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Gas Prices May Threaten Ternium's Brazil Steel Slabs Project -Sources

RIO DE JANEIRO -(Dow Jones)- Latin American steelmaker Ternium SA (TX)'s steelworks project at Brazil's Acu port may be threatened by natural gas prices, which are significantly higher in Brazil than in other Latin American nations. Ternium, which plans to use the natural-gas-based direct reduction process for its Acu steelworks, is being asked to pay $12 a million British thermal units of natural gas by Brazil's state-controlled oil and gas producer Petroleo Brasileiro SA (PETR4.BR, PBR)--nearly six times more than the price of gas in some other countries--according to people close to the project. Natural gas at this price level would make the steel slabs plant unviable, the people said. Petrobras bases its natural gas prices on the average price of a basket of oils in a previous six-month period, meaning the prices don't quickly reflect changes in gas prices on international markets, which are now falling. Gas prices have slumped 24% from the fourth quarter of 2011 and may eventually benefit Ternium's Acu project, despite the time lag in local pricing mechanisms, Barclays Capital said Tuesday in a report. According to Barclays, Ternium currently pays about $4.5 per MMBtu of natural gas for its steelmaking operations in Argentina, while people familiar with the market put prices in Mexico, where Ternium also has a direct-reduction based steelmaking plant, at around $2 per MMBtu. "Ternium's in no rush, (we) would expect they'd like to try and get Petrobras to be more realistic," said London-based UBS analyst Rene Kleyweg, referring to the prospects of the Acu steel plant's getting the go-ahead. Petrobras had no immediate response to e-mailed questions on the price of gas supplies to Ternium when approached by Dow Jones Newswires Tuesday. Ternium declined to comment. According to a spokeswoman for Rio de Janeiro state's economic development secretariat, Ternium is expected to gain a construction license for the Acu plant from the state's environmental authority in coming days. The project may also involve construction of a pelletizing plant to process iron ore from Anglo American (AAL.LN)'s Minas-Rio project to use in the steelmaking process, according to the secretariat. This isn't the first time that natural gas prices have posed problems to Brazilian steel projects. A steel slabs project being developed by miner Vale SA (VALE, VALE5.BR) and South Korean steelmakers Dongkuk Steel Mill Co. (001230.SE) and Posco (005490.SE) in Ceara state, northeast Brazil, was originally designed to use natural gas but the technology was changed after failure to reach agreement with Petrobras over the price of gas supplies. The Ceara steel project, now named Companhia Siderurgica do Pecem, was originally planned for a 2010 start-up but according to specialist publication Steel Business Briefing may not start up until 2016, even later than Vale's recent projection of a first-half 2015 start-up. The plant is expected to produce 3 million metric tons a year of slabs, partly for export to South Korea, in a $4.69 billion investment. -By Diana Kinch, Dow Jones Newswires. Tel 55 21 2586 6086 diana.kinch@dowjones.com -0-

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