Latin CEO / October 2000
By Larry Luxner
On January 16, 1901, German immigrant João Gerdau opened a tiny nail factory in the southern Brazilian state of Rio Grande do Sul, marking the birth of a company that would one day rank among Latin America’s largest steelmakers.
These days, as Gerdau’s heirs prepare for the company’s 100th anniversary, Gerdau S.A. has much to celebrate. Not only is it the world’s largest nail manufacturer, the family-controlled conglomerate is Brazil’s largest producer of steel products for construction. It is also arguably Brazil’s truest multinational corporation.
In 1999, the company reported sales of US$2.2 billion – up 47 percent from the year before – and profits of US$198 million. While CSN is the market leader in flat products, Gerdau has 50 percent of the domestic market in long steel products, with Brazil representing 60 percent of company sales by volume and 75 percent by monetary value.
Overall, Gerdau S.A. churned out 3.5 million tons of crude steel last year – 61 percent of that from its Brazilian operations and 39 percent from Gerdau’s subsidiaries in Argentina, Canada, Chile, Uruguay and the United States. In a recent report to investors, Banco Santander Central Hispano predicted that Gerdau, which began trading ADRs on the New York Stock Exchange in early 1999, would earn profits this year of US$272.8 million. That figure surpasses competitors like Usiminas (with US$224.1 million), CSN (with US$230.8 million) and CST (with US$199.7 million).
"We like Gerdau very much,” says Santander Investment steel-industry analyst Rodrigo Marques in São Paulo. “Their management team is pretty strong, and Gerdau has one of the best-defined long-term strategies of all [Brazilian steelmakers] in terms of where they’ll be in the next five to 10 years.”
President and CEO Jorge Gerdau Johannpeter, a fourth-generation steelmaker, says he’s proud of what he calls the “strong professionalism” that has characterized his family business since it began life as Companhia Fábrica de Pregos Pontas de Paris. “I started at Gerdau when I was 18 years old, studying at night and working during the day so I could learn the business from top to bottom,” says the top executive. “At that time, our capacity was 60,000 tons a year. Now we have a capacity of 7.5 million tons.”
Gerdau, 63, runs the company along with brothers Frederico (who heads finance and administration), Klaus (in charge of industrial operations) and Germano (chief of commercial operations). The Gerdau family owns 25 percent of the company’s overall shares, but retains control of 72 percent of the voting stock.
The company employs 12,500 people worldwide, including 8,500 workers in 10 steel mills in Brazil. A visit to one of them, Gerdau Aços Finos Piratini, showed some 1,050 workers manufacturing rolled, forged and cold-finished steel products, with 95 percent of production staying in Brazil and the remaining 5 percent being exported to Argentina and other Mercosur countries.
Aços Finos Piratini is a case study of Gerdau’s capabilities. The factory, originally established by the state of Rio Grande do Sul, began production in 1973. By 1990, the steel mill was losing US$1 million a month. Two years later, Gerdau bought it in a privatization auction for US$107.4 million. Since then, the company has poured an additional US$150 million into the sprawling plant, which is located in Charqueadas, a 45-minute drive from Gerdau headquarters in Pôrto Alegre.
When the state owned this factory, there were 2,000 workers. Gerdau cut employment in half and now produces double the amount of steel,” says Francisco Deppermann Fortes, the plant’s human resources manager. “Since 1992, our productivity has jumped from 70 tons to 271 tons per employee per year.”
Yet Aços Finos Piratini is unique within the Gerdau group in that 75 percent of its production is destined for Brazil’s booming auto industry. Overall, 60 percent of total company sales go to the domestic construction industry, another 30 percent goes to the auto industry and other industrial customers, and the remaining 10 percent goes to agribusiness. Interestingly, Gerdau also has its hand in forestry and cattle, though such ventures account for less than 2.5 percent of total company revenues.
Gerdau’s strong presence in construction serves the company well, with Brazil’s building industry expected to expand by at least 4 percent in 2000. “Usually, the consumption of steel in Brazil is linked to GDP, so as GDP grows, we are also seeing huge growth in demand for steel products for civil construction projects,” says Marques. “Gerdau is the one supplying this steel.”
Gerdau, also vice president of trade industry lobby Instituto Brasileiro de Siderurgia, predicts Brazil’s steel industry will receive investments of US$12 billion between now and 2007, boosting capacity from the current 31 million tons per year to 40 million tons. Over the next three years, the company itself will invest US$100 million in three operations in northeastern Brazil: US$54 million will go to Usiba (Bahía state); US$33.5 million for Açonorte (in Pernambuco) and US$12.3 million to Cearense (in Ceará).
At the same time, Gerdau is pursuing opportunities outside of Brazil. Since 1980, when it purchased Siderúrugica Laisa S.A. in Uruguay, Gerdau has raised its profile throughout the Americas. “Early on, we began to be concerned about globalization,” says the CEO. “After we achieved a strong position in the Brazilian market, we had two options: diversify or use our know-how to invest in other countries. We concluded that we had to continue in the business we knew. Investors like companies that have a strong focus.”
At present, Gerdau owns 100 percent of Canada’s Courtice Steel Inc. and Manitoba Rolling Mills; 100 percent of Chile’s Siderúrgica AZA; 100 percent of Uruguay’s Laisa; 73 percent of Argentina’s Sipsa and 38 percent of another Argentine company, Sipar. It also owns 75 percent of US-based AmeriSteel, which it acquired for US$262 million last year.
The purchase of AmeriSteel represents an important reduction in risk for Gerdau,” says Marques. “Entry into the US market – one in which the structure of demand is much more stable than in Brazil – should lead to a notable diversification of risk for the company.”
Gerdau’s global positioning has already paid off handsomely for the company, in particular insulating it from President Fernando Henrique Cardoso’s January 1999 devaluation of the Brazilian real. “We had US$400 million in dollar debt, but also US$400 million invested in outside companies, so the two situations balanced each other. As the dollar became stronger, our investments were worth more,” says the CEO.
About the only thing that concerns Gerdau is how long the current stretch of good luck will last.
Two years ago, we ranked 50th among international steel producers. Today we are 20th,” he says. “Even though we have a good position domestically, there are lots of mergers in the steel industry. We must be in a better position to compete internationally.”