CIRCULATING COPYTO BE DRTUPTD%TE TO EPOnRTS DESR

A AIN., ,GENE1RAL FIL1ES R E RESTRICTED

LINEUL IIFNt LESPY Report No. WH- 146aTO BB RETU1RNERD TO ARCHIVES DnIVSTON

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be pub!ished nor may it be ruoted ns representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION_~ IREEJ;ea rF 1P RP TE

VII2L Wouns II

ONE WEEK

CURRENT ECONOMIC POSITION

AND PROSPECTS

OF BRA7TT.

Volume VI

The Steel Industry

lviay I1, 1965

Western Hemisphere Department

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CURRENCY EQUIVALENTS

Currency Unit - Cruzeiro (symbol Cr$)

FLOATING RATE

June 1964 U.S. $1 = 1. 200 CruzeirosApril 1, 1965 U.S. $1 = 1,840 Cruzeiros

Volume VI

The Steel Industry

TABLE OF CONTENTS

PaeA

RIT1MARY

THE STEEl IDMUSTRY OE BP7TIL 1

II. Steel Production 3L.L. uuucioncy nud Cs LJevel of Ulhe Bra-zi' an

Steel Indus-try 5IV. Financing and Ownership of th-e Steel Industry 12V. Alternative Expansion Plans for the Brazilian

Steel Industry 15

ANNEXES

1 - Table 1 Production, Imports, Exports and Apparent 1Consumption of Steel in Brazil, 1936/38and 19h9 to 1962

1 - Table 2 Production of Crude Steel by Major Companies 2in Brazil, 1955 to 1963 and Capacityend 196b

2 Description of Steel Plants Visited in Brazil 1I TTO Tlr 7TTA L T-..4.- -. La JJ±~..Lfl1J, ~ .J.L%.j I.LId. J. .L1. US-II-3Av, IpaL-t-nga, L'-LIaL &-rais1

2. Cia. Siderurgica Panlista (COSIPA),

3. Cia Siderurgica Nacional (CSN), VoltaRedonda, State of' Rio de Uaneucir

4. Cia. Siderurgica Belgo 11ineira (CS;EM),Monlevade, hinas Gerais 7

5. Cia. Siderurgica Mannesmann, BeloHorizonte, Mlnas Gerais 9

6. Cia. Ferro e Ago de Vitoria, Vitoria,Espirito Santo 10

SUMI{..RY

i.Selcn,tionin RrP7.il has grown on the average byabout 10 percent annuall- since the end of the war and reached 3.4m;llion ingot tons by 1963. urt her growt.h is exntn-ed to lead toa demand of 7-8 million ingot tons by 1970. Steel production hasgrown even fastCer t;han consumpt4on4on t;he p-t-war period t. nb+o

6A ~~~~~~~~~~VWL G S1LA W V l W111UlVV- . - k

11 percent per annum, and today covers 30-90 nercent of domesticde.,- A051iLCi I Au

ii.~ ~ UL haWbro atosc,bnd,ve given the Bra"i""a steelLi...k~ AW[um ' UJ. lI. UL 0 U UIILL'.LLACIL iLCAV~- r, V1 i UA1 - -'.L

industry a strorng competitive position. The three most important~ - -. -- - - - -- - - -- -.0L IA -.L - - 4au vaILages are fifrst, an etUrevmely chedp sUPP±L/ Ul of YLI rgi dUe LIrLo Uir

secondly, a large and dynamic market which permits an economic scale ofproduction; and thirdly, the low cost of labor.

iii. The Brazilian steel industry started out exclusively withprivate initiative and financing. However, when rapid industrializationbegan after the war and the construct-on of large, modernt plants becamea necessity, private interests could not supply the substantive fundsrequired for such ventures and government financial help was eventuallyrequired, even in cases w-here large projects had been started by privateinterests. As a consequence, government agencies today hold a majorityin the three largest plants.

iv. Present expansion plans of the Brazilian steel industry foreseeadditions to capacity, mainly in four plants. The new plants of USIEINASand COSIPA are to be expanded from 0.5 million ingot tons to 1.0 and 0.8million tons respectively. Volta Redonda is planning to go from l.bmillion to 3.5 million ingot tons and the National Economic DevelopmentBank hopes to construct a new 1.0 million ton plant at Vitoria.

v. Although these plans Drovide for an expansion big enough tomeet expected demand by 1970, their pattern might be improved in orderto save scarce investment resources and achieve lower production cost.This could be done by postponing the constriction of the new plant inVitoria by a few years as well as limiting the expansion of VoltaRedonda to 2.5 million inaot tnns bv 1970. Tnsteadj both TSIMINAS nnACOSIPA might be expanded at a faster pace, e.g. reaching 2.0 millioningot tons each by 1970n This wouild be possible at compartivelysmaller investment cost and, at the same time, help to considerablyreduce production cost in both plnnts. A study of the industry'sexpansion pattern, more detailed thsan that of the mission, is advisablehpforer major projects are *dertaken.

_1_

THE STEEL INDIJSTRY OF BRAZIL

T S+te1 Cmncimn+A eon

@ ~~~~v J

1. Stee cos,...+ +-on in Brazil rli not~ ;creasein fhp pre-wa r

period. In 1936/38 average annual consumption amounted to about500V,000l ingoto tons, about th sv,eK- as inA 1929 -n -n11 fe hwar, however, rapid growth began and has continued ever since as canue seen fIrom !hi'le fOllow-wLng figures (tLhousand tions olf ingot eq va-lor /.

i 9 3 z/0 9 90 1956I - 1,69

i949 _ O/ 8L7 1957 1- ,04U -L),-) I - -L~~~~I

1YL4~~~~i - OLLU - ±~~~~~~7L -'LU

1950 - 1,038 1958 . 1,908

1951 - 1,320 1959 - 2, 522

1952 - 1,367 1960 _. 2,682

1953 - 1,252 1961 _. 2,855

1954 - 1,872 1962 - 2,921

1955 - 1,631 1963 - 3,426

From 19h9 to 1963 the compound growth rate has been 10.3' percent peryear. Since 1959 it has slowed down to 8 percent, mainly due toinflation and political circumstances.

2. The major part of steel consulmption is concerntrated in the in-dustrial region of Brazil, i.e. the triangle between the cities of Rio deJaneiro, Sao Paulo and Pelo Horizonte. In the rest of the country onlythe southern states Rio Grande do Sul. Santa Caterina, and Perana as wellas the state of Espirito Santo, north of Rio de Janeiro consumeappreciable amounts of steel. Geogranhical distribution of steel con-sumption in 1961 was as follows (in percent):

Region %

Industrial CenterYi 89.0

South 5.7

Espirito Santo 1.h

Rest of Brazil 3.9

' Staves of Minas Gerais, Rio, Guanabara and Sao Paulo

Within the industrial center Sao Paulo is the most important state,accounting for 57. ipecen P of total JBrazilian steel+ consu H+t4o

3. steel consumpti-ion in 1960 was su ributu,e aiong major con-suming sectors as follows (in perceent):

Sector L

Iachinery, incl. electric 8.4

Transport equipment 9.3of which: Shipbuilding (o.6)

Railway rolling stock (1.6)1lotor Vehicles (7.1)

Metal products 34.5of which: Containers (8.5)

Household equipment (3.7)Others (incl. wire pdts)(22.3)

Construction and civil engineering 33.9

Railroads 7.9

All Others 6.o

4. The composition of 'steel consumption bv products has changedgreatly in the post-war period. In 1962 flat products (excl. tinplate)represented 37.8 percent of steel consumption havlng arown at a rate of11.2 percent from 19h9 to 1962. Next came bars and light sections witha share of 3L.2 nercent and a growth rate of 7.7 percent. For wirerods the respective percentages were 12.1 and 5.7 and for tinplate 7.6and 7.2 Railsq and heay seCtions represented 8.3 percent and had agrowth rate of only 6.3 percent. However, consumption of the latterproducts declined sharnlv from 1959 to 1962 and therefore a somewhat h;igherannual growth rate might be more representative. For more detail,see Table 1 of Annex T.

5. Prospects for furt her growt h in steel consumpition appear to 'begood since a sizeable and quickly growing industry as well as largereql_lire.ents for construction and civil works provide the necessarystimulus for continued growth of steel consumption. Steel consumptioncan be forecast by correlation of per capita steel consumption withGNP in constant values from 1950 to 1962. Assuming an annual growthrate of "-NP of 6 percent steel consumption in 1970 would be sevenmillion ingot tons. Another possibility would be extrapolation of the!post--war growth in steel consumption. Using an exponential trendrenders 6.9 million ingot tons for 1970. The figure of seven millioningot tons Ulso agrees with the opinion of most leading men in the steelindustry itself as well as with the] forecast made by the banco Nacional.

do Desenvolvimento Economico (DIBDE). Since the rate of' growth haddeclined in the last few years as a consequence of inflation, politicalinstability, and the slowdown in demand in early 1965, a favorablemonetary and political clinate might result in faster growth to, say,eight million ingot tons by 1970-72.

II. Steel Production

6. The rapid rise in steel consumption has been paralleled b-, aneven more rapid growth of steel nroduction. In 1949 domestic steelproduction covered 64.5 percent of Brazilian apparent steel consumDtion.By 1962 the firure had risen to 88 nereent. The annual rate of growthover the period was 11 percent. The coverage of domestic consurnntionhv don-.tie nroduiietion va-riept tnsieranh1v frrmi 07 neroent in the caseof bars and li-ht sections and 93 percent for rails and heavy sectionsto as little a 6.5 nercen+ for wire rods. Flats (37.5 percent) andtinplate (80 percent) occupied intermediate positions. 'The highestrate of increase between 1n949 and 1962 was for t ate (14. 9 ecet).Next came all other flat products with 12.1 percent and wire rcds with11.6 , wnhilfle rails -andL bleav- secion (8.3 -percent! -4-.ad 1b Ers and 1 4 1h 4.L.L . J, W~~~~~~~~~~~~~~~~~~~~LL.LC I LL~~~~~~~~~~~~~~~~~ ~~~~L~~~~U L~~~~~~~CLVj~~~~~~~~~ ~~~~ ULUL1~~~~~~~~~~~ ~~~~ .J. J ~~~~~~~~~~~~~J1L~~~~~~~ LJ~~~~~~~I ~~~~~~ O.1JA.~~~~~-= ULU l V.- ±UI1UL U LII I -.

sections (8.8 percent) registered the lowest rate of increase. Thedeveorueo-ent of stee bl-r ± o Y he U rizi. LaL1 market car; be bwS--1!rULzeU

as follows:l/

Coverage of Consur&ption Annual rate ofrroduct by production or imports growth 1949 to

(l) 1949 1952 1962

Bars and light sectionsProtduction 83 97 8.3Imports 17 3 -Consum.ption 100 100 7.7

Rails and heavy sectionsProduction 85 93 7.0Imports 15 3 -Consumption 100 100 6.3

Wire rodsProduction 29 62.5 11.6Imports 71 37.5 0.1Consumption 100 100.0 5.7

Strip, sheet and plateProduction 71 87.5 12.1Imports 29 12.5 4.8Consuwption 100 100.0 11.2

TinplateProduction 30 80 14.?ILports 70 20 -Consur'.ption 100 100 7.2

TotalProduction 64.5 88 11.0Imports 35.5 12 0.1Consumption 100.0 100 8.9

1/ Production is net of exports

- k -

Imports inlcreased substantially only in the case of flats (excludingtinplate) from 56.000 to 107.OCtons. Total imports fluctuated mostof the time betwAeen 200 and 400 thousand tons per year. Exports werenegliglible but wnill probably reaGh sizeable nronortions in 196L. Formore detall, see Table 1 of Annex I.

7. The structure of the Brazilian steel industry has twodi st nguishi.ng featu'res. Flrst, the + enrmous nat ural eucal vptus fore.Ftspermit the production of comparatively large quantities of charcoal pig

n a4t lOw cost. T- 10963 ou rf a +toal p-i4g -rlrony p^di ion of2,323,100 tons almost half, i.e. 1,l06,500 tons, were charcoal pig iron.

competitive prices has probably helped considerably in creating the secondu.L vin u feature of the Braziliar. stee LAA.A QustryJ V.L 4 -5- -ar n -of small steel Droducers. In all, there are over 20 companies producingsteel, and for moso9t of them,l steel production is the only or majoractivity. Another consequence of cheap charcoal pig iron production isX L____ _ v J__ _ n __q _ _ _t__ L__ _ X _. -I___I__ .: 4. u s_>..tihe relatively large uiuber of integrated wuork. whl e Uhere are LfUor

integrated companies working with coke there are six working withcharcoal and most of the non-integrated plants use charcoal pLg iron

purchased from independent producers.

8. There are five sizeable integrated plants in Brazil (see Table2 of Annex I), four of them using coke. The largest is the Cia.Siderurgica Nacional (CSN), whose plant in Volta Redonda is the largeststeel works in Latin America with a capacity of 1.4 millicin ingot tons,,Next come USDcdINAS and COSIPA, both new plants with 0.5 million ingottons each, but laid out for four and three million tons respectively.Steel production in COSIPA, however, will start in 1965 only. Thefourth integrated plant working with coke is that of iIannesmann with acrude steel capacity of 350,000 tons per year. The fifth lerge plantis that of Belgo Mineira at Monlevade in Minas Gerais with an annualingot capacity of 400,000 tons. This is a charcoal iron producer andas such is the largest in the world. As can be seen from Table 2 ofAnnex I, there is one other comDany producing over 100,000 tons peryear, the llineracoo Geral do Brasil. However, production is dis-tributed over six plants, only one of which at Mogi das Cruzes producesover 100,000 tons.

9. The Brazilian stee]. industry is at present engaged in a majorexpansion program in order to meet growinz demand. The Fanco Nacionaldo Desenvolvimiento Economico (BNDE) which is heavily involved in thefinancing of exDansion has drawn un a nroiection of outnut exnansinnbased on its own intentions of providing finance to expansion. Inaddition, however, there are a few companies thst are planninngexnansions independent from BNDE financing, the major example being theVolta Redonda nlqnt of the ria, *riderurgica Macional (CSrl)o By mergin-gboth the BlDE's and the individual companies' o4ans the followingexpansion pnatter.vn would emerge (irn thousnds of ingot t

Plant 1965 1966 1967 1968 1969 1970

USIiiINAS 500 600 600 800 1,000 1,000COSIPA 500 5w 600 80 800 o00Volta Redonda 1,400 1,500 1,500 1,500 2,500 3,500Belgo Mineira 400 4wO 500 500 600 700Yiannesmann 350 350 350 350 350 350New Plant - - - - 500 1,0 0All Others 900 900 950 1,000 1,000 1,200

Total 4,o50 4,250 4,500 4,950 6,850 8,550

10. Allowing for some exports and a capacity utilization of perhaps90 pe.ent,C+ thIe e -ansion foese -w n match de.-,and IrJcin. AI,'~ J. ~ u, dk ~ LALJh ki LVU1QO IZJ W.L-LJ. L11 lutlI UvAiOLAU.t jJA-uJ U_LJL e

description of existing installations, together with plans for expansion,are setut OUi,n =lAex A cric ofnis given in chapter V.

III. Efficiency and Cost Lev-el of the Brazilian Steel Industry

11. Rapid inflation in BraziL has made it extremely difficult tojudge the perfonmance of a company by analyzing its accounts. Not orlydoes the rapid deterioration in the value of money create almost insur-mountable difficulties for proper analysis of monetary figures, but aflood of special laws designed to slow down inflation and shift itsburden to or away from different sectors of the economy has introduced.further distortions in the price structure.

12. For the individuaL enterprise the main difficulty arises fromthe fact that it has been robbed of its main instrument to establishsuccess or failure of each of its particular activities, i.e. thecomparison of input and result in monetary values. Inflation does notproceed as a homogeneous wave all over the economy since for theindividual product the demand/supply situation detennines to tlhat ex<tentits price follows, lags behind or advances in front of the general priceincrease. Therefore, it can be said that inflation accentuates normalprice movements resulting from the demand/supply situation. Even ifthe general movement is upward its degree varies from product to product.In a galloping inflation the situation becomes even wrorse since short-term disturbances in the demand/supply situation often lead to immediateexaggerated movements of the prices concerned. Therefore. the effeet ofinflation on the various activities of an individual company cannot besatisfactorily corrected by simply anniving an overnll ilndex to eachmoney figure in the accounts because the velocity of price movementsvaries considerablv from one item to the other. In addition, calc'=ations of the economics of different activities are distorted by anumber of laws issued to inflii une- the economy as a whole in certainways, e.g. to increase exports. The side effects of these laws inthe individ_ail Pnt-rprise are frequently to induce actions whI ch other-wise would not be taken as e.g. export at a loss, in order to obtainthe nrivileges ganted by +he law I or e4-- t prom4 otion (see para. 1,).

13. Under all these circumstances, the management of an enterprisemoves away from cost/price considerations towards a more speculativeattitude. Technical efficiency becomes quite a separate issue fromfinancial success. For the latter, three "new" important criteria forjudging management's perfoimance have to be introduced. First, successof management is the greater the more outside financing it can obtainat rates which will be less than the inflationary movement over the sameperiod. In large sums such credit is easier available from governmentinstitutions which in turn, however, often try to win a share in thecompany in evchange for giving a sizeable credit at relatively lowrrates. In inflation, delaying payments of any kind, mainly to suppliers,also is good practice.

14. The second important principle is to keep working capital aslow as possible. Normally. this would be excluding inventories ifLIFO could be used. However, in Brazil FIFO is obligatory and thefictitious profits from appreciation of inventories are taxed.Consequently, the best policy under these circumstances is to bringFIFO as c'lose to LIFO as nossible; i.e. keep inventories as low asrpossible. In this connection, it is worth noting that firms manu-f;;c.turing prnucts in short siinn1v havp not only the advantaee of beingable to charge higher prices, but also -the possibility to demand earlypayment. In steel, for instance, w:here a period of 115 days is the"normal" delay, producers of specialties derive considerable advantagefrom being able to demand cash. lHence, the noticeable movement in theprivate sector of the inudstry to shift production towards specialtiesand leave the mas rket to the lar 1 gosv-= .nt-o.sed plants

5 The ti-dA ant rtost i.portant poi..t is a "sond" price policy.This involves over and above a normal sound price policy, the knowledgenot only of what every prwoduct sold has cost, but also -what its pro-duction under present monetary circumstances would cost, i.e. itsre-placemenlt value. Because of the rapid inflation widel;y varyingprices for the same products can be and are charged. Expectations offuture developments in the prices for differenb products also varywidely, even if a consensus may exist on the speed of overall inflaticn.Hence, ULWe skili of purchasing and marketing personnel and their feelfor the market and its future price movements become doubly importantas not only the normal competitive forces are at work but in additionprofits and losses are accentuated by purely monetary movements.under these circumstances, the safest method to establish the profit-ability of an individual sale is to calculate the cost of the productsold in replacement values. Only in this way can the necessaryfinancial means be secured to remain in business, i.e. to continueproducing., Any other, i.e. loTer than replacement value, leaves thecompany with a financial deficit the moment it reDroduces the Droduct.In periods of rapid inflation and in businesses with sizeable stocksthe "inflationary'gap" can assume considerable proportions if eithera lack of skill in accounting or a lack of possibilities -to raise

prices sufficiently result in sales prices lower than replacementvalues.

16. The reaction of individual companies to these circumstancesvary widelvfrom simple continuation of established accounting andpricing procedures to a complete double accounting system, one intraditional form ror tax purposes and one in replacement valuesincluding price forecasts for all products of importance for thecompany concerned. This svstem serves as a basis for pricing policiesas well as for decisions to continue ordiscontinue (or to expand orcontractl the nroduction of individual items. Intermediate forms ofdouble accounting by deflating all values by one inflation index--usually that of the Vargus Foundation--are most frequent. It shouldbe kept in mind that calculations in replacement values include allitemsj5~ i.e= dre -_tion of' fixed assts. valuation of inventories.reserves for bad debts, etc.

17. To illustrate the complexity of the problems arisin- from"Itintrnn" rad inA f n4 ati or +d the rq d+.,rettA ron of t.hp yrd-

stock "money" used by enterorises the followJing case may be of interest.Company -found tha it1, co 4-- " not really -;u.d- 4he ef irc f ec

individual shop of its p'lant by using actual data. Consequently, asyst-em of cost accounting based on intern-Iational prices tVas devisedwhich is absolutely independent from Brazilian prices. The result isa cost account in quantities -weighed by normal" prices. On the basisof this system changes in tlhe efficiency of individual ope rations aredetected and subsequently its causes traced to es-tablish whether "normal"or inflationary factors are the reason. If the latter is the case itoften points to possibilities of avoiding losses or to making aduitionalprofits. Although the bi-monthly operation of the systiem required anIBM computer the overall result has been an anpreciable improvement inthe company's financial position.

18. In addition to purely monetary aspects, inflation has beenthe reason for quite a number of special laws which create constantlynew and "unusual" possibilities for individual companies. Therefore,the success of management today also depends on its imagination inprofiting from these laws. While the same is, of course, true inothercountries it seems that, as inflation in the purely monetarysector, the concurrent wave of laws has considerably altered thesituation as compared to "normal". Since it is impossible to describethe whole picture in systematic fashion a few examples may give a tasteof what is involved.

19. The new law on export promotion provides for the followingimportant incentives. For half of the value of your exports you obtainthe license to import free of some of the almost prohibitive restrictionsas e.g. the surcharge on every transaction involving foreign exchange(including purely financial transactions) and the requirement to deposit

n-o -

50 percent of the value of your imports with the Banco do Brasil for 210days, w]hich in view of the speed Of infation. is a very efectivreadditional tax on imports. It is evident that an industry like steelwhich requires large imports of raw materials (coa l, s-uLpplies and 1qui -

ment (new or spare parts) can derive substantial benefits from this newlaw even when exporting under cost.

20, A more complex example is based on a regulation that 20 percentof the proceeds of oil imports into Brazil had to remain, in the countryunless the oil company concerned exports some product (excluding iron oreand coffee) in the same value. In one case this has lead to the exnortof finished steel to the overseas subsidiary of the oil company concernedat a price somewhat over world market prices. The deal wras sought cutby the steel company.

21. The new law 4347 on re-evaluation of fixed assets will havewidely varying effects on different companies. Since Brazilian lawsdo not permit depreciation of land and compary-owned buildings andsince there is a 5 percent tax on the increase of fixed assets companieswith smaLl land holdings and less value in buildings will profit ascompared to others. Another facet is that re-evaluation anddepreciation has to be on the book value of net assets. Consequently,re-evaluation will Five companies with fairly new installations muchgreater neu! depreciation possibilities than those with most assetswritten off.

22. These few examples may suffice to indicate the complexity ofthe situation. It serves to stress the point that only extremelyflexible managers mith a definite flair for snpeculative thinking tendto remain successful, while the conservative usually faces a slowerosion of his financial strength.

23. In *rwo h ai n+ atln, it *s A; ffcl ofrprecise `udgmnent on the efficiency and competitiveness of the Braziliansteel i ndultry, even if cost data are available. HorIever, an ntoverl impression can be obtained if total cost per ton of product are adjustedroniirly tr. rt ae rep

1ace.fn+t val ue, th2n conr.verted A ir-.t U.CS. ollar

* *.L~~..tt±t ~ U V Ci. UL~~** ~t~~iy~t i~I~ .&IAUUJ U.J Vi W~.L±.L Ct,Q

at the free rat ' prevailing in the month for which the data were obtlainedand compared to steel prices in t.he leaUing producing and exportingcountries. To reflect replacement value cost data have been increasedby 20 percent based on an ass-umed average lag of abo-uL three monthsbetween the purchase of inputs and the month of actual production.T hs include- an adjustment for depreciation wherever this was iowerthan US$15 per ton of finished product sold, which is the overallaverage of the American steel industry. For comparison, steel exportl

using tne iree rate actually understates Brazilian competitiveness.The theoretical unified exchange rate would be even more favorablefor the Brazilian steel industry's position.

prices were taken for the ECSC (actually obtainable prices, Thomasquality, rOP) in utoveuiuer ±yuu and their high ariu low in uhu past fiveyears, United Kingdom and Japan export prices in November 196 4 and forthe linited States home prices in November i964, as these were generallylower than export prices, while the reverse is true in the ECSC and theUnited Kingdom. The resulting comparison is as foliows:

(In US$/ton)Brazilian Ad- ECSC export prices Export prices tiomejusted Cost Nov. 1959 - 1964 U.K. Japan U.S.A.Second Half 1964 high low Nov. Nov. Nov.

1964 1964 19641 1.964

Pig iron 45-/ 58 _ _ 62=/ - 63

9/'Blooms, slabs 73 - - - 9O ' - 84

Merchant bars 85 91 110 81 114 80 129

Hot rolledsheet 98 110 - 107 126 121 116

Cold rolledsheet 109 109 200 104 132 129 1X2

Heavy plate 92 9g 108 83 116 115 121

1// Coke Pig iron. Charcoal pig iron is about $302/ Hnom. prices

Smrces: Me-tal Bl1letin; Iron Age, UN/ECE: TheEuropean Steel 1M1arket (1961 and 1962)

2L. Althou-h these fi.gures can only be considered to be roughindication,z of t-he rea~l siti n -thypoint oafilygo c,petitive nosition of the Brazilian steel industry sirce its adjustedcost-s for ' rou+ lis~+-ed is3 ~eithe-r blwor notl substantial-lydifferent from the export prices quoted. The basic reasons for thesecomlparatiwvPely low costs are first, extremely cheap supply of high gradeore (varying from US$2 per ton of pig iron produced to about US$6 for a100 percent 81nter charge), and secondly, Low cost of labor. Inaddition, compared to many other developing countries, Brazil has theadVa1Utage oI hJCaVIng an inuternal marKet6 large enougn to permit steelproduction in several large integrated plants, while the small scaleproducer profits from the very iow cost of charcoal pig i.ron which moreor less offsets the advantage of the economies of scale in the largeplants.

- 10 -

25. ComDared to European plants, the cost of coking coal is alsonot particularly nigh, since Uaerican coal is landed in Vitoria forabout US$17 per ton. As is knoun, the cost of European coking coal isso high that governments have had to -p-ose severe restrictions on theimport of American coal in order to protect the European coal industry.In Brazil the national coal industry is protected by a law providingthat foreign coking coal can be imported duty free only if steelworksuse 40 percent national coal. This is a low grade coal wnicn, however,after beneficiation and proper blending with American coal, renders asatisfactory metallurgical coke. Beneficiated national coking coalcostaabout US$26 fob Santa Caterina. Transport cost to individualsteel plants vary widely, depending first on whether comparny-ownedbulk carriers are used and secondly, on unloading and port charges inthe receiving port. Low coke rates have been achieved by the plantsusing coke, the average being around 600 kilograms per ton of pig ironproduced, with a record achievement of 578 kilograms per ton byUSIMINAS in July 1964. In plants based on charcoal, technicaladvances have also been made. Belgo-iiineira, for example, has reachedoutputs of 450 tons per day per blast-furnace with charcoal consumptionat L0o-4$50 kilograms of carbon per ton of Dig iron produced. All theseadvantages can once more be illustrated by a comparison of domestic steelprices in selected Latin American countries:

Domestic Steel Prices in Latin America, September 1964(in US$ per tonn at+ f-ree exc.hnnaa vmat

(cif capital of the country)

Brazil- Arg. Col. Chile Mexico Peru Venezuela

Concrete bars,in -7. 7-12 m. 99 192 17 16 55 0 4I uu (L~ M.I 77 ±L7L ±L4! .LC .. )L 2OU ±L-4 u

Concrete bars,20 mm, 7-12 m. 90 188 131 126 152 194 13lL

Wire rods in coils,8 mm. 109 206 163 140 167 205 152

Hot rolled blackshveetL, J .umw, l.x3 m. 132 L)96 -).L Loy 1i9 56 -

24 B.W.G, 1x3 m. 191 249 191 181 197 -

Galvanized sheets,0.4 mm. 1x3 m. 217 391 206 221 332 - -

Angles, 28.1x38.lxb.8mm, 7-i2 m. 115 213 175 153 168 186 131

u,L ld7-1 2 U..LA7 . v

mm, 7-12 m. 101 213 190 152 168 236 133

I/ Sao Paulo

Source: Revista Latinoamericana de Siderurgica,M^vr 19Of El TTr A pACn - +; ^ _%

26. In spite of the favorable cost situation, there is stillplenty of room for improveTrents, mainly as far as general overheadsand administration are concerned. Although the cost of labor is low,considerable savings could be achieved by streamlining employment.While employment is alreadr higher than normal in the plants themselves,(e.g. 13p,000 for a plant of 1.4 million ingot tons), the main problemis often the social obligation to keep up whole towns, socialfacilities, etc. usually at a loss since, for social reasons, neitherprices nor rents can be raised to the economically required level.Part of the over-staffing is due to lack of skill and consequently on-the-job-training on a large scale is found, particularly in newerplants. Another facet is that many plants have to maintain a largestaff in repair shops, auxiliary services and for maintenance, sincethe required services can-not be obtained from outside the plant.Finally, administrations are usually over-staffed.

27. The favorable cost situation of the Brazilian steel industrysuggests that it should be in a position to export, at least tocountries where it would have a transport cost advantage over the oldproducers and exporters, i.e. Europe, United States and Japan. Partof Latin America and eventuallv West Africa mimht be Dromising targets.The Latin Ahmerican Free Trade Area (LkFTA) will strengthen Brazil'scompetitive position in that area even more. In qnite of its. fairlvfavorable position the Erazilian steel industry has shown littleinterest in exporting in the nast and failPd to set up the propermachinery to promote exports. Only the recession in 1964 broughtabout a Ghange of' ~-a1-nu snd wjth it nimedjate and considerablesuccess. Export orders were obtained not only from Latin Americancoriutri Pq in par+ieulan Argertina 1bu,+ also f-.om -4- Tsrael and- - -- - - - ---, ~ I-- -- - ~ .- _ UA J ~JIL JH

0, _L 1 a _L '.AI

the United States. In Spain and Israel the orders were won ininternational biddinv in face of stiff com.petition from Europeanfirms. The prices quoted covered fully total cost and a small profitin addition to *;hich there are t.hVe advantates derived rI-om the= exportpromotion law. One company indicated that in October 1964 it had soldout tk.e p1art- 4- of4-_ -e 4F-r 1965 anr,- -_ .- - - - LJUUA LL UIJ V VAkJIJL ID UijJ U L 'V r LaLUt.ly ±7U); d[LIU

could have obtained export orders for 250,000 tons for 1965 if it hadthe necessary production. capacity available. 'I..et1hr the recent

discovery of the export potential will bring about a basic change inthe attitude of Brazilian steel producers or whether they wii turnback to exclusively supplying the internal market as soon as con-ditions permnit, remrains to be seen. At any rate, tnere seems to beenough evidence to assume that Brazil could export a-,preciablequantities of steel if the production capacity were available andsteel producers would invest time and effort to expand their foreignmarkets. Since, unlike other developing countries, Brazil has alarge internal market exports could represent a welcome supplementaloutlet andc the competitive position of the Brazilian steeL industrywould be even stronger if the cost of the additional output were notso much related to total cost, but rather to marginal cost.

- 12 -

IV. Financing and Ownership of the 3teel Industry

28. Up to the second world war the Brazilian steel industry i.asPnt.+relV in '-rivntE hands. nuring the war the federal rovernmentdecided to construct two new steel plants, first, the integrated largeplant at l Volta PRdonnrid anrd enndly the snecial steel nlant of Acesitain l;inas Gerais. Both these plants have remained almost entirelyow.ned bny the Federal Government through the TreasAirv. The share ofprivate stockholder is about 7-8 percent in each of them. Since 1952anot..her 6overn=v+ o-rgarzati0,n t Bmi, 1-s py an im_ortantrole in financing the steel industry. .Then inflation started tobecom..e more rapid the BAnE der nA euty ̂ r+ciation whe,n makinglarger loans 2nd thius has obtained substantial or even controlling

shares in th.0e steel Wa,Cne which were o n sat byprivate interestsa USIMINAS, COSIPA and Ferro e Ago de 17itoria.

29. CO;,IPA was started by private interest in 1953. However,~viiei ±0~ ~0j.LUC"J ±14dU WIt L4 Z 1 IILL 1'Z_)~~whetn -large capita incrase --- re reurdA.e=, e pwasoh

and obtained from various sources resulting by 1963 in the folimoingdistri-uut:L.on of shares: rNLE, V8.2 percent; State of Sao Paulo,23.3 percent; National Treasury, 6.7 percent; private interest 9.1percent; oth'ers 2.7 percent. Mean-w'Ie, the E,NDJE has ad-vanced largeamounts of capital to COSIPA (35 billion Cruzeiros by September 1964)which wiil be converted into stock when a new capital increase is made.Since the other stockholders are reluctant to go along with a capitalincrease it can be expected tint the BNDE' s share will soon increasesubstantially. Ferro e Ago de Vitoria originally was a charcoal pigiron plant owned by private Brazilian interests. In 1960 an agreementwias made trith the German Ferrostaal to construct a small integratedplant. Ferrostaal obtained a majority in the new cormpany and extendedsuppliers credits for the equipment. However, financial difficultiessoon developed which were overcome by a series of capital increasesmainly through contributions from the ENDE since neither the Braziliannor the German group took up their stock options. As a result, theBiIJDE today holds about 93 percent of the shares.

30. Foreign comDanies are involved in three important firms.In 1921 Arbed of Luxembourg founded the Belgo-llineira which sub-sequently became the first large integrated steel plant of Brazil.Today Arbed holds 34 percent of the stock, while 66 percent is dis-tributed among some 20,000 Brazilian stockholders. In 1952 theIannesmann Steel Co. of Germany started construction of an integratedsteel plant at Belo Horizonte in Mlinas Gerais. At present. iIannesmannstill holds about 70 percent of the shares, the rest being held by alarge number of Brazilian individual stockholders. In 1958 a steelcompany was formed in MUlinas Gerais by Japanese and Brazilian interests,the Japanese holding L0 oercent. Brazilian holdings werr snlit. amnnthe State of Minas (25 percent), various Brazilian industrial firms andprivate interests. In 1962 canital was increasre miYfr1r1 and the

- 13 -

BITDE became an important stockholder after industrial and privateinterests had refused to ,o along wTith the capital increase. Miainshareholders were then: Japanese, 40 percent (a group madle up ofYawata. Fuii, Mippon Kokan; Kawasaki, Sumitomo, Nakayama. TokyoShibaurap Hitachi, Mitsubishi Denki, Miitsubishi Zozen, Ishikawajima,Hibaura. Fuli Denki and individuals): BNDE, 25 percent; State ofAlinas Gerais, 24 percent; and Cia. V7ale do Rio Doce, 9 !percent.In October 196 )j nepotiationns between Brszilian and Jananese interestsstarted on another substantial capital increase by about US$60 millionequivalenrit Howpver, hy the midcdle of .Tnvemnher- it anneared likelythat the Japanese group was not prepared to contribute more thanUS$T1) million, thereby reducing its shnre in the cornmny to( less than30 percent. It also seems likely that the State of Miinas Gerais willnot go along, with th" capital increase. The BNMTE will prohably haveto take up both increases and consequently obtain over 50 percent.

31. The rest of the industry is controlled privately and hasbeen~~~__ fi e {r..paesucs redCit-s from, com,u,.ercial Wnd govern=-IJ~~~I1 ~ L.LU JIL U.V V LU." L U LO LiJIIIOiUP

ment banks and suppliers credit. During the last few years wheninfl ation grew continuously faster, it became morue anjd more difficultto obtain financing in any form. The recession in 1964 has furtheraggrav-ated the situation as steel prices rose apprecia-bly slower thanthe general inflationary price increase.

32. As has been pointed out in the previous chapter, gallopinginflation makes it difficult to evaluate financial statements byindividual companies. In particular, the determination of real profitsis almost impossible since replacement values--which ought to be thebasis of such a determination--are not available. However, judgingfrom the cost picture developed in the previous chapter profits undernormal conditions should at least be adequate if proper pricingpolicies were followed. As has also been pointed out, judgments ofcompany performance on the basis of accepted ratios would be extremelyhazardous since, for instance, in an inflationary situation the lowestpossible current ratio and the highest possible debt/equity ratio aremost advantageous. From this point of view the Brazilian steelindustry has not fared so well since long-term loans are practicallynot available except in limited amounts from abroad and financingrequirements therefore have to be covered by increases of equity, whichanyway is increased constantly by periodic re-evaluation of fixedassets. Consequently, most of the industry has an excelLent debt/equity ratio by normal standards. Current ratios vary greatly,depending mainly on how strongly the company can urge its customersto pay promptly and on the other hand how long it can delay paymentsto suppliers. Short-term credit is very expensive and difficult toobtain for periods of more than 30-60 days.

- 14 -

33. In the period from 1952 to 1963 roughly US$1,100 million havebeen invested in the Brazilian industry. Of this total, about US$41200million were financed in the form of loans or participations by the BlhDEto which another US$25 million supplied by BWDE in the form of advancesshould be added. Furthermore, the BNDE guaranteed foreign credits tothe extent of US$325 millionlY. This figure excludes foreign creditsfor the construction of the Mannesmann plant and for the expansion ofVolta Redonda. The latter two projects required approximately totalinvestments of US$100 million and US$200 million respectively, of whichabout 50 percent were obtained from abroad. About US$100 million wereraised for C3SIPA and UTSIMINAS outside BIZE financing, advances andguarantees. This leaves the rest of the industry for which only a veryrough estimate can be made by assuming investments to be about US$15 perton of crude steel output, reflecting mainlj retained profits,derreciation and financing obtained from private Brazilian sources,foreign financing being already included in the PNDE guarantee figure.Under these assumptions the figure for internal financine of the restof the steel industry would be around US$150 million. Summarizingthee estirmates (in millions of US$):

225 BlZE resources10 Own resources (Mannesmann and

Volta Redonda)150 nther

1,100

The total investment of about US$1,100 million compares with a capacity1 ^ -- - -- -V + V,- -41 * 1 -' ' - -; -- 4 tJns ove SI6Q UIG V% 1-uli Derlo con er e' L.nne s

million tons, due to COSIPA and USIIiINAS, cost about US$500 million,Le V.aLg US$600\ rLL 'l.on flr tUh Vt1J.AU41-" tIwu rnL.LLio nIKgot ton i

i.e. UTS$300 per ingot ton, which aDpears to be reasonable.

34. The data available do not permit a year by year breakdown oftIh Lnvestment estimatue. nowever, an approximation can De arrivea atfor the two periods 1952/57 and 1958/63. In the first, about TJS$300mililon were invested, in the second, about aoo million. The increasingimportance of the BPDE as a source of finance for the steel industry isillustrated by the fact that during the first period it contributed onlysome US$20 million in the form of finance and guarantees, i.e. less than10 percent. In the second period, however, about US$530 million in theform of financing, advances and guarantees were contributed, i.e. two-thirds of the total. Excluding guarantees the ENDE's contribution was

/ Up to the end of 1963 the amount of refinancing the repayment offoreign loans by BNDE and consequently the amount of double countimplied in adding up financing and guarantees is negligible.

- 15 -

almost US$220 million, i.e. 27.5 percent. On the other hand, theextent to which the steel industry has taken up Bv;DiEs resources canbe illustrated by the fact t1hat out of total financing steel represented0.6 percent up to 1956, 7 percent in 1957, 81 percent in 1960 and 84percent in 1963. In 1964, it is estinated to have reached 87 percentand the forecast for 1965 is about 80 percent. IWhile steel re?reFented6 percent of financing of basic industries by the BNDE up to 1956 itsshare clirnbed to 9t percent in 1963 and rill be 100 percent in 1965.The BR-DE's interest in financing the steel industry can be seen from thefact that in the period 1952/63 steel represented 22 percent of allrequests for financing, but hL percent of all financing granted. Thesame applies to guarantees of foreign credits authorized. Steel'sshare in total requests for guarantees was 22 percent, its share inauthorized and contracted guarantees 48 percent. The precariousfinancial position of some of the steel companies financed by BNIDE ledto the choice of participations rather than loans which is contrary tonormal BI)DE practice as is borne out b-y the fact that 91 p)ercent of allparticipations held by Bi\'DE at the end of 1963 were in the steelindustry. In 1964 and 1965 this percentage is due to increase evenfurther as large advances to various steel companies are transformedinto narticipations.

V. Alternative Eynansion Plans for the Brazi1ian Steel :[nduitrt

35e Tt hnq been estim-Ated in chapter T thnt Brazilian steelconsumption by 1970 might reach 7-8 million ingot tons. It has alsobeen pOi nted out that proc ts+.z forv rapid inrs o a f Prnaz I iis steelexports are good and therefore an allowance of 0.5 million ingot tonsfor ne+. avr + c c d, bema. Takngi i4no account tha;t cap,acity

Will hardly be utilized by more than 85-90 percent the expansion targetsho,-,Id be a crude steel ,,roduction capacity o0f about 8. 5 rr.illion t.lon sby 1970.

36. Brazilian plans fcor expanding steel capacity can be arrivedat by putting togetLhr h x on ro o individual co-. pni-.The item "all others" is of necessity a rough estimate only, but sinceexpansi;on plans of" smae o.pne enrlyino-eonymds~~~. L i J.L-LU I.AJ1IiPCU11.U0Z 5J1-LLL LLV0jLVt: (JL1±~y MoUest5capacity additions their effect on total Brazilian figures remainscom,paratively sr,all. Plans as put together from individual companies,projects would result in the following growth of capacity (in thousandsof ingot0 tLons):

- 16 -

Plant 1964 1965 1966 1967 1968 1969 1970

USIMINAS 500 500 600 600 800 1,000 1,000COSIPA - 500 500 600 8oo 800 800Volta Redonda 1,1400 1,400 1,500 1,500 1,500 2,,00 3,500Belgo Mineira Lao LOO LOO 500 500 600 700ilannesmann 350 350 350 350 350 350 350Niew Plant - - - - - 500 1.0OOAll Others 900 900 900 950 1,000 1,100 1,200

Total 3,550 4,050 4,250 4,500 4,950 6,850 8,550

37. Investment requirements for this plan can be roup hly estimatedas follows: (million US$)

Plant 1965 1966 1967 1968 1969 Total To be spent Impliedin: cost; per

Brazil Abroad ton ofaddedcapacity

USIMINAS 40 20 - - - 60 20 140 120COSIPA 10 10 - - - 20 5 15 65Volta Redonda 60 100 120 160 170 610 300 310 2'0Belgo Mineira 10 10 10 15 15 60 °0 20 200New Plant 40 80 120 110 100 450 260 190 450OAll others 10 10 10 10 10 50 25 25 165

Total 170 230 260 295 295 1,250 65f0 600 27 ,5

38, ~~~A ru, uc i poin 1 ln 4 hl xplsio patr s h ostrcil~~ y~~JJ~~Lt.~~ t- i - x 4 4 r U±LL uJ.ILuil JC1 L, L L UL bJtZ UOI5i LVUCUJLCI

of a new integrated plant at Vitoria proposed by EWDE. Its mainjustification is the expected deficit in non-flat products by 1970.Another powerful motive to start this venture would seem to be the Bi,TDE'shope to obtain participation and finance from the Italian Government-controlled s-teel group Finsider. The possibility to produce therequired non-flat products at USSIiivi'AS and COSIPA is rejected with theargument that these are flat products plants and should remain so.Hence, no further expansion than to 1.0 and 0.8 million tons in thesetwo plants is foreseen, although their layout permits expansion totihree or four times that size.

39. The most important increase of capacity is expected to comefrom Volta Redonda's expansion from 1.14 to 3.5 million tons. In theopinion of many industry people, including the former long-timedirector of Volta Redonda, this scheme is too ambitious and will resultin considerable, uneconomic overcrowding of the site. An output of2.5 million ingot tons is generally considered as the optimum.I,mportant factors in weighing the advantages and disadvantages ofpresent expansion plans can be summarized as follows:

- 1r -

1. Since investment cost per ton of capacity addedare always much lower for expansions of existingplants than for new construction on a green fieldsite, postponement of the new plant in Vitoria mayentail a saving of capital outlays to the countrysince the same expansion could be achieved at lowercost in USIMINAS and COSIPA.

2. Important possibilities of lowering the cost ofproducing steel in USIKENAS and COSIPA are foregoneby limiting their exDansion to the proposed figures.Lower investment cost for further stages than forthe first would soread the heavw financial burdenover a larger production and improvements inoperation and management as a restilt of exneriencegained in the first stage would quickly be reflected-in lowpr eot nf thp neIAitAnnal lt. Tnthe new plant in Vitoria wolld add another importantnlantt whirh is srggling wt+.h all +the iuanl j+inl

difficulties resuLting in high cost.

3. The expansion plan at Volta Redonda will resultin low,r investmet+ cost per ton 4f i 1 44i dto the 2.5 million ton expansion and secondly,II,:I r. V=% AC-re-e the dangefr t.at-aZ8 com,pare(d t1oO thepresent--costs would rise because of the higherfi1nacial burden and ubcause of an overcruwded plantsite.

4. The present plan would probably perpetuateNDhE's obligation to investing the major part of itsfunds in the steel industry and at the same timediminish the nope of its being able to sell bothUSIMIiAS and COSIPA to the public since it seemswulikely that these plants can earn a reasonarlerate of return on investment at the limited sizeof output foreseen.

4U. in view of the drawbacks of present plans, the followingalternative expansion pattern might be suggested (in thousands of ingot;tons):

Plant 1964 196 y 196O 1967 1968 1969 1970

USIMINAS 500 500 600 800 l-o0 i nn 2*000COSIPA - 50o 6oo 800 1,000 1,500 2,000Volta Redonda l.Lw0 1.Ioo I50nn 1, 500 1,500 1,800 2,5n00Belgo Mineira 400 400 400 500 500 500 500Mannesmann 35n0 350 3o< Inn 5 n tvn GnAll others 900 900 900 950 1L000 1j,0 1,20

Total 3,,50 4,o50 4,350 4,950 5.500 6,900 a,700

- 18 -

In actual nractice. there is likely to be some slinnaae so that the twomillion ton ca'acity for USIMINAS and COSIPA may not be reached until,say. 1Q72= The principl1 diifferenres nre thnt. TSTMT13AR and ('nrTPA wou.lAbe expanded faster, 'Volta Redonda would be ;kept to 2.5 mi:Llion tcns andthe construction of te plnant at V1tor4n be elanraA lvby a fw years. nn

this pattern of expansion USIIIINAS or COSIPA would have to diversify intonor.-r^lat -roducts to m-eet do^me S t i C d e M&-nd A >.o Mioh, also^ export.-

11,' - 'y-'fA~J*j% fS~l * *t. -64* . '' ''

possibility of expanding further into the export markets for flats,leaving sosme deficiency ofVLmsXcsp lyO non-flat's tlo lbe covered 1D.^-yimports.

41. Investment requirements for this alternative can be roughlyestimated as *ollo-ws (mi±lion US) :

Plant 1965 1966 1967 o19 19o6 Total To be spent in: Implied costBrazil Abroad oer ton of

added capacity

USI11INAS 40 50 70 70 70 300 130 lTC) 200COSIPA 40 50 70 70 70 300 130 170 200Volta Redonda 20 40 7CT 80 30 240 120 120 220Belgo Mfineira 2 2 2 2 2 10 4 6 100Mannesmann 3 3 3 3 3 15 6 9 100All others 10 10 10 10 10 50 25 25 165

Total 115 155 225 235 185 915 415 500 195

42. The estimates of investment costs (and the propcirtion of domesticand foreiern cost) in p1a(araphs 17 anAII 4 nare highly tentaTire and wil]have to be firmed up by more detailed studies. Apart from minor pointsas the smnller exy ariri of 'PO ^ ?inelra +o -4 A 4 rerc 4n of 4te

site and the increase at M2annesmann possible at very low investment, thetent-ative estimate-S point to the foloin posbl d-a'a o halternative investment pattern:

l. A considerable saving in investment cost.

2. A greater chance of lowering the cost of steel__ . _ B._ tIC 1rTY/T!A ^ __ - 8 _ o proudu-Cd uy vu S.1Io ASnd COSIA because or a largerscale of output. Hence, a better position for thesale of bot'n plants to the public and better prospectsfor BN1DE to have funds available for sectors otherth-an steel.

3. Lower costs in two important plants and possiblyalso in Volta Redonda would improve Brazil'scormpetitive position and hence prospects for exportsof steel.

43. The potential sources for financing the suggested expansionpattern can be estimated only roug,hly. Internal generation of funds

- 19 -

under normal circumstances, i.e. excluding grave recessions, might bebased on the figure of US$15 per ton of output as explained in para-graph 33. Both USIMINAS and COSIPA will most probably not generateany funds, but will even require some cash in the next few ycars forpurely operational purposes. For the rest of the industry internalgeneration of funds is therefore estimated at US$230 million 1/. Un-less special measures are taken to mobilize private savings, the BIFEwill continue as the principal source of funds in Brazil. If the BN DEcontinued to channel t-he maior part of its resources into the steelindustry, it might be able to supply some US$50 million per year, i.e,a total of LTS$2T50 million. This would leave S T3 ,mI Jllio.n to be fin.anced from foreign sources. However, if it were assumed that alley-4r-.nt -impor+s will be foreigrn finar.ed, +thi f4snm-ing gnap to beclosed by BNDE would amount to US$185 million or about US$35 million aIr&-s i ng. 4h, D"n WMA ' 'd be _ able lo -- In so.ma TT<415f .411ior. intoJCZLIJ 0 v@ UAhM iiJuW&J VI %"d U..L'. w VW &Aa&4MA'WJ6 W'L L # U.PVPh &.AW

sectors other than steel.

I/ ARnTming the U$155/ton+ iile doAas ort appy to .new caaci 4 in

the first few years.

TABLE 1

-?RDDE.SI 21D _!4 2RT E- .'RTS L. .APARNT_NT CONSCUITD4 OOF SThEL IN BRAZIL, 3193cS/33 N) 1919 TO 1-62

(in thouskand tons of fi.i.17e' pr3ducts

1936/33 19l,9 1950 1951 19Q5. 1?93 19& 1?55 1356 197 1958 1959 1960 19O61 1962

-rv a diht, .ec- tionsroduction 36 231b 268 264 32 7 31? 29-4 2914 376 421 517 627 701 780 759

minorts 80 h 6 ' 5 63 51 21 203 84 19 37 19 27 22 26 214

LxDorts - 3 - - - - - - 3 - - 9 8 5

2o:nsunsntdon 160 277 313 327 386 330 497 378 395 455 536 654 714 798 778

? us and ;eavy .ections*roduction - 69 106 120 130 128 153 16h 186 176 171 1.61 129 172 177

Thn orts 71 12 15 21 33 23 27 3h 16 90 88 271 161 83 1.3

:or ts - - - - - - - 12 3 - - - 8 - -

>nsum7tion 71 B1 121 141 163 151 180 186 199 266 259 L32 282 255 190

WI re Rod; roduction - 37 36 145 4:1 h3 48 62 68 70 75 89 iLl 16: 1,72.

,rMorts 60 89 117 .15 120 5i, 171 94 86 98 31 41 67 65 103.xports2,nsum.tion 6o 126 153 199 16.1 103 219 156 15h 168 106 130 208 230 275

.trio, Theet and P:Laternduction - 152 160 206 227 249 273 376 367 3599 461 525 607 682 753mpoy,rts 85 56 50 56 102 51 137 61 38 60 14L4 Lo 100 11) 107

ux'ortS - 13 IJ 1 3 - - _ - - - - 12o nsumption 85 195 206 261 3216 300 410 437 405 IJ59 505 635 706i 801 860

TinDlate'lroj.uction - 20 37 144 42 40 41 38 77 64 79 90 94 133 139

,2m,orts 146 I46 148 94 73 614 1i] 72 95 l09 33 58 85 140 35ixnorts - - - - .- - - - - - - - -o-nsumption 146 66 85 138 115 104 155 110 172 163 112 1,8 179 173 171

To talT 1roduction 73 465 572 682 703 795 8314 932 1,07h4 1,130 1,303 1,1,92 1,71:2 1,932 1, 99

3L 3 2149 275 387 38i 212 'e2 3u5 25 394 215 507 435 3314 282

ra)orts _ 16 h 1 3 - - 1] 3 3 - - 19 8 S

>nsumiption 146 698 843 1,068 1,088 1,007 1,486 1,266 1,325 1,521 1,518 1,7999 2,12S 2,258 2,276

Note: To avoid doufole countin semis for tubes produced in Brazil and i imported seamless tubeshave been included with bars and 1 ight sectiorns; welded tubes and skelp with strip, sheetand ilate. Imnorts of wire hiave been included with wire rod.

,ur, !: -cononl o"omission for LaLin Aqeriza, antia.:o ie `ile.

TABI, 2

FpL)DUCTIC)iJ OF CRtlUDL STEIL EBY i,aJOR COUMPFAiJIS IN BRhZTL, 195,5 To 196:3 ID CAPACITY E,D 19647in thousands of tons7

CapacityCopani es .1955 1956 1957 1958 1959 1960 lc 61 1962 1963 end 1964

IntegratecI (Coke)

Siderurgica Naciorial 667 740 8b 81:i 872 1,006 1,130 1,164 1,5268 1,licoUSIIIINAS --- - 7-3 -07

COSIPA C- - - - - - 0CMarnnesmann _ L8 65 91 95 111 1.22 147 189 350

Integrated, (Charcoal)

Belgo-Minedra 185 21 3 213 274 3L5 390 L07 399 396 hoohiineracao Gera.l 120 1]85 181 203 212 225 231 221 243 250Acesita L8 43 5b 58 65 71 75 8? 82 90Aliperti 43 lO li 6:1 66 63 77 80 85 85Barra !Kansa 35 36 41 52 60 67 69 7'2 7 3 75Himne (abUDI) 36 33 :33 LID 45 15 39 hLO 37 40

No t Integrated,

Rio Grandense 10 13 16 2:2 23 32 L2 54 62 70Dedini - 1 1 19 27 30 40 5q6 5'5 60Aoo s Vill ares 6 6 10 16 20 25 33 36 4O ho CLanari - - ' - 2h 27 27 25 29, 30 'Pai.ns - - 2 1 18 17 7 i8 2 25Aparecida 14 18 19 2:L 17 19 15 23 20 20Cobrasma 16 16 1.1 12 12 12 18 1.5 18 20Otliers 38 47 6 7 8:3 85 91 104 105 117' 1 20

'IOTAL 1, 218 1,439 1,561 177:3 1,986 2, 231 2,L4L6 2,539 2c,812 h., 075

AiEX 2

Description of Steel Plants Visited in Brazil

1. USTINAS- IpatLnga, Iinas Gerais

I. Plant in production. November 1964

A. Coke ovens

Two batteries of 50 ovens each.Daily capacity: 680 tons.By-products plant.

B. Sintering plant

Dwight Lloyd unit, 2,200 tons per day.

C. Blast furnaces

Two 700 tons/day furnaces, 7 meters hearth diameter.

D. Steel plant

Two 45-ton LD oxygen converters.AM.-Sua C n -_

4-. lV% 1V% 4. an 4s- n a 4 r.. ann£>,M IU W .L9 UJ . J vJ gV w~' V^^ .L.& s '..& WV8 ^ V M

operation.vet 8-uton Welect'rc arc fvU-.ace%- Ao Od- "v'sorl-'JALU L.ULI~iL~L. d~L1 Li A ±VJL .LOLUIU.L-y WIVIZA VLI.Lfy

Dolomite shop for manufacturing refractories.

E. Rolling mills

One slabbing mill, 466"x120", 15 ton ingots.Annual rated capacity: 1.- nrillion tons.Plate mill, 4 high, 36'x541"x120" with broad side mill46"x-l2O`- and complete plate finishing installations.Produce Lloyds' Grade "A" shipbuilding plates.

F. Machine shop

Very large machine shop, splendidly equipped with machinetools of all types, foundry and forge.

II. Plant under construction in November 1964

Hot strip mill, 6 stands, 27" and 55"x8o"; speed: 2,230ft/min, strip thickness from 2.2 mm to 9.6 nm.Cold strip mill, 4 high, reversible, 66"; speed: 2,000ft/min.Continuous hot shear line, 66".Annealing furnaces.All this equipment is to be put in operation successivelyin the first half of 1965.

A_:_ 2PaCge 2

III. Construction schecule

Planned Actual

Blast furnace No. 1 'st half '62 Oct. 26, '62Coke oven No. 1 " June 16, '62Sintering plant " Feb. 19, '63Steel plant " June 28, '63Slabbing mill " June 28, '63Plate mill 9nd half '62 July 15, '63Hot strip mill 1st half '64 1st half '65Cold strip mill " "

IV. Other information

Plant site 6.035.000 souare meters.

Township for 37.500 inhabitants in the first phase is owned.by company and represents an important liability (rents can-not be raised in step trit.h infMat4-non; larg?pe 4nfrftrnrtiirerequirements, etc.).

AirDort, complete with strip large enough for jets of the

Ram, M M eria.l suprflywr 4 -. n,r.-~ 4- P,..... .-P c4 P... f_ - .- 4.-t t- J._+-J. o.L~ J.J : JJ iron ore inh fo.n.L of fir,es fro.. nearby~

Itabira mines, coal imported and Brazilian through Port ofWJ4 § A_ _ IVA_A r L111flr I.)tL _A n _Jd __...L L__ I .pr .J ' __

.L>zXt wuX= c;. ,V< lg eqlK nenIItii constD9itutesserious bottleneck which prevented blowing in of blast fur-nace NoT. i ver a year-. C dlLY ha w U spply'

million for purchase of equipment, the installation of whichis supposed to be iinisned Dy Deginning of 1965. Then,unloading at 250 t/h into silos will start. Limestone comesfrom ruatosLhos near Belolnorizonte. Company nas zo supplyrailroad cars since Central do Brazil lacks cars, and is con-sidering purcnase oI locomotives for same reason.

Inflation: Plans for USlNAS started at 47 Cruzeiros perUS Dollar, construction started at 65 Cruzeiros per US Doll.ar,rate in November 1964: 1,680 Cruzeiros per US Dollar.

ANEX 2Page 3

?. Cia. Siderurgica Panlista (COSIPA), Ptacaguera, near Sao Paulo

I. Plant in Droduction. November 1964

One slabbing mill 2-high. reversina. UA"xllb".two slab heating furnaces.One nlAt.e mill; I-high. 110"Q.One hot strip mill, 5 stands, 66".On.e cold strip ti ll- Pi-H1ah4 ghj 3 tr.nneis: Flt.One cold temper mill, 4-high, 66".18 annealing5 furnaces.Pickling line.

V PA OU8,4 SI,4 r:g e 4ii ra.i0v4.

A f L..t U

A. Cjokt~~e ov

1W) Da terLie, arnual capac-i-y: 370,U.A toI.By-products plant.

B. Sintering plant

.Work on plant itself not yet started, will be 1,650 t/day.

C. Blast furnace

One 2,000 t/day furnace.

D. Steel Dlant

Two 60-ton LD oxygen converters.Annual capacity: 500,000 tons.

E. Other plant

Foundry, forge and machine shop and various other auxilaryinstallations.

III. Construction schedule

A detailed construction progress report for September 196t..showing planned and actual conpletions in percentages, isavailable in the Bank.

IV_ Other infornAtion

Raw mWA4 rials: Twon ore frm; -Me nere4 s^e-np 800 kilo-meters away. Because of uneconorically low freight ratestr-nsiport by rail aearedpA to be he chsapest s.LL;.& A. IWY

in ilovember 1964. However, after adjustment of freight

ANNEX 2Page h

rates sea transport through Vitoria may be cheaper.Study of transport problems by COSIPA available inthe Bank. Coal by sea through Santos and later com-pany's oim port at plant site from Santa Caterina(LO per cent) and United States (60 Der cent). Lime-stone is available at a distance of about 200 Kn.,transport is by rail.

Tnfrastructure P.in tm nrts. a f vrrable po,int. nfCOSIPAis location is the fact that no infrastructureinvest.mPnts (township, airport, access roads, etc=)

are required for COSIPA on account of the viciinityof Sant-os and various .,4llages in the neighborhood.

ANDEX 2Page 5

Cia Siderurgica Nacional (CSND _ VTolta Redonda, State of Riode Janeiro

I. Plant in production, November 1964

A. Coke ovens

Three batteries with 123 ovens, annual capacity 1.1million tons of dry coal. By-products planit.

B. Sintering plant

Dwight Lloyd unit. 2,600 tons per day.

C. Blast-furnaces

Two fnrnaGes of' 7.93 and S 08 meters hearth HiameterOriginally rated at 1,000 tons per day they now produceup to 1,400 tons per day.

D. Steel plant

Eight basic open "hear+h fu,ln.-ceSo 250 tons each, aMnualcapacity: 1.4 million tons. Cne 3000 KVA electric arc

R. Lkoiiing rmills

Vile biiauuiv miii, oO!gx9 2x", annual capacity:1.4 million tons.Plate mill, 4.-nigh, 36'x49:x72', annual capacity: onemillion tons.hot strip mill, 4-hign, 6-stand, 46t?x50'i, annual capacity:one million tons.Ral and structural mill, 3-high, 3-stand, 23'x68;;29"x68", annual capacity: 200,000 tons.Cold strip mill, 4-high, 4-stand, 18.5"x46 "x54", annualcapacity: 250,000 tons.Cold strip mill, 4-nigh, 3-stand, 21"x53"x5b", annualcapacity: 500,000 tons.Temper pass mill, 4-high, 2-stand, 19"x59"x42";Temper pass mill, 4-high, 1-stand, 181/?k46"54";annual capacity: 300,000 tons each.Plate and sheet finishing lines.Electrolytic tinplate line "Ferrostan", annual capacity:120,000 tons.6 hot dip tinning pots; 60,000 tons per year.2 semi-continuous sheet galvanizing lines; 45,000 tonsper year.

F. Structural steel plant

rianufacture of all types of fabricated steeL productsfor heavy construction jobs.

ANNEX 2Page o

II. Exmansion plan as of November 196l

Expansion plan based on report by McKee who has been involve3dwith original design and construction of the p-Lant. Target3.5 million ingot tons.2 blast furnace, 30 ft. hearth diameter.3 LD converters of 120 tons each.Slabbing mill, 45"1x72"1.Hot strip mill. 56".Cold reduction mill.Continuous tinning and galvanizing facilities.

III. Other information

Raw ma-teri a1!s Tron ore mine owned by CSN at 1z20 kilometers.Coal: hO per cent from Santa Catarina from mine and washingnlaint orwned hy GSN -in nun hulk ncrriAr= TAmrnPtnnPn from nwn

quarry at 250 Km.

Township: Company owns large parts of Volta Redonda (80,00()i n'k vk + n "+e 'c +4- 1 ~ hn^+ nl e qa e%' a Intai -ner pJ.f*LflJb Sfl.ts, hosp ta~*A...JLl sS, hotels scoos .housir., etc

V- n4-2n and14 owncr-1,4 Althou-gh the c- 4-.;i go-ler-nment=

owned, Management has been kept relatively free from govern-menlta iL Lnterference since 'LI bec-Cam establshc prctc -`oelect some of the company's Superintendents to the Board ofDirectors. At present 5 out of 7 Directors are Superintendents.

ANNEX 2Page

4. Cia. Siderurgica Belgo Mineira (CSBM), Iionlevade, Minas Gerais.

I. Plant in production in November 196l

A. Sintering plant

One old plant. 600 tons/day.

B. Blast furnaces

Four charcoal blast furnaces. originally 90 tons/day now350 tons/day, record 5h0 tons/day.

C. Steel plant

Four basic open hearth of 40 tons each, 3 working, veryold annnual capaec ty: 1140,fnno tol .Two 30-ton LD oxygen converters, one vessel in continuousonerat-ior.. Annualn Iaaiy 250, % ons

D.Rol'-r.g rnl..s

O..e 'bloomg i 1 f'L m41T* L'VI'D/ 15wa.

One blooming mill, 3211, combined annual capacity of both:650,^0 onsO

One continuous billet mill, 3-stand, for 3" sections,later to be followed by stands of new M'xorgan mill.Annual capacity: 60,000 tons.une section mill, 26"/ I , -h gh, 7-stand, very old.One wire rod mill, 12 continuous stands and 10 open standsin two lines. Annual capacity: 1i0O,000 tons.Steckel mill, 24k", reversible, annual capacity: 120,000tons.Three tube welding machines, using slit strip from Steckelfor mall diameter pipe. At the time of visit these machineswere producing angles because of lacking market for pipe.

II. Plant under construction in November 1964

Morgan wire rod mill to supply wire drawing plant at BeloHorizonte. At the time of visit construction of buildingfor Morgan mill was stopped because of lack of funds. Themill had been bought already to still bring it in underthe special free import privilege, accorded to CSEIM at itsformation and expiring January 1, 1964.New sintering plant at mitne to operate with two pans.Annual capacity: 600,000 tons.

ANI'E 2

III. Other information

Plant site: 200,000 square meters. After expansion to500,0U0 tons ingot capacity output per square meter willbe 2.5 tons, which is said to be a world record.

Raw materials: Iron ore by cableway from own mine, 51im away, charcoal from own eucalyptus forests and planta-

tionis .

Other plants: "Siderurgica" at Sabara, south of BeloHorizonte, two charcoal blast furnaces (50,000 tpy) twobasic open hearths furnaces (50,000 tpy), 4 rolling mills(650,450,300,260 mm)), foundry, refractory plant.

Wire drawing plant in Belo Horizonte.Tube welding machines are to be moved from l4onlevade toSanta Luzia, near Belo Horizonte to form a separate tubemaking plant.

Townships: A large part of the town of Monlevade (30,000inhabitants) is owned by the company, involving consider-able social overhead.

ANNEX 2Page 9

5. Cia. Siderurgica Mannesmann, Belo Horizonte, Minas Gerais

I. Plant in production in November 1964

A. Sintering plant

One Dwight Lloyd plant, annual capacity: 500,000 tons

B. Iron-making plant

Two Soederberg electric pig iron reduction furnaces,200 tons per day each.One blast-furnace, 5 meter hearth diamter, 700 tonsper day

C. Steel plant

Three electric arc furnaces, 2 or 25 tons, one of35 tonsTwo 30-ton LD Oxygen converters, both in operation.Combined capacity: 350,000 tons per year, some ofwhich alloy steel.

D. Rolling mills

One blooming mill, 30"One merchant mill, 30", rolls forging billets andsemis for tubes. Combined annual capacity forboth mills: 120,000 tonsOne Pilger mill, 3-stand, finishing stands, annualcapacity: 60,000 tonsTwo extrusion presses for tubes (5h,000 tons)Continuous tube galvanizing lineCold drawing plant for tubes

II. Other information

Raw materials: Iron ore by cableway from own mine6 Km awav. Imoort coke through the nort ofVitoria or Rio de Janeiro. Limestone from ownquarrv nearby.

ANNEX 2Page 10

6. Cia. Ferro e Ago de Vitoria, Vitoria, Espirito Santo

The plant was originally a charcoal blast-furnace plantwith one fuxr,ace of 40 tons per dAy, TtS productionwas stopped in 1962 after association with Ferrostaalfrom C'erm-qyr in order to erect a- intep.ted plant.

This was to include a 700 tons-a-day blast-furnace, twosml . .J oyger. conver+er JsJ ( rn0 +py)% , roughing m*l

and mills for light and mwdium sections and wire rods.0-r y tow-bloo amng, stmccur' ar.d rod r.;1s w;+h an

annual capacity of 130,000 tons were built. Lack offu,(ds pr.ver.t eA4 the constructor. of bl1ast=f.^n n.cear.~L UA~.O ~ V1A " . ULI A .AJ U' ULO.JL Al .L W.L~ U .L U" ""%, V~J' .U

steel-making facilities. Since the plant site is asmaLLL Wria.Lgle b JordueLredL U oJ ore s.Liae bJy a1UU r L.oair an.Aon the other two by swamps, the original plans wereglveni Up "i 1YU). At theU UsamI tine, thJ C*ia. Vle dUU

Rio Doce had started construction of its new, largeiron ore purt au ronta uo iuuerao, north of Vitoria, inthe community of Camburi. Land to the north of thenew port was reserved for Ferro e Ago for the con-struction of a large integrated plant. McKee wasemployed as consultant to study possibilities ofintegrating the rolling mills at Cariacica with blast-furnace and steel-making facilities at the Camburisite, and submitted a proposal to erect a coke plant,a blast furnace (25 feet), two 50-ton LD converterswith an annual capacity of 420,000 tons at Camburiand expand the rolling mills at Cariacica to h00J000tons capacity, Ingots were to be shipped 35 Km fromCaniburi to Cariacica by truck across the bay ofVitoria and through the town. Toward the middle of1964 doubt aroee about the practicability of thisscheme and a detision was made in the BNDE to gc,immediately to 4 fully integrated plant at Camburiwith an initial capacity of one million tons per yearto produce non-flat products only. McKee wasemployed to make a feasibility study of the 420,000ton and of the one million ton project. A US$1.3million loan to finance this feasibility study wasobtained from the Inter-American Development Bankon November 27, 1964. Following is a description ofrolling mills in production in lWovember 1964 atCariacica:One blooming mill, 30"One structural mill, L-stands of which three 3-high.last 2-high, 480 mm (19.2")One bar and rod mill. 3I-stands of which 7'gtands (3-high and 2-high) 480 mm, 2-stands (3.high and 2-high)760 mm; 5-stnnds (2-high) 3nn mm. .- anAd

275 mm.