From this morning's CS LATAM note...

Stepping into the Brazilian flat steel market

Stepping into the flat steel market: Yesterday, after the market close,
Gerdau announced the resumption of its R$1.75bn investment plan in a new
heavy plate rolling mill. This project is part of Gerdau’s previous 2008-2010
investment plan of R$6.4bn, which was postponed due to the global slowdown.
Brownfield project located at Gerdau Açominas site: The company aims at
initially adding 1Mtpy of heavy plate capacity, which should be mostly channeled to the domestic market. Construction works should start in 2010 and should last about 2 years. Startup is expected to take place by the end of 2012.

What is Gerdau aiming at? This project marks the entrance of Gerdau into
the Brazilian flat steel market. Heavy plates are mainly used in the shipbuilding,
construction, oil and heavy machinery markets. We note that, while the heavy
plate market is currently in a relatively bad shape compared to other steel
markets, it still has a fairly promising outlook. In our view, it should benefit from rising infrastructure investments throughout the next decade.
Brazilian shipbuilding demand set to grow. Both Vale and Petrobras have
plans to increase and renew their fleet over the coming years. In this scenario, domestic shipyards should play a major role. Vale is expected to invest US$1.5bn in the acquisition of barges for its Corumbá operations.

Additionally, Petrobras’ ambitious investment plan in the pre-salt area should also trigger substantial investments in the shipbuilding industry. From 2013 to 2015, Petrobras should need about 65 new vessels and another 78 from 2016-2020.

We estimate a ~R$2.5/share positive impact on Gerdau’s NPV. In our
calculations, we assume: (1) 80% sales in the domestic market; (2) LT heavy
plate export prices at US$750/t; (3) domestic prices at a 20% premium to
exports; and (4) total cash-cost of production at ~US$425/t (in line with other domestic players’ production costs). We keep our positive stance on Gerdau.