This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BRASILIA 003162 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/BSC, WHA/EPSC AND EB/TPP 
DEPT PLEASE PASS TO USTR SBOVIM, JKEMP AND MSULLIVAN 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD, KPARKHILL, SLANGKAMP 
USDA FOR FFAS 
NSC FOR SCRONIN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EIND BR WTO
SUBJECT: BRAZIL - STEEL POLICIES; NAMA NEGOTIATIONS 
 
Refs:  A) STATE 190684    B) Brasilia 1929 
       C) Sao Paulo 1185 
 
¶1. SENSITIVE BUT UNCLASSIFIED - PLEASE TREAT ACCORDINGLY 
 
¶2.  (U) Introduction.  The following information is provided 
in response to ref A's request for information on the 
Brazilian steel industry and related government policies. 
See paras 12 and 14 regarding FIESP views on WTO NAMA 
negotiations.  End Introduction. 
 
¶3.  (U) The Brazilian steel industry is ranked eighth in the 
world in terms of crude steel production.  It contributes 
3.1 percent of the world's total crude steel output and 
accounts for more than half (51 percent) of the crude steel 
production in Latin America.  In 2004, gross revenues for 
Brazilian steel companies totaled USD 50 billion, up 43 
percent from the USD 35 billion for 2003 due principally to 
increased steel prices in the international market. 
 
¶4.  (U) The 2004 production capacity for Brazil's steel 
industry was 34 million tons, up 20 percent from a capacity 
of 28 million tons in 1996.  Current capacity utilization is 
running at about 97 percent given high domestic and export 
demand.  The industry has plans to invest USD 13 billion 
over the next 5 years to increase production capacity to 
49.6 million tons, a 46 percent increase.  Given the high 
domestic interest rates in Brazil, the industry expects to 
finance the expansion with foreign capital and through loans 
from Brazil's national development bank, BNDES; according to 
a BNDES analyst, the bank will likely provide around 30 
percent of the industry's financing needs.  The expansion 
covers 27 plants owned by companies such as Usiminas/Cosipa, 
Usinor/Arcelor-Acesita-CST, CSN, Gerdau, and Arbed/Arcelor- 
Belgo-Mineira, which are the five largest groups controlling 
94 percent of the production capacity in Brazil.  These 
steel plants are mainly located in the south (3), southeast 
(20), and northeast (4) regions of Brazil. 
 
¶5.  (U) As part of Brazil's privatization process in the 
1990s, there was an intense re-structuring of the steel 
industry.  When the process ended in 1997, there were 21 
steel companies.  In general, the companies do not compete 
against each other in all market segments, but tend to 
specialize in certain product areas.  After the 
privatization process, international and national companies 
started to form strategic alliances.  Although not yet 
complete, Companhia Nacional de Siderurgia (CSN) and CORUS 
the British-Dutch steel company started working on a 
strategic alliance in 2002, which will have the capacity to 
produce 25 million tons of steel.  It is rumored that 
Usiminas and Companhia Siderurgica de Tubarao, two of the 
main steel producers in Brazil, may merge.  According to the 
Brazilian Steel Institute, there have not been any recent 
firm closings and no other information is available on 
future amalgamations. 
 
¶6.  (U) Brazil's production of steel products increased from 
about 25.8 million tons in 2000 to 30.6 million tons in 
¶2004.  Between the years 2000 and 2003, domestic consumption 
as a proportion of total production declined from 61 percent 
to 54 percent while exports rose, reaching almost 13 million 
tons.  Domestic consumption once again accounted for around 
60 percent of production in 2004 (an export tax was in 
effect for part of the time) with exports dropping to 12 
million tons.  However, despite the drop in export volume, 
strong steel prices pushed the value of exports up by 37 
percent in 2004 to reach USD 5.3 billion.   This trend has 
continued in 2005 with a 1.6 percent increase in export 
volume of steel products between January and September 
yielding a 29 percent increase in the value of exports 
(close to USD 5 billion) over the same period a year 
earlier.  Overall, export volumes grew from 9.6 million tons 
to 12.0 million tons (24.8 percent) between 2000 and 2004; 
the value of exports grew from USD 2.7 billion to USD 5.3 
billion (94.5 percent) over the same period. 
 
¶7.  (U) Through September of this year, Latin America had 
absorbed 29 percent of Brazil's steel exports, Asia 28 
percent (China peaked as an export destination with a 18.9 
percent share in 2003 and currently accounts for 6.7 percent 
of Brazil's exports), North America 24.6 percent (of which 
20.6 percent goes to the U.S), the European Union 12.1 
percent, Africa 5.9 percent, and finally 0.5 percent has 
been sold to other countries in Europe. 
 
¶8.  (U) Import levels of steel into Brazil are typically low 
and declined by 49 percent from a high of 1.1 million tons 
in 2001 to 0.5 million tons in 2004.  However, due to high 
domestic demand for steel, imports from January to September 
2005 increased by 31.4 percent by volume and 60.7 percent by 
value compared to the same period in 2004.  Between January 
and September this year, the European Union supplied 36.1 
percent of Brazil's imports of steel products.  Latin 
America accounted for 30.2 percent, Asia for 14.5 percent, 
Africa for 4.8 percent, North America for 4.5 percent (of 
which the United States is responsible for 4.1 percent), and 
finally other countries in Europe such as Ukraine, Russia, 
Turkey, etc. supplied 9.9 percent of Brazil steel imports. 
 
¶9. (U) The GoB does not have export promotion policies in 
place specifically for the steel industry.  Furthermore, 
currently there are no government imposed export 
restrictions on key inputs for steel production or final 
products.  The GoB does, however, offer a variety of tax, 
tariff, and financing incentives to encourage production for 
export, and the use of Brazilian-made inputs in domestic 
production.  For instance, recently passed legislation 
provides some tax relief for capital equipment investment by 
companies for which exports account for 80 percent of gross 
revenues (ref B).   This so-called MP do Bem measure was 
contained in law 11,196, which President Lula signed on 
November 21, 2005. 
 
¶10.  (U) The steel industry also makes use of BNDES' FINAME 
program, which provides capital financing to Brazilian 
companies for, among other things, expansion and 
modernization projects as well as acquisition or leasing of 
new machinery and equipment.  One goal of this program is to 
support the purchase of domestic over imported equipment and 
machinery.  As noted above, the steel industry also makes 
use of BNDES' long-term financing programs.  The interest 
rates charged on this financing are customarily lower than 
the prevailing market interest rates for domestic financing. 
 
¶11. (U) The federal government does not use VAT policies to 
promote the domestic steel industry.  The VAT-like ICMS tax 
is a state rather than federal tax.  States, at times, 
manipulate the ICMS to attract individual investments, but 
there is no policy specific to the steel industry. 
 
NAMA Negotiations and Steel 
 
¶12.  (SBU) Ref A also posed questions regarding Sao Paulo 
industry association's (FIESP) view of potential flexibility 
in Brazil's position on tariff reductions within NAMA and 
the possibility of Brazil's steel sector going to zero 
tariffs.  On October 14, FIESP's Director of International 
Relations Roberto Gianetti da Fonseca informed visiting USTR 
Director for Brazil and Southern Cone that the GoB was 
considering moving off the ABI formula in NAMA to a Swiss 
formula, perhaps with a coefficient of 30, providing a 
glimpse of future Brazilian flexibility (ref C).  As the 
Hong Kong Ministerial has drawn closer, FIESP officials have 
increasingly been "toeing the line" on the GoB's NAMA tariff 
cut limits and the government's linkage of flexibility in 
NAMA to additional concessions in agriculture. 
 
¶13.  (SBU) In a November 19 Estado de Sao Paulo article, 
Rubens Barbosa, chairman of FIESP's Trade Council, claimed 
FIESP would reject tariff cuts of over 50 percent (from 
bound rates) in NAMA, reinforcing Foreign Minister Amorim's 
earlier statements on the GoB position.  Carlos Antonio 
Cavalcanti, FIESP Assistant Director for International 
Relations, reaffirmed FIESP's support for the GoB position 
in a conversation with Econoff November 30.  Cavalcanti said 
additional flexibility is impossible without substantial 
further movement in agriculture - the "payment" in 
industrials would be commensurate with concessions received 
in agriculture.  While Cavalcanti linked the 50 percent 
tariff cut limit to agricultural offers currently on the 
table, he provided no insight on what might be possible with 
further concessions in agriculture, in particular whether 
Brazilian flexibility would be limited to engagement on 
sectorals. 
 
¶14.  (SBU) Cavalcanti was unwilling to confirm the steel 
sector's ability to "go to zero," but noted that it is an 
extremely competitive sector in Brazil.  While claiming 
FIESP "is open" to sectorals, he cautioned that many 
industries do not believe they are sufficiently competitive 
to engage in such negotiations.  With regard to Amorim's 
statements on the weekend of November 26-27 suggesting a 
possible opening to sectoral agreements, Cavalcanti claimed 
that Brazil would only negotiate sectorals if very 
substantial, additional concessions were made in 
agriculture, principally by the European Union. 
 
Linehan