The Latin America Steel Market:an Overview

Francisco LealOECD Steel Committee. 26-27 September 2019, Paris

Introduction

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A challenging global environment. Persistent trade tensions and theslowdown in world growth is negatively impacting economic activity inLatin America. The year started with general optimism, soon we haverealized our economies could not stay afloat in this great uncertainty.

Latin America will grow only 0.6% in 2019, significantly less thanpreviously expected (2.2%). The generalized downward surprise ingrowth in the first half of the year is behind this revision.

The deterioration of short-term growth prospects is particularlystrong in Brazil and Mexico. In both, GDP will expand by less than 1.0%in 2019, partly due to uncertainty about internal policies. In 2020 growthwill increase in both countries but will remain close to 2%.

The balance of risks is tilted to the downside: both global factors (tradetensions, risk aversion) and local issues (political noise, fiscal policy)could further delay the process of convergence to potential of growth inthe countries of the region.

Another 2019 setback, but LA will recover

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Source: IMF. WEO Feb 2019(e): estimated

1.3

0.3

-0.6

1.2 1.00.6

2.3

-2.0

-1.0

0.0

1.0

2.0

3.0

2014 2015 2016 2017 2018 2019(e) 2020(e)

GDP (%)

Construction still as the main driver. Steelmaking mainly BOF and long products

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Raw Production

45.24%

1.69%4.10%

15.29%

13.01%

19.77%

0.90%

Steel Weights

Construction Domestic Appliances Electrical Equipment Mechanical Machinery Metal Products Automotive Other Transport

45.6% 46.1%54.4% 53.9%

2018 2019

CRUDE STEEL

EAF OBC

81.8% 81.2%

18.2% 18.8%

2018 2019

PRIMARY IRON

Pig Iron Sponge Iron

49.3%47.8%

2.8%Finished Production

Longs Flats Seamless Tubes

Latin America GDP outlook

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GDP Growth (%)

Source: Latin America from IMF WEO Aug 2019 - April data update. Others from National Regional Secretaries.(e): estimated

Country 2015 2016 2017 2018 2019(e) 2020(e)Latin America 0,3 -0,6 1,2 1,0 0,6 2,3

Argentina 2,7 -2,1 2,7 -2,5 -1,3 1,1

Brazil -3,5 -3,3 1,1 1,1 0,8 2,4

Chile 2,3 1,7 1,3 4,0 3,2 3,2

Colombia 3,0 2,1 1,4 2,7 3,5 3,6

Dominican Republic 7,0 6,6 4,6 7,0 5,1 5,0

Mexico 3,3 2,9 2,1 2,0 0,9 1,9

Peru 3,3 4,0 2,5 4,0 3,9 4,0 Venezuela -6,2 -17,0 -15,7 -18,0 -25,0 -10,0

Steel Drivers: 2019 down, but strong 2020

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Source: Alacero(e): estimated

-0.9

-1.3

0.4 1.0 0.5

2.1

-4.5-4.9

3.4 3.4

1.6

4.4

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2015 2016 2017 2018 2019 (e) 2020 (e)

Industrial Production SWIP

Latam ASU Outlook for 2019-2020

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Million Tons

Other Latam: Bolivia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panamá, Paraguay, Trinidad & Tobago and Uruguay.

Country 2018 2019(e) 2020(e)LATAM 67,0 65,9 68,0

Argentina 4,8 4,1 4,2Brasil 21,2 21,7 22,7Chile 2,7 2,6 3,0Colombia 3,6 3,7 3,8Dominican Rep. 0,5 0,6 0,6México 25,6 24,7 25,1Peru 4,0 4,1 4,1Venezuela 0,2 0,1 0,1*Otros Latam 4,3 4,4 4,5

Latam ASU Outlook 2019-2020 (%)

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Growth Rate (%)

Other Latam: Bolivia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panamá, Paraguay, Trinidad & Tobago and Uruguay.

Country 2018 2019(e) 2020(e)LATAM -1,0% -1,6% 3,1%

Argentina -1,9% -14,3% 2,0%Brasil 8,6% 2,1% 4,6%Chile -5,6% -4,2% 12,8%Colombia 2,1% 1,9% 2,4%Dominican Rep. 11,0% 7,8% 5,0%México -3,5% -3,5% 1,6%Perú 10,5% 0,1% 0,4%Venezuela -66,8% -27,1% -10,0%*Other Latam -23,7% 2,3% 2,6%

Latin American steel market in 2018

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Million Tons

Source: Alacero

67,7

52.9

25.1

10.6

67,0

53.8

22.9

9.7

0

10

20

30

40

50

60

70

80

Consumption Production Imports Exports

2017 2018

-0.96%

1.73%

-8.75%

-8.69%

Latin American Steel Market 2019 (1st Semester)

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Million Tons

Source: Alacero

33.6

26.1

13.0

5.0

33.7

27.4

12.0

5.3

32.5

25.7

11.7

4.7

0

5

10

15

20

25

30

35

40

Consumption Production Imports Exports

Jan-Jun 17 Jan-Jun 18 Jan-Jun 19

-3.5%

-6.3%

-2.4%

-10.3%

Variation in the consumption of finished steel between JAN-JUN (2019 Vs 2018)

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234.0157.6 121.0 71.1 36.9 28.2

-2.5 -2.6 -21.4 -44.0 -48.3 -50.1 -50.6 -66.9 -83.7

-653.4-796.6

-1,171.4-1,400.0

-1,200.0

-1,000.0

-800.0

-600.0

-400.0

-200.0

0.0

200.0

400.0

VariationMillion Tons

Latin American Steel Trade Balance until June 2019

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449.0

2,187.9

133.9 28.8

1,538.1

103.2324.1

950.0 1,130.6 1,180.0

5,023.6

902.0

124.9

1,237.9

-996.7 -1,151.2

-3,485.5

-798.8

-4,000.0

-3,000.0

-2,000.0

-1,000.0

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

Argentina Brazil Chile Colombia Mexico Peru

Main Countries

Expo Impo Balance

5,029.4 4,747.1

11,975.8 11,683.7

-6,946.4-6,936.6

-10,000.0

-5,000.0

0.0

5,000.0

10,000.0

15,000.0

JAN-JUN 2018 JAN-JUN 2019

LATAM

Expo Impo Balance

General View

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Latin America under pressure.

In the economic scenario, we should highlight the good GDPgrowth of Chile, Peru and Colombia. Immigration issues fromVenezuela still a major challenge.

The tax reform in Colombia was not enough to reach thetarget in the projected budget, now the new policy is to reducegovernment spending to help to get there.

The main source of concern is the trade war USA-China. TheLA region is rich in fertile land, minerals, oil, natural gas andcoal and is highly dependent for economic activity,government revenues and the current account balance. Theevolution of prices will largely depend on the economicoutlook of China, the world's largest consumer of thesecommodities.

Risks and opportunities

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Trade agreements in sight.

The USMCA is not approved yet and is causing suppressedeffect in investment, due to uncertainty in the face of USprotectionist restrictions and Chinese unfair trade. However,the trade war opens the door to a promising future forcountries that can strengthen their domestic markets andinvest in value added to substitute commerce into the US.

The Mercosur-EU agreement does not guarantee realmarket growth, especially for our steel industry. As informedso far, the steel industry should receive few benefitscompared to other segments, such as agrobusiness. It evenentails a risk opening the door to replacing production withimports and the possibility of weak control over the rules oforigin of steel.

Argentina

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Economic scenario impacted by the political one.

In Argentina, pro-business president Mauricio Macri couldnot be reelected, and the course of market economy maybe interrupted. Foreign exchange reserves fell from $65.34 billion in April to $ 44.69 billion in May. With the frightof the market, the exchange rate jumped to over 60pesos/dollar after the election. Because the governmenthas used foreign financing to cover its spending, publicdebt mixes dangerously with foreign debt. Mainly for thisreason, the country depends on financing negotiated withthe International Monetary Fund (IMF). Breaking the dealwith the Fund could mean insolvency.

Final comments

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As Association that represents Steel Industry in Latin America:

We confirm that the deceleration that the region is sufferingis derived from what happens worldwide in the economicaspect, but it is exacerbated in our case because theproblem of excess capacity generates oversupply in theregion of imported steel products in unfair conditions,generating a reduction in its steel production of -6%, whilecountries like China see its production rise +9% (first 7months of 2019 vs same period 2018).

Our recommendation is to strengthen the actions taken byeach government to establish measures that prevent tradediversions, derived from unfair competition, from causinggreater damage to developing economies. Promoting freetrade but with equal competitive conditions.

Final comments

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In the Latin America region, the steel industry and theeconomic performance is about to enter in a new phase ofrecovery, nevertheless we foresee big potential impacts asa function of:• Global trade tensions and commodities prices.

• The region ability to implement structural reforms directed to productivity, innovate and assimilate new technologies.

• Substitution of production by imports, in a deindustrialization process.

A recent fall in the finished steel trade deficit, withoutincreasing production, could lead to a new set of risks ofdeindustrialization and loss of competitiveness. The solutionwe anticipate is that LA will become the trading partner oflarge economies as a result of their commercial tensions.

Latin America SRO and Discussion

Francisco LealOECD Steel Committee. 26-27 September 2019, Paris