But I would just like to learn more about your decision-making process and why you decided to be more conservative. Has there been any changes in your target? And I think this has been the main focal point in terms of the analysts in general. The second point, Werneck, I think the message of the company has been very clear in terms of all of this incredible, I mean, this excessive volume of imported steel and the deceleration that we are seeing in many chains. Looking at the Brazil results in the margin of Brazil, I think that this is one of the main points of attention for the company. And that’s why, I mean, that also includes increasing tariffs and profitability. If I look at the past 10 to 15 years, Brazil’s profitability is at Dilma’s level, I mean, recession level.
So, what do you have that you could utilize to somehow resume profitability in Brazil or go back to your profitability levels in Brazil? Do you have any measures related to cost reduction? Or is there anything that you can tell us that you’ve been doing to somehow on the micro side somehow you could try to compensate for this more challenging landscape?
Gustavo Werneck: Well, thank you, Leo. Thank you for all of your comments and questions. I mean, Japur, answer the part on dividends and then I will talk a little bit about the Brazil side.
Rafael Japur: I think your second question, it’s quite timely and that gives me the opportunity to tell you something about your first question. I mean, we are a Brazilian company that pays dividends in Brazil and, therefore, this depends on our capacity to generate cash denominated in BRLs to pay the dividends. But when we see moments like the one today, whereas our Brazilian operation is performing, I mean, in addition to everything that is happening with so — with a large volume of imported products and our investment portfolio in terms of CapEx comes from Brazil, I mean, R$9 billion of CapEx. So, this is a very important amount for our Brazil operation. But we depend on bringing money from the U.S. or maybe from other subsidiaries of the company to pay out dividends, but this is not necessarily good for financial and tax reasons.
Well, certainly, we should highlight that the year is not over yet. We still have another quarter and so we have room to revisit and rediscuss the dividend payout for the coming quarters. But today, taking into account the current perspective in the Brazilian market with this excessive amount of imported goods, I mean, 23% penetration of imported materials in September and we do not see any going trend of this number coming down. And we have an important portfolio of projects, but yet a lot of uncertainty is related to the Brazilian economy, because the apparent consumption for domestic goods, I mean, is uncertain. That’s why we are more cautious in terms of paying dividends, starting in Brazil.
Gustavo Werneck: But now, Leo, let me tell you a little bit about Brazil. We are still very quick in adapting to the current scenarios. Our capacity to deliver good profitability and proof of what I’m saying is our special steel operations. When you look at the results, despite a very complex landscape, as you put it yourself, in Brazil with the decline in the demand for light and heavy vehicles, despite all that, we were able to quickly adjust our fixed cost in our steel operations and adjust that to the current moment of our business. This is just a message that indicates that we are still very alert and very quick to prepare the company to navigate in different scenarios. In terms of flat and long steels operation, that was a bit different because in the past few months, we thought that we could find opportunities to continue to export from Brazil.
And that we thought that we would have the penetration of imported steel coming from Asia, especially from China, much lower than in fact, the reality showed. And in the past few weeks, we went to China and we came out of that country very convinced that this current export level will continue in the next coming months. After almost 13 years, we may see again a high level of Asian exports, absolutely high. I think there will be 100 million exports coming from China and they’re looking — so we’re looking for geographies and countries that have not yet adopted measures to contain all of this subsidized steel that comes into the country in a very unfair and predatory way. We’ve been — well, given that, we are now trying to remove capacity to reduce fixed costs as we did with special steels.
Because it’s important that we can navigate in a scenario that will still be prevalent in the next coming months. So, in addition to the reduction in fixed costs and the removal of capacity, I mean, it’s important that the federal government comes up with measures that can bring more competitive field. This is affecting the entire steel industry in Brazil and we have to fight that predatory import very quickly. We’ve been talking about this tariff of 25% and this will come as a means to level the playing field in terms of competitiveness. We said for — in several occasions that our competitiveness is quite high. We compete on equal footing with any large steel producer, but we see the penetration of steel that comes to Brazil at a cost that is lower than the production cost.
This really indicates unfair competition. We’ve been constantly talking to people at the federal government and what we see is that they are now being convinced that something has to be done. We are already removing capacity from our operations in Ceara and Rio Grande do Sul and unfortunately, in the last few weeks, we had to let go almost 700 direct workers. And in terms of wealth generation in Brazil, this is a very complex issue. Therefore, something has to be done and it has to be done urgently. It’s important that competition goes back to something fair in Brazil. So, this is our claim today. In addition to that, we are reducing capacity. We are making some strides towards reducing our fixed costs because it’s important that we recover our domestic market levels.
In terms of exports, we see that the market is closed to us right now. I know that 22% of our installed capacity in Brazil has been traditionally vocation for exports, but with this flood of Chinese steel, we don’t see any opportunities to export at margins that will be attractive to us. Therefore, this is bad for the consolidated margins that we’ve had in our Brazil operations. But I know that this was a very detailed answer, but it was just to explain to you that in fact, this unprecedented flood of imported products from China is bringing about serious problems to the entire steel market in Brazil.
Rafael Japur: Well, Gustavo, talking about imports, when we look at the traditional prices from March to now, there was a drop between 5% and 7%. On the other hand, negatively speaking about our exports from Brazil, our exchange rate from March to now, and it changed, I mean, there was the appreciation of the Brazilian BRL. So, there was a gap between 10% to 15% of competitive — competition losses. So, after this flood of steel coming from China, and also, in view of the exchange rate, it’s very difficult to be competitive and to generate cash and have good results, if you think about exports from Brazil.
Leonardo Correa: That was great. Thank you, Japur. Thank you very much.
Renata Oliva Battiferro: Thank you, Leo, for joining us today. Next question, Lucas Laghi, sell-side analyst with XP. Lucas, please you can ask your question live and enable your camera.
Lucas Laghi: Good afternoon. Can you hear me now?
Gustavo Werneck: Hi, Lucas. We can hear you very well.
Lucas Laghi: Thank you, Werneck. I was just connecting. Good afternoon everyone. Thank you for taking my question. I have two questions that I’d like to dive deeper with you. First, a follow-up question on the previous one. It’s about the Brazil operation, particularly about profitability. There was a slight contraction on a quarterly basis. If we think about lower prices on Q3 compared to Q2, Werneck already mentioned the imports of Chinese and Asian steel in Brazil. So, I’d like to better understand, if we think about Q4, still about cost, but particularly variable cost, particularly when it comes to coal and iron ore price dynamics and the timing vis-à-vis how these components are accounted for as cost over fourth quarter and first quarter 2024.
