Near-term outlook for the steel industry remains cautiously optimistic as communicated by the World Steel Association. According to the WSA, the world steel demand which is expected to increase 6.5% in 2011 and roughly 5.4% in 2012 would probably be restricted by financial crisis in the European region, political unrest in other parts of the world, Japan earthquakes and economic uncertainties in China. Production, on the other hand, remains at high levels, which in turn is affecting steel prices. Raw material prices are on the decline due to soft steel demands.
The outlook for the Brazilian steel industry also looks favorable with the growth in manufacturing and construction industries. The forthcoming 2014 Soccer World Cup and 2016 Olympic games, to be held in Brazil, have also boosted the company’s growth prospects considerably.
We believe the growth outlook of Companhia Siderurgica is encouraging considering the various projects that are being carried out by the company. Moreover, its entry into the cement business would be an expected synergy.
In the third quarter of 2011, Companhia Siderurgica’s net income jumped 49% year over year while its top line soared 7%. Crude steel production was up 2% year over year in the quarter.
Despite the positives, continuous rise in the cost of goods sold makes us greatly concerned about the financial health of the company. In the third quarter, cost of goods sold went up 25.6% year over year, leading to a 7% decline in gross margin.
In addition, CSN’s escalating debt levels; ascribed primarily to funding the company’s investment plans as well as high cyclicality and growing competition in the industry are major hindrances to growth. The company faces stiff competition from Ternium SA-ADR (NYSE:TX - News) and Usiminas SA-ADR (Other OTC:USNZY.PK - News), among others.
Companhia Siderurgica primarily engages in the production of hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries.
The current Zacks Consensus Estimate for the fourth quarter is 22 cents, representing a year-over-year increase of 20.37%. Estimates for the fiscal years 2011 and 2012 are $1.11 and $1.12, reflecting annual growth of 8.43% and 1.27%, respectively.
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