Gerdau: emerging market champion

The long, steep rise in commodity prices has been a deep blessing for hydrocarbon rich Latin countries, spreading its largesse blindly from oil-rich Venezuela to diversified mineral-providers including Peru, Chile and Brazil.

Many companies, such as Venezuela’s state-run oil firm PDVSA, have rested on their laurels or worse during this bonanza. But a handful have maximized the opportunity to turn themselves into true global leaders. If the fortunes of the lucky are shrinking in line with today’s more constrained times, those that have worked the magic of transformation are here to stay as global leaders.

Brazilian steel maker Gerdau is a good example of a firm that has moved in record time from an absolute unknown to a diversified, highly competitive international player. It is now the largest producer of long steel in the Americas with 317 units, five joint ventures and four associated companies in 14 countries, including the United States and India, with capacity of 25.9 million metric tons of steel per year. That’s all a far cry from its modest origins in 1901 as a nail factory in the southern city of Porto Alegre where it remains based.

Like many Latin firms, it is firmly rooted in family traditions. But it has been neither hidebound or ripped apart by family rows, the fate of many comparable firms. Instead, Gerdau has successfully pulled off the pursuit of multiple strategies. It is diversifying internationally through acquisitions; increasing production and efficiency at home; and working to create a vertically-integrated business with more control of its own inputs.

The splashiest area has been international expansion. Last year, Gerdau Ameristeel pulled off the coup of buying Chaparral of Texas in a deal worth north of $4 billion, putting it firmly on the map of US investors. Then, in April, it added the steel business of Quanex Corporation, the second largest producer of specialty steel in the US, for $1.5 billion. These cap a period of enormous and rapid expansion for the firm that started off outside Latin America with a 40% stake in Spain’s Sidenor as recently as 2005.

More quietly, the firm has been rapidly expanding its presence in its home market through new capacity, including the $1.5 billion, 1.5 million ton expansion of plate producing mill Ouro Branco, and securing more its own supplies as prices rise in raw materials. It bought a 50.9% stake in Colombian coke producer Cleary Holdings Corp for $59 million, for example.

The final plank in Gerdau’s success has been a far-greater ability to raise funds overseas. The closure of the gap between developed and developing market cost of funding has proven an enormous fillip for such firms, notes Andrea Goldstein, senior economist at the Organisation for Economic Co-operation and Development. In the teeth of deteriorating markets, the firm launched two deals in late April raising a total of 4.4 billion reais.

There are advantages for firms in ‘old’ industries being based in developing countries, adds Goldstein. They often have the upper hand in attracting talent as they are seen as top-rate employers in contrast to their dowdy image in developed markets, he reckons.

Challenges are now changing for Gerdau. Weak markets, a huge increase in competition, and the volatile nature of commodities pricing have created a new, more hostile environment.

Analysts are worried that Gerdau’s aggressive expansion in steel has not yet been matched with securing a steady supply of materials, in spite of attempts. The price of steel scrap, coal, iron ore and other raw materials rose 24% in 2007. CEO, André Gerdau Johannpeter, has announced aggressive plans to tackle the firm’s dependence on outsiders to supply inputs: “We plan to get 80% of our iron ore from our own mines by 2010,” he said.

There has been a huge increase in new steel projects throughout Brazil, which enjoys the lowest-cost iron ore in the world. After a period of restructuring in the steel industry which saw little new capacity come onstream, by 2013, Brazil may be producing as much as 86.6 million tons annually, more than double its current annual capacity, says Marco Polo de Mello, executive vice president of the Brazilian Steel Institute.

There have also been questions over whether Gerdau expanded too fast at the top of the cycle. “The emergence of global emerging market players coincided with a great period of liquidity,” notes Goldstein. “Now that is drying up, it will be interesting to see how these emerging market-based multi-nationals are affected.” Finally, there remains the nagging question of how Gerdau balances family interests with its growing number of debt and equity holders, too.

All these questions have taken some of the gloss of Gerdau with shares down more than 40% since its peak. But that has to be put into context: it is still up nearly fivefold in five years. Gerdau is now firmly entrenched as a global leader and one that arrived there in record time.

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