China becomes 2nd largest auto exporter to Brazil, worries local steel market

Story originally published on Fastmarkets.com

Published by: Ana Enis, Gabriela Brumatti

Source: Drive

Chinese steel has become a concern for the Brazilian market, not only due to direct imports but also in the form of vehicles coming from the East Asian country. So far this year, China's market share of imported cars increased to 13.6%, jumping from fifth place to the second-largest country-of-origin for automotive imports in Brazil.

The value of Chinese auto exports to Brazil reached $440 million in January-August 2023. Year on year, this amount represents a 387% increase from the $90 million sent in the same period of 2022, according to Comex Stat, a division of the country’s industry, development and trade ministry (MDIC).

Kimberly Leppold, Fastmarkets’ head of research for steel products, said that further imports could be expected to have a detrimental effect on domestic car demand and demand for galvanized steel, the main finished steel product consumed by the industry.

“What we are seeing in the Chinese market is that steel demand is weak in the construction sector and exports are not picking up the slack,” explained Leppold. “Exporting cars has the dual purpose of exporting value-added products as well as the materials that went into the products.”

Fastmarkets’ monthly price assessment for steel hot-dipped galvanized coil domestic monthly, exw Brazil was 5,800-6,100 Reais ($1,163-1,224) per tonne on September 8, widening downward by 1.65% from 6,000-6,100 Reais per tonne in August.

Since the increase in vehicle imports is a recent movement, the national flat steel distributors’ association Inda said it is difficult to measure the move's immediate impact. But Inda’s executive president Carlos Loureiro called the increase a “very bad sign” for the industry.

The automotive industry accounts for around 23.5% of steel consumption in the country, according to the Brazilian steelmakers’ association Instituto Aço Brasil.

“So, any portion that we lose from national production to imported products will definitely impact steel consumption,” Loureiro told Fastmarkets.

The number of imported vehicles registered in the country has reached its highest level in almost eight years. In August, 16.27% of registered vehicles in Brazil were imported, the highest figure since December 2015, when imported vehicle registrations reached 16.37%, according to figures from the national automotive association ANFAVEA.

Germano Mendes De Paula, industrial economic researcher at the Federal University of Uberlandia, said that for the time being it is difficult to estimate how long the import surge might last — or how intense it might become.

From January to August, Brazil brought in 2.9 million tonnes of indirect steel imports (processed products containing steel, such as machines and vehicles), equivalent to 75% of direct imports, De Paula said.

Within the total imports of steel-containing products, the category “cars and commercial vehicles” was the only one that registered an increase from 2022. During this period, over 1.04 million tonnes were imported from the category, up 5.1% year on year.

“The greater the indirect imports, the smaller the size of the domestic market addressable by the steel mills,” De Paula said.

Vehicle imports in Brazil gained more strength in May 2023, according to Isabela Tavares and Yasmin Riveli, automotive and steel analysts from Tendências Consultoria — a Brazilian economic trends consultancy specialized in data science.

“[It was] closely related to a favorable movement of the exchange rate [for the Brazilian Real against the US dollar], and to a resilience in employment rates and in people's income, especially higher-income families,” they said via email.

Chinese leadership in Latin America

During a September 5 press conference, ANFAVEA president Marcio de Lima Leite said that Brazil is already facing difficulties in exporting its vehicles in Latin America, the country's main export hub. The market share of the Brazilian automotive sector in Latin America decreased from 22.5% to 19.4% over the past decade (2012-2022). Chinese market penetration has grown in the last 10 years from 4.6% to 21.2%.

“Brazil is losing space in the export of vehicles to its traditional market, which are countries such as Argentina, Chile and Colombia, and Asian producers, such as China, India and Indonesia, are gaining this market with their low prices,” Lima Leite said.

To guarantee competitiveness in Brazilian production and prevent the loss of revenue collected on imports, the president has proposed a tariff of up to 35% on the import of electric cars.

For the next few months, imports will likely be affected by new government policies, including electric vehicle (EV) incentives, according to De Paula. The researcher said that trade flow movements could also be affected by worldwide measures, like the decision from the European Commission to launch an anti-subsidy investigation against Chinese automakers.

“It is a very important issue for the world market, which tends to reverberate in the Brazilian market as well,” the researcher said.