Exclusive interview with André Gerdau

Online publishing of interview with André Bier Gerdau Johannpeter on March 27, 2017

What is your evaluation of the platform of the new U.S. administration?

President Trump and Congressional Republicans have laid out an aggressive agenda for the administration’s first 100 days. Many of the top priorities are relevant to our industry. Among the key issues President Trump has promised to address, International Trade, Regulatory Reform, and Transportation and Infrastructure are most relevant to potentially bolstering Gerdau’s competitiveness in North America.

How do you assess Brazil’s situation in the global scenario?

Brazil’s outlook for 2017 includes an end to the recession, but with only a gradual recovery in growth. The performance of the Brazilian economy in early 2017 compared to the same period of 2016 has shown a clear improvement trend. With inflation slowing sharply, the Central Bank has embarked on a long and intense cycle of interest rate cuts, which should, without putting at risk the goal of reaching the inflation target of 4.5%, support slight GDP growth in 2017, but with forecasts for more robust GDP growth in 2018. In parallel, Brazil’s Central Bank has been announcing micro-economic reforms, such as simplifying reserve requirements and actions to reduce bank spreads, which could help to loosen credit in the future. Another important factor was the freezing of federal government primary spending in real terms. This is further supported by the president’s proposal to reform the public pension system, which has a high likelihood of being approved and would represent an important step towards balancing the budget.

With these developments, risk premiums have waned and fears have practically dissipated that Brazil will become a prisoner of “fiscal dominance,” which would undermine the effectiveness of monetary policy and jeopardize economic growth. One of the consequences of this change has been the stronger Brazilian real, which, given its effects on slowing inflation, paves the way for even more substantial cuts in interest rates, which would stimulate economic growth.

Solutions to Brazil's crisis include boosting competitiveness and exports. What immediate measures can be taken by the Brazilian government in this regard?

It is absolutely necessary for us to develop the concept of a level playing field in the tax, labor, financial and logistics systems in order for Brazil to be able to compete on an equal footing in the international market against other countries. These are long-standing deficiencies that the government and society must act upon as a priority. To achieve this, we need to formulate the strategic planning on each front, with clear targets to be met based on, for instance, the successful experiences of other countries. We must recognize our strong performances in certain areas and work at least to equal other countries in our weaker areas. In the steel industry, the Brazilian Steel Institute offered suggestions to the Brazilian government for emergency measures to move towards competitive equality. These suggestions include increasing the rate of the Reintegra tax incentive from 2% to 5% as a way to compensate the cumulative charges and taxes levied on steel production, offering financing facilities more compatible with the cost of money in international markets, preserving the levels of the common external tariff (TEC) and more flexible and effective mechanisms to protect international trade.

What impacts do you think the global political and economic scenarios will have on the steel industry?

The political and economic scenarios will continue to intertwine. Many countries have been posting only moderate economic growth, and consequently their steel consumption is incompatible with the local industry's installed capacity, which means they end up exporting their products to international markets. This scenario is not a problem, except when exports are subsidized by governments or the dumping practices of certain companies, which results in unfair competition. As a result, various compensatory and antidumping fees have been implemented in recent months, and the trend is of a continuation of this practice until a balance is reached between world steel supply and demand.

How can the international Steel Industry recover?

Steel industry associations from various countries have been discussing issues of critical importance to the steel industry’s recovery. One of the main problems is the oversupply in world steel production capacity, given that 60% of the surplus of 800 million tonnes is in China. We believe that the best way to resolve this problem is to eliminate overcapacity, especially with regard to less competitive mills. China is the main country responsible for this situation and the government’s plan to eliminate from 100 to 150 million tons of capacity is an important step towards reducing the impact from global overcapacity. Note that while we do have to live with the situation of unfair trade from primarily China and, to a lesser degree, from other countries, steel associations and countries should take measures to reduce the impacts this situation causes on their local markets.

China announced that it is reducing its steel overcapacity due to international pressure, and also due to stronger internal demand. Will that be sufficient to solve the problem of the imbalance between world steel supply and demand?

The closure of installed capacity in China will reduce the imbalance in the international steel market. It is important to note, however, that the industry continues to face major structural challenges, such as global overcapacity and the unfair competition practiced by other countries in international trade.

What are the main challenges currently faced by the leaders of steel companies?

The steel industry has been experiencing a complex and challenging scenario marked by weaker global demand and apparent consumption, installed overcapacity, slower economic growth in China, higher volatility in financial markets and slow growth in international trade.

How can the new U.S. administration affect the steel industry as a whole?

In North America, the outlook for 2017 is for steel consumption to grow by 3%, according to the Word Steel Association. The industry should benefit from growing demand for non-residential construction and the recovery in the industrial sector. There are strong expectations for the development of the new infrastructure projects announced by the Trump administration. Another positive factor that could influence Gerdau’s performance in the United States was the preliminary approval, by the U.S. Department of Commerce, of an antidumping duty in the investigation of rebar imports from Turkey, Japan and Taiwan, as well as compensatory measures for rebar imports from Turkey.

What are the growth opportunities for the steel industry in the future, and in which segments and regions?

In challenging moments for the industry like the one we’re currently experiencing, consolidation becomes opportune and currently represents a global trend in the industry. However, we believe this process will focus primarily on China.

What are Gerdau’s main plans?

The outlook for 2017 points to a still challenging market, but with a gradual recovery in steel demand. In this light, Gerdau has been making management adjustments and efforts to make its structures more agile and simpler. This should help to improve the company’s profitability over the coming years.

Our plans for the near future include continuing to work to create value for the company through various work fronts. We also will maintain the highly disciplined monitoring of our financial indicators and continue to work on modernizing our culture and on advancing the digital innovation initiatives that are delivering important productivity gains and cost reductions for our operations.

Russula carried out various renovation projects at Gerdau plants in Brazil and abroad. What is your opinion of the need for technological renewal at Gerdau mills?

Gerdau believes that, in the business world, innovation is indispensable. And it’s no different in the steel industry. Gerdau, for instance, is constantly evaluating its production processes to identify opportunities for capturing efficiency and productivity gains by modernizing its mills and adopting new digital tools.

Does the company plan to diversify?

The company has been diversifying its markets. One example is the recently formed joint venture with Sumitomo Corporation and The Japan Steel Works (JSW) to meet demand from Brazil’s wind power industry and from other important industrial sectors in the country, such as oil & gas, mining and sugar & ethanol. It also began to produce flat steel goods in Brazil, specifically heavy plates and hot rolled coils.

What are the critical investments that Gerdau must make over the next few years? In which countries or regions does it plan to invest?

In 2016, the focus of Gerdau’s investments was on property, plant and equipment, which should remain the focus in 2017. The highlights were the investments in flat steel, with the startup of the heavy plate rolling mill at the Ouro Branco Unit in Minas Gerais, and the completion of construction on the melt shop in Argentina, which will start operations in March 2017. For this year, investments should be directed to productivity improvements and mill maintenance.

Gerdau is recognized for its pioneering and entrepreneurial spirit. What is the next frontier?

Although our history stretches back one hundred years, we are strengthening our business culture through various innovation initiatives. Borrowing from other industries, we have implemented disruptive practices on our factory floor. Today we work with innovations such as artificial intelligence, digital tools and others.

Gerdau has been operating for over 100 years. Since you have survived for so many years and continue to grow, can you share with us the secrets and pillars of this success?

At Gerdau, we constantly work to remain competitive and to distinguish ourselves from the other players in the market. So we strive to make our business more and more sustainable while contributing to the technological advancement of our value chain.

Gerdau has a strong commitment to digitalization, having, for example, created its own platform, eGerdau, and signed an agreement with GE Digital last year. Where exactly do you think digitalization will add more value for steel producers?

The combination of management experience and new technologies has allowed Gerdau to enhance its competitiveness in an increasingly competitive global steel industry while simultaneously improving the quality of the service it provides. One example of this is the development of digital innovation actions, which amounted to R$150 million in resources in 2016.

The initiatives are being implemented in virtually all areas and the company’s business divisions have the autonomy to develop tools and to implement innovations that contribute to their results. The main highlight is the Digital Mill project, which has brought digital innovation to our industrial plants. With the project, we have adopted the use of drones, operational dashboards on smartphones and customized apps that help accelerate processes in the production chain by boosting efficiency and reducing operator work time. With this initiative, Gerdau has captured a recurring annual gain of R$15 million at its mills.

From the commercial standpoint, eGerdau, for instance, is a platform that was created to make it easier for our clients to manage their orders. It allows users to monitor the status of their purchases on a daily basis and gives them access to the product catalog and information, quality certifications and copies of invoices. But there are many other examples.

What technologies would you like to see being developed to help Gerdau achieve its targets in the future?

Supported by Gerdau’s innovation-driven culture, we accompany new technologies that emerge in the market and are constantly evaluating opportunities for capturing gains for the business through our R&D centers and partnerships with universities.

Gerdau has been investing heavily for years in R & D and in developing sustainable technologies that reduce energy and water consumption and in turn cut CO2 emissions and optimize the recycling of scrap and co-products. Sometimes, companies table sustainability projects because they don’t have a clear idea of their economic feasibility or put other priorities first. Can you tell us about Gerdau’s successful experience and what advice you would give to other companies in the industry on implementing sustainability projects, based on Gerdau’s good example?

Throughout its history, Gerdau has constantly invested in improving its eco-efficiency practices. The results not only help to protect the environment, but also capture important returns for the business. One example is the reuse of 78% of the co-products generated in 2016, which are used in various industries, such as road paving, railroad ballast, casting, cement and ceramics. The sale of these co-products generated revenue of R$270 million in the year.

Reusing water is another one of our priorities. Gerdau has one of the highest water recirculation rates in the global steel industry, with an average rate in excess of 97.5%, with the small amount not reused mainly corresponding to losses due to evaporation. These strong water reuse results are the product of regular investments in advanced closed systems for treatment and recirculation.

Protecting our air is another pillar of environmental management. On this front, all of the company’s mills feature modern dust removal systems that capture the solid particles generated during the steel production process. Gerdau also works continuously to reduce the energy consumed in its industrial process, as reflected by its comprehensive energy efficiency program.

Gerdau is the largest recycler of ferrous scrap in Latin America, transforming 12 million tonnes of scrap into new steel goods every year. In 2016, 71% of the steel produced by the company was made using scrap as the main raw material. Therefore, scrap recycling is one of Gerdau’s main contributions to the environment, since it removes obsolete materials from cities while reducing energy consumption and CO2 emissions in steel production, creating new jobs and generating income for a broad network of suppliers.

Gerdau’s Equestrian Team won medals in two Olympics. What skills have you learned from these experiences and what is the importance of that experience for leading a large company like Gerdau?

In my opinion, any kind of sports activity, not only equestrian, contributes to the development of skills that have a positive influence on our professional development and personal balance. The constant preparation and surpassing of limits, and even facing defeats, are some of the experiences that sports give us that can influence the decision-making process of a business.