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Vale's New Partnerships Stir Competition In Brazil Steel Market

-Increased competition, imports keep lid on local prices -Vale, partners to invest $22 billion in four mills -Disputes among competitors go back a long way By Diana Kinch Of DOW JONES NEWSWIRES RIO DE JANEIRO -(Dow Jones)- Brazil's steel sector has been shaken up since mining giant Vale SA (VALE, VALE5.BR) started building its first steel mill, bringing in new foreign partners and triggering a bitter fight over manpower and customers. The squabbling among local steelmakers is likely to intensify as Vale plans to build another three major steel mills with new partners, including South Korea's Posco (005490.SE) and Dongkuk Steel Mill Co. (001230.SE). The new plants are being developed by Vale following government criticism that it wasn't doing enough to boost the development of Brazilian industry, and to enlarge the local market for iron ore, of which Vale is the world's biggest exporter. Vale and its partners plan to invest about $22 billion in the four mills, increasing Brazil's steel-production capacity by 40% from the current 47 million metric tons per year, which is already double local demand. Vale's projects are intended to focus on slab sales to partners overseas, but analysts say the new works will still raise competition at home. "The rationale's the same," said Max Bueno of Spinelli Corretora. "They'll certainly boost competition and put added pressure on prices as they increase steel supplies. There's already a high surplus of steel capacity world-wide." According to the Brussels-based World Steel Association, global steelmaking overcapacity stands at 532 million metric tons, equivalent to one third of world demand. In Brazil, steelmakers including Companhia Siderurgica Nacional SA (SID, CSNA3.BR), or CSN, Usinas Siderurgicas de Minas Gerais SA (USNZY, USIM5.BR), or Usiminas, ArcelorMittal Brasil (MT) and Gerdau SA (GGB, GGBR4.BR) have had limited success raising prices this year as they compete with imports from an oversupplied world market. Last year, CSN quit the ranks of the prestigious Brazilian Steel Institute, or IABr, aggrieved according to people familiar with the company because it felt the first of Vale's new joint ventures--Companhia Siderurgica do Atlantico, or CSA, in Rio de Janeiro state--had poached CSN employees to man its new steelworks. "Brazilian steelmakers hate the word competition," said a CSA executive who asked not to be named. CSA, a Vale-ThyssenKrupp joint-venture, is the first major steelworks to be built in Brazil in 20 years, with ThyssenKrupp keen to invest in locations close to high-quality iron ore such as Vale produces. The new investments have aggravated what was already a desperate local shortage of skilled labor. A CSN spokesman declined to discuss details of the company's absence from the IABr, which has wider implications for the industry as it may mean IABr has to estimate its monthly production statistics for Brazil. The IABr numbers are used by analysts world-wide to build their forecasts for future supply. The institute said Tuesday that its statistics include data published quarterly, or supplied to the market, by CSN, although some have expressed concern that monthly statistics could be deficient. "This takes a bit of credibility away from the information," said Pedro Galdi, an analyst with SLW Corretora. "We're left with incomplete data." Disputes aren't new for the companies. ThyssenKrupp fell out with CSN in 2004 over management of a joint-venture between the two--Galvasud--to produce galvanized steel for the automotive industry. The dispute ended up in a New York court, where CSN Chairman and Chief Executive Benjamin Steinbruch prevailed and bought out ThyssenKrupp's stake. CSN's disagreements with Vale have even deeper roots. A CSN-led consortium snatched up control of Vale during the mining company's privatization in 1997, with Steinbruch becoming chief executive of both CSN and Vale simultaneously. Brazil's antitrust authorities blocked that, but it took another 12 years to unravel the two companies' respective rights to iron ore at a major mine in southeast Brazil. -By Diana Kinch, Dow Jones Newswires, Tel: 55 21 2586 6086; [email protected]

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