Subsidized Steel Imports Will Erode Margins And Delay Modernization

Key Takeaways

• Surging subsidized imports and persistent global overcapacity are eroding pricing power and margins, constraining Usiminas' ability to generate sustainable earnings.
  
• High decarbonization costs, ESG pressures, and reliance on Brazil risk long-term market share, capital access, and earnings stability.
  
• Investments in modernization, product mix optimization, and potential trade protections position Usiminas for sustained margin expansion and earnings resilience amid challenging import conditions.

Catalysts

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

• The surge in subsidized steel imports-mainly from China-with over one million tons of flat steel brought into Brazil in the first quarter and a 42 percent year-over-year increase, is undermining domestic pricing and threatening to erode Usiminas' revenues and gross margins for the foreseeable future, especially as the government's ineffective quota and antidumping measures have yet to provide any real protection.
  
• Persistent overcapacity in global steel production, coupled with weak enforcement of trade defenses, will likely drive prolonged downwards pressure on product prices, limiting Usiminas' ability to pass on cost increases or achieve sustainable margin recovery, which is likely to severely constrain EBITDA generation and net earnings over the long term.
  
• The global move toward decarbonization and the rapid adoption of green steel is expected to require substantially higher compliance and capital expenditures from Usiminas, while its reliance on traditional steelmaking leaves it at risk of losing market share to more technologically-advanced, lower-emission competitors, which will compress future margins and returns on investment.
  
• Usiminas' concentrated exposure to Brazilian demand, in conjunction with high domestic interest rates and a lack of effective barriers to unfair imports, exposes its revenue stream to significant volatility from local macroeconomic shocks, while limited global diversification prevents offsetting these risks, raising the probability of long-term earnings instability.
  
• Intensifying ESG standards and investor scrutiny are likely to restrict access to low-cost international capital for carbon-intensive steelmaking, and delays in technological upgrades will further burden Usiminas' cash flows, ultimately reducing its capacity for shareholder returns and undermining its long-term valuation.

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 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.5% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach R$509.9 million (and earnings per share of R$0.46) by about July 2028, up from R$140.5 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 18.2x on those 2028 earnings, down from 35.1x today. This future PE is greater than the current PE for the BR Metals and Mining industry at 7.7x.
• 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 23.66%, as per the Simply Wall St company report.

Usinas Siderúrgicas de Minas Gerais Future Earnings Per Share Growth

Risks

• Despite challenging import conditions, Usiminas achieved net revenue growth of 6% year-over-year and 10% versus the first quarter of 2024, with EBITDA margins trending above 10% for three consecutive quarters, indicating operational resilience and potential for sustained earnings improvement if these trends continue.
  
• Persistent investments in modernization, efficiency gains, and projects such as the PCI for blast furnace operations are expected to lower overall cost of goods sold and improve operating margins over time, supporting the potential for expansion of net margins and higher future earnings.
  
• Usiminas is seeing resilient domestic demand, with steel sales up 4% in the Brazilian market and the ability to raise prices for key customers such as OEMs, suggesting underlying revenue stability that could contradict expectations of a prolonged decline.
  
• The company's ability to optimize its product mix, including higher-value exports to auto and oil and gas clients in the Mercosur region as well as selling more enriched iron ore products, may provide revenue diversification and protect overall gross margins even during domestic market downturns.
  
• Management emphasizes that if trade defense measures or antidumping protections are implemented by Brazilian authorities, this could materially reduce the impact of subsidized imports, restore fair competition, and enhance both Usiminas' pricing power and profitability over the medium
• to long-term, ultimately supporting share price recovery.

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$26.9 billion, earnings will come to R$509.9 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 23.7%.
  
• Given the current share price of R$4.01, the bearish analyst price target of R$4.0 is 0.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.