 %

Brazilian FoundryBrazilian Foundryvsvs World Production World Production -- (t) (t) -- 20032003�� �������� ���������� ���� ������ ��

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�&'()*+��&,*(-��./01-23�*)������&'()*+��&,*(-��./01-23�*)�����

Brazilian FoundryBrazilian FoundryProductivity Productivity

(2004 estimated)(2004 estimated)

10152025303540455055

1990 1992 1994 1996 1998 2000 2002 2004

Brazilian Industry Brazilian Industry Exportation Ratio (%)Exportation Ratio (%)

62 60 56

37

16

0

10

20

30

40

50

60

70

Pig Iron Aluminum Ferroalloys Steel Foundry

export / production

Brazilian FoundryBrazilian FoundryAnnual Exports Annual Exports (US$ 1000)(US$ 1000)

2004 = 830 million US$ (estimated)2004 = 830 million US$ (estimated)

0100200300400500600700800900

1980 1983 1986 1989 1992 1995 1998 2001 2004

Brazilian FoundryBrazilian FoundryExportsExports

�� in 1980 in 1980 -- 77 Million US$77 Million US$�� in 2003in 2003 -- 565 Million US$565 Million US$�� in 2004in 2004 (forecast) (forecast) -- 830 Million US$830 Million US$�� Growth rate of 9 % per year Growth rate of 9 % per year �� Enhanced “mix” value Enhanced “mix” value

Brazilian FoundryBrazilian FoundryImportsImports

�� IrrelevantIrrelevant�� Basically components, not raw Basically components, not raw

castingscastings

Brazilian FoundryBrazilian FoundryProjected Demand x Installed CapacityProjected Demand x Installed Capacity (ton)(ton)

0

1000

2000

3000

4000

demand 2249 2800 3130 3400 3580 3770 3910install cap 3000 3100 3400 3400 3400 3400 3400

2003 2004 2005 2006 2007 2008 2009

Brazilian Foundry Brazilian Foundry ProjectedProjected Demand x InvestmentsDemand x Investments

•• Investment 2004/5 Investment 2004/5 -- US$ 387 MUS$ 387 M

•• Required Investment up to 2009Required Investment up to 2009 -- US$ 1,2 BUS$ 1,2 B

COMPETITIVENESS of the COMPETITIVENESS of the BRAZILIAN FOUNDRY INDUSTRYBRAZILIAN FOUNDRY INDUSTRY

CONCLUSIONSCONCLUSIONS�� Foundry business is a Brazilian natural Foundry business is a Brazilian natural

VOCATION VOCATION �� We can compete in a global marketWe can compete in a global market�� Our production is intimately linked to autoOur production is intimately linked to auto--parts parts

productionproduction�� Production capacity needs to be increasedProduction capacity needs to be increased�� Brazil could position itself among the top 7 world Brazil could position itself among the top 7 world

producers of castings by 2010producers of castings by 2010

Special thanks to Special thanks to Mr. Roberto Joao de DeusMr. Roberto Joao de DeusABIFA’sABIFA’s Executive SecretaryExecutive Secretary