UPDATE 1-Gerdau says margins unlikely to improve next qtr

* Tough industry conditions hamper recovery, CEO says

* Steel imports seen falling gradually into 2011

* Spain business remain a challenge, executives say
(Recasts to add background, details on margins, comments,
share price in paragraphs 1-13)

By Guillermo Parra-Bernal

SAO PAULO, Nov 30 (BestGrowthStock) – Operational profit at
Brazil’s Gerdau, the world’s No. 2 maker of long steel for the
construction industry, is unlikely to improve in the 2011 first
quarter due to weak demand, persistently high raw material
costs and fierce competition, company executives said on
Tuesday.

“There is no indication” that earnings before interest,
tax, depreciation and amortization as a percentage of revenue
will rise in the first three months of next year from recent
numbers,” Chief Financial Officer Osvaldo Schirmer told
analysts at an event in Sao Paulo.

The so-called EBITDA margin, widely used by investors as a
gauge of operational efficiency and profitability, dropped to
15 percent of revenue in the third quarter from 20 percent a
year earlier due to rising costs. Schirmer did not provide a
number for the last quarter of 2010 or the first three months
of next year.”

Nonvoting shares of Gerdau (GGBR4.SA: ), the company’s most
widely traded type of stock, were off 0.3 percent to 19.55
reais at midday.

At the same event, Chief Executive Andre Gerdau Johannpeter
gave new indications that the company’s performance will
increasingly hinge on growth in Brazil, where more than $1
trillion in infrastructure projects through 2014 should
leverage demand for steel products.

Conditions will remain challenging for industry players
throughout 2011, Gerdau Johannpeter said, citing excess
capacity, high costs of iron ore, scrap and other raw
materials, and limited pricing power in segments such as steel
products used for the auto sector.

“We are going through tough industry conditions,” he said.

His remarks signal that the steel industry in Brazil is
being squeezed by market share losses to imported steel,
eroding profit margins, a strong Brazilian currency and rising
raw material costs.

He said it is difficult to forecast trends for iron ore and
scarp prices globally.

IMPORTS, DISCOUNTS

Problems in the domestic market, where demand was rising at
double-digit rates in the first half of 2010, have been stoked
by cheap imports that allowed distributors to increase
inventory more rapidly.

Accumulation of stock forced some mills to slow production
and offer price cuts of as much as 20 percent so as not to lose
market share to Chinese steel. Gerdau Johannpeter said Gerdau
had offered discounts “selectively” but did not elaborate on
the terms of this strategy.

Steel imports from China and other low-cost producers
likely peaked in August and will decrease gradually into 2011,
he said. Government plans to impose a minimum import price for
more than a dozen types of steel products — such as hot-rolled
and cold-rolled steel, wire rods and rebar — helped stem the
flurry of imports, he added.

Market conditions in Spain and the United States, where
Gerdau has operations, are evolving at a very slow pace, he
said. Spain has serious unemployment problems, while the U.S.
economy is adjusting gradually to a new reality of more
contained spending, he said.
(Additional reporting by Elzio Barreto and Alberto Alerigi
Jr.; Editing by Lisa Von Ahn and John Wallace)

UPDATE 1-Gerdau says margins unlikely to improve next qtr