April 20, 2017 / 12:16 PM / 3 years ago

UPDATE 3-Usiminas says Brazil steel price premium unsustainable

(Adds comments from Leite interview in paragraphs 2-5)

By Guillermo Parra-Bernal and Alberto Alerigi Jr

SAO PAULO, April 20 (Reuters) - Executives at Usinas Siderúrgicas de Minas Gerais SA said on Thursday that Brazil domestic flat steel prices remain unsustainably high, which risks luring cheap imports and worsening a local glut of some products.

Local prices are now between 20 percent to 30 percent above international prices, which is “unsustainable,” Chief Executive Officer Sérgio Leite in an interview to discuss Usiminas’s quarterly results. While international prices could rise, local prices may climb 3 percent to 5 percent this quarter, he added.

Wider so-called price premiums and a stronger currency have hampered profits at Brazilian steelmakers in the past. Five years ago, a similar situation led to an excess of steel imports into Brazil, triggering a crisis that mills are still struggling with today.

“Equilibrium premiums are 5 percent to 10 percent, making it hard for anyone to operate at these levels,” Leite said.

Higher domestic prices helped Brazil’s No. 1 listed flat steelmaker reverse a net loss last quarter. While sales volumes rose despite Brazil’s ongoing recession, analysts said volatile price trends could put the brakes on Usiminas’s recovery.

Net income came in at 108 million reais ($34 million) last quarter, reversing a loss of 195 million reais the prior three months. The result beat Thomson Reuters’ average consensus estimate of 26 million reais.

“A reduction in domestic prices could be triggered by a drop in international steel prices and further currency appreciation, potentially reversing the trend of improving results,” said Marcos Assumpção, an analyst with Itaú BBA.

Domestic sales, which are generally priced higher than exports, accounted for 90 percent of Usiminas’s revenue last quarter.

Shares rallied as much as 5 percent on the stronger results, which suggested an inflection point for a company wrestling with the recession and a dispute between top shareholders Nippon Steel & Sumitomo Metal Corp and Ternium SA.

Still, earnings before interest, tax, depreciation and amortization fell 10 percent to 528 million reais from the prior three months. Analysts estimated EBITDA, as the gauge is known, of 326 million reais.

Leite pledged to keep reining in costs and optimize the use of working capital, which rose in the wake of higher inventory and a halt of operations at the Cubatão mill.

Usiminas will invest around 300 million reais this year and control the use of working capital even as inventory stays high. Declining Brazilian interest rates are helping lower debt-servicing costs for Usiminas, he added.

$1 = 3.1505 reais Editing by Chizu Nomiyama and Meredith Mazzilli

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