Gerdau changes strategy toward more value added

Facing a global supply glut and strong competition with Chinese and Turkish steel exports, which are squeezing margins, Gerdau is starting a new strategy focused on a model it calls expertise sharing. The goal is assuring better prices for its steel and focusing less on volume, the prevailing model until 2008.

Until then the steel group had expanded through acquisitions and new investments in capacity expansion, joining the group of 15 largest steelmakers in the world and attaining the long-steel leadership in the Americas. “The path is different now. We’re adopting a strategy based on three pillars: changing the management model, revising the corporate culture and the business portfolio,” CEO André Gerdau Johannpeter told Valor.

Wednesday’s announcement of a joint venture with two Japanese companies that will supply the wind-power equipment market is one of the first steps in this sense. The executive said the effort would not stop there, but avoided citing other partnership examples. “With the [expertise] sharing, in this case, whose studies we started a year and a half ago, we contributed facilities and assets and the two Japanese companies brought market and technological expertise.”

He advanced that before the second week of February the company will make official a technological partnership, devoid of any shareholding, for its steel slab business in Ouro Branco, Minas Gerais. The partners’ technical know-how is aimed at enriching the product line of the new steel rolling unit – from simpler applications to those with a high degree of efficiency, both for the domestic and foreign markets. The steel slab line, before set to begin operating at the end of 2016, will be pushed forward to July, Mr. Johannpeter told Valor.

The partnership with Sumitomo Corporation and Japan Steel Works (JSW), with planned investment of R$280 million, is forecast to commence producing at some point in 2017, depending on the approval of Brazilian antitrust regulators. Gerdau will hold 50% of the new company – probably called Gerdau Aços Forjados – and will contribute a steel cylinder line and facilities located near its specialty steel mill in Pindamonhangaba (São Paulo). Gerdau will also supply all inputs to the new venture.

Gerdau will not invest cash in the new business, a role reserved to its partners, for the purchase of equipment to produce wind-turbine parts: rotor shaft, tower bearings and blade bearings. “We’ll be present from the base to the top, with rebar and specialty steel,” the executive said, underscoring the potential of the segment, which he forecasts it will grow to 24GW from 8GW by the middle of next decade.

Including cylinders and parts, the overall production is of around 50,000 tonnes a year. Gerdau, which already makes steel cylinders on site for steelmakers and aluminum smelters, will reinforce the unit with Japanese technology. It wants to increase exports, today headed to over 30 countries, in order to benefit from the exchange rate. Together with the arrival in the wind-power market, the new strategy is aimed at offsetting part of the decline in sales of specialty steels, whose top customer in Brazil is the now ailing car industry.

“Our global business, the way it has changed, doesn’t allow everyone having their own operation,” the executive said. He underlines that Gerdau will seek in its diversified business – whether in Brazil, Latin America or North America, Europe and India – value for the company and shareholder return.

“We’ll work to lower costs, something that will continue to be done since commercial defense steels are limited to compete with China. Other options are what will bring value, but it doesn’t happen overnight,” Mr. Johannpeter said, adding that’s the strategy adopted for crisis moments to show the market and to Gerdau employees which path the company is taking.

Like other steelmakers, Gerdau faces an economic crisis in Brazil that led steel consumption to contract nearly 20% last year. It is expected to further decline in 2016, between 5% and 6%, depending on how much GDP drops this year. Gerdau and other steel producers are adjusting output to the Brazilian market’s size, as well as in other countries, which face Chinese competition.

After completing a $700 million investment in Mexico last November, that will replace imports and supply the North American structural steel market, Gerdau is betting on the steel slab-rolling unit in Brazil to substitute slab imports (a semi-finished product with low value added). With an output of 1.1 million tonnes a month, the plant is part of a R$3.4 billion investment that marks its arrival into the flat-steel segment in Brazil, diversifying its business.

The first stage, a hot-rolling unit, has been operating since 2014. Gerdau completed 115 years this month and started by manufacturing nails, also with a long tradition in long steel. The wind-power sector is one of the few that are still showing heated demand for steel plates, which are used in its towers.

In Argentina, in the middle of 2016, Gerdau will launch a new steel mill to replace Brazilian billet imports. “It will provide us cost reductions in a moment when the market there, with the new government, has positive prospects,” he says. The investment totals $190 million. The executive said the group was concluding a phase of large investments and should cut them significantly this year.

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