Rising Imports And Regulatory Shortfalls Will Exacerbate Steel Challenges

Key Takeaways

• Rising steel imports and global green trends are squeezing Usiminas' sales, margins, and market share, as antidumping efforts remain ineffective.
  
• Margin and earnings pressure will persist as costs rise and demand shifts to substitutes, while regulatory and decarbonization demands boost expenses.
  
• Focus on operational efficiency, trade protections, capital investments, and prudent financial management positions Usiminas for strengthened margins and improved long-term earnings resilience.

Catalysts

Processes, manufactures, and markets flat steel products in Brazil and internationally.

• The surge in steel imports into Brazil-accounting for 28 percent of apparent consumption and up 50 percent year-over-year-exposes Usiminas to sustained competitive pressure from foreign producers, especially from China, as ineffective quota-tariff measures fail to stem the flow, threatening to depress domestic sales volumes and drive net revenue per ton to multi-year lows.
  
• Despite management's expectation for cost reductions from operational efficiency, the persistent inability to pass higher input costs to customers due to cheaper imports and high inventories throughout the value chain will likely continue compressing EBITDA margins and bottom-line profitability over the coming years.
  
• Delays or political resistance in the implementation of effective antidumping and safeguard measures in Brazil could result in chronically low capacity utilization and further loss of pricing power, potentially causing a structural, long-term decline in Usiminas' revenue growth and market share.
  
• Structural headwinds from a global shift towards green materials and increased use of substitutes, such as aluminum and recycled metals, in construction and automotive end-markets could steadily erode demand for flat steel, leading to lower sales volumes and stagnating or declining earnings over time.
  
• Heightened global decarbonization efforts-resulting in new carbon taxes, emission regulations, and required investments in green steelmaking-may lead to a steep rise in operating expenses and capital expenditure requirements for Usiminas, challenging its ability to maintain margins and placing long-term downward pressure on net income.

Usinas Siderúrgicas de Minas Gerais Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Usinas Siderúrgicas de Minas Gerais compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Usinas Siderúrgicas de Minas Gerais's revenue will decrease by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.4% today to 1.1% in 3 years time.
• The bearish analysts expect earnings to reach R$281.8 million (and earnings per share of R$0.22) by about August 2028, down from R$376.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.7x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the BR Metals and Mining industry at 9.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.21%, as per the Simply Wall St company report.

Usinas Siderúrgicas de Minas Gerais Future Earnings Per Share Growth

Risks

• If antidumping and other trade defense measures against unfairly subsidized imports are successfully implemented, Usiminas could see improved domestic pricing and higher sales volumes, leading to enhanced revenue and net margins.
  
• Ongoing internal initiatives focused on operational efficiency, cost reduction, and process automation are expected to lower production costs, potentially offsetting weak pricing and supporting EBITDA and profitability over time.
  
• Significant capital investments, such as the R$1.7 billion for a new coke battery, aim to achieve greater fuel efficiency, energy optimization, and self-sufficiency, which may lead to sustained margin improvement and improved long-term earnings.
  
• The company has demonstrated financial discipline by generating positive free cash flow, reducing net debt by 24%, and extending its debt profile to avoid significant amortizations until 2028, which strengthens its balance sheet and improves earnings resilience.
  
• Any effective rebalancing of global supply and demand-such as China's potential reduction in steel exports-could alleviate downward price pressure, supporting international prices and thereby boosting Usiminas's revenue and net profit.

Valuation

• The assumed bearish price target for Usinas Siderúrgicas de Minas Gerais is R$4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Usinas Siderúrgicas de Minas Gerais's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$10.0, and the most bearish reporting a price target of just R$4.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$25.4 billion, earnings will come to R$281.8 million, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 23.2%.
  
• Given the current share price of R$4.42, the bearish analyst price target of R$4.0 is 10.5% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.