Gerdau builds steel inventories amid energy crisis in Brazil

Brazilian steelmaker Gerdau has been working at full capacity to serve customers and increase steel inventories amid an energy crisis that puts the country at risk of rationing and blackout.

"This is a point of attention and we are closely monitoring how it will play out. But it is important to understand that this crisis is more severe in the Southeast, and this is important because we have production facilities across the country, which gives us more flexibility to shift production, as we did in the previous crisis," said Marcos Faraco, head of Gerdau's operations in South America during a Gerday Day event on Sept. 2.

Brazil's Mines and Energy Minister Bento Albuquerque has warned that the country's energy crisis is worse than previously thought, as a record drought hampers hydropower generation – the largest source of energy in Brazil. Water reserves at hydropower plants are already at their lowest level in 91 years of records.

"The rainy season in the south was worse than expected. As a result, the reservoirs of our hydroelectric power plants in the Southeast and Midwest suffered a greater reduction than expected," he said in televised announcement.

With a larger steel inventory, Gerdau will be able to serve customers at the end of this year and at the beginning of 2022, if the situation worsens, said the executive.

According to Faraco, the steelmaker is currently operating its long steel segment with 80% of capacity. In heavy plates, it's operating at 75% of capacity, while operating at full steam at its hot-rolled-coil plant.

Gerdau has its own power generation at the Ouro Branco mill, in southeastern Minas Gerais state, which is able to supply 60%-70% of its energy demand. "We also have the Dona Francisca plant, in the south of the country, which is also integrated into our energy matrix in Brazil. We are going to prepare the organization for a worse scenario than the current one," said Faraco.

According to analysts at Credit Suisse, the negative impacts of an energy shortage or rationing would still be felt by customers of steel companies, "which, in our opinion, could translate into smaller shipments, even if they are able to avoid production losses."