Brazil steel demand to fall on slower economic growth: S&P

The steel industry in Brazil is currently in a slump due to sluggish domestic economic growth, which has hit demand in the region, Standard & Poor's said in a report released Tuesday.

S&P, like Platts, is owned by McGraw Hill Financial.

"We expect a modest recovery in Brazil's GDP in 2013, which may reach 2.5%, but this growth comes with greater downside risks," the ratings agency added.

While infrastructure construction remains strong with the upcoming Olympics in 2016 and the football World Cup in 2014, other sectors, such as the auto industry, capital goods and housing construction, are lagging, S&P said.

Delays in regional oil and gas industry projects have also caused problems for steel producer companies that have invested heavily in anticipation of rising orders.

"Although steel prices continue to trend down given the global overcapacity, domestic competition has decreased as higher import tariffs and depreciation in the Brazilian real have discouraged imports since the last quarter of 2012," S&P said.

Major Brazilian iron ore producer Vale is weathering the weaker economy and continues to show capital discipline and prudent growth, it said.

"However, if demand from China deteriorates -- resulting in iron ore prices below $100/mt for a prolonged period -- the resulting lower cash flows could weaken Vale's credit metrics," S&P said.

Vale currently maintains one of the world's lowest cash costs for producing iron ore at $45-55/mt, which should guarantee its profitability even during a prolonged period of low prices, S&P added.