Companhia Siderurgica Nacional (ADR) (SID), Gerdau SA (ADR) (GGB): Will Future Initiatives Be Enough to Boost the Brazilian Iron & Steel Industry?

Bottom line

So far this year, shares of Companhia Siderurgica Nacional (ADR) (NYSE:SID) have dropped 47%, and Gerdau SA (ADR) (NYSE:GGB)´s and Usiminas’ have both fallen 32%. In the case of CSN, speculation that the company may purchase ThyssenKrupp‘s plants in Brazil and Alabama has contributed to the drop in shares.

Despite the fall, I believe the time to buy these stocks has not come yet. Profitability is their main problem. Focus on the domestic market has served them well as Brazil’s developing economy has supported steel consumption better than the developed world, but they have seen profitability erode by rising costs, tough competition from imports, and a very complicated environment that makes prices increases very difficult. This is not likely to change in the near future.

In addition, Companhia Siderurgica Nacional (ADR) (NYSE:SID) has lost focus on its main source of economic moat: the iron ore business. It continues to assign capital to activities with lower prospects rather than invest in the lucrative mining business. Gerdau at least managed to lower cost increases, which signals it is relying on prudence to bolster profits, while Usiminas’ results unfortunately reveal that its recovery may take longer than expected, as expenses keep rising and income keeps falling.