Five months after a devastating earthquake, Chile faces a mandate to rebuild but not enough domestic steel capacity to meet demand
By Katerina Valdivieso
Published: July 1, 2010
SANTIAGO, Chile: After suffering a disastrous earthquake in February, Chile is starting to rebuild. The government has begun implementing reconstruction plans estimated to cost $8.4 billion, Sebastián Piñera, Chile's new president, said in his first presidential speech in May, with most of the money earmarked to rebuild destroyed hospitals, schools, roads, bridges and airports.
Rebuilding Chile with modern infrastructure more resistant to seismic activity would require an immense amount of steel. Currently, however, Chile only has two iron and steel companies, which together produced just 60 percent of national consumption in 2009. And both were severely damaged in the earthquake.
Piñera also has set a goal of growing Chile's gross domestic product (GDP) by 6 percent annually, an objective which would translate into increased steel demand. Steel consumption increases when economies grow, and in developing countries such as Chile this ratio is very high. Experts estimate that the demand for steel would increase 50 percent more than GDP growth.
Slammed by the worldwide recession, the country's apparent steel consumption, which does not include consumption from inventories, dropped 36 percent to 1.7 million tonnes last year, according to Chile's Association of Metallurgical and Metal-mechanic Industries. So far this year consumption has climbed more than 30 percent compared with a year earlier as the global economy improves. This comes as the country's steel output continues to struggle in the wake of the earthquake and recession. Chile's iron and steel production in April plunged 47.9 percent compared with the same month last year, putting the year-to-date total nearly 12 percent lower than in the first four months of 2009.
Production by Compañia de Acero del Pacifico SA (CAP), the country's largest steel producer, is expected to be down 30 percent this year—a loss of some 300,000 to 350,000 tonnes—because Huachipato, its most important mill with a capacity of 100,000 tonnes per month, was forced to shut down after the quake and didn't resume regular operations until the first week of June.
Gerdau AZA SA, a subsidiary of Brazil's Gerdau SA, managed to resume operations a few weeks after the earthquake even though its two rolling mills, Renca and Colina, are located in south-central Chile, near the epicenter of the 8.8-magnitude earthquake.
Meanwhile, due to intermittent outages at the CAP and Gerdau AZA plants, the country's imports of steel products have increased 97 percent compared with year-earlier levels, according to Matrix Consulting Ltd.
Today, Chile presents an opportunity to new investors who could satisfy the growing reconstruction-related demand for iron and steel in the years ahead. Some analysts say there could even be room for a third steelmaker.
One product that may see a steep increase in demand is light-gauge steel framing, which has proven a popular construction option in Chile. "There haven't been reports of destroyed houses that used this material," according to engineer Alberto Maccioni, owner of Bascuñán & Maccioni Associates. "It has provided great results; and curiously enough, it has been much more popular here (in Chile) than in the United States," from where it is imported.
There also are opportunities in steel grinding balls used in copper mining, according to Juan Pablo Silva, a partner at Matrix Consulting. "The opportunities (for importers) are in manufactured steel products, such as steel grinding balls, steel tubes, steel beams, etc.," he said.
The main supplier of long steel bars to Chile is Empresa Siderúrgica del Perú SAA (Siderperu), also controlled by Brazil's Gerdau Group, which sells steel products used in mining. Chile's CAP has captured around 63 percent of the market for grinding balls, which are used in mining to crush and process copper, Chile's main export.
Silva said there could be enough room for another company to compete with CAP and Gerdau AZA. "It would not be a crazy idea to think of a third iron and steel company if we think of a projection of 3 million tons of (annual) demand. Siderperu is pretty small, even for its own demand. We could use a new company that supplies northern Chile and southern Peru," he said.
Despite the temporary halt in production and the potential increase in steel demand, Mauricio Gasaly, manager of CAP's sales division, does not see the rationale for a third steel company. "Chile is always a good market for Chilean and foreign investors, but in terms of iron and steel the demand is fully covered by CAP, Gerdau AZA and some foreign suppliers," he said.
Prior to the global recession, CAP had a goal of increasing its annual output to 3 million tons—twice as much as it was producing in its best year. Gasaly said CAP is looking to return to normal production around August, and plans to carry out its strategy to produce 3 million tons annually in the very near future.
Other obstacles stand in the way of a third steel company: northern Chile is less populated than the rest of the country, and the lack of water—some parts of the Atacama Desert have not had rainfall for more than 400 years—would be a major challenge for any investor building a new steel plant in the region.