Resaltan crecimiento de Aceros Arequipa

"It's simply market growth that has prompted us to boost sales"
Mario Munailla
Marketing manager/Aceros Arequipa

By Pablo Gaete

Peru has been growing at a breakneck pace in recent years and its GDP is expected to expand faster in 2008 than the economy of any other country in Latin America.
In addition to growth, the country has infrastructure and construction projects lined up along with an extraordinary housing boom that has prompted ever-increasing demand for steel products.
Aceros Arequipa is reaping the benefits of this boom as it is a leader in the Peruvian market, along with Siderperú.
In this interview, BNamericas spoke with Mario Munailla, Aceros Arequipa's marketing manager, who discussed the current status of Peru's market and where it's headed, as well as the company's own outlook for growth.
BNamericas: Aceros Arequipa's results in the first quarter were excellent compared to the same period of 2007. Profits grew 218% to 58.6mn soles [US$20.5mn], revenues were up 53% to 489mn soles and sales increased 35% to 195,000t. How much of these results is due to higher output and how much is due to steel prices?

Munailla: Production has increased by quite a bit because of an expansion that wrapped up last year that took output from 400,000t/y to 540,000t/y of long products.
The expansion was designed to keep growing along with the market, which registered much higher demand in 2007.

BNamericas: What is expected of the market and for Aceros Arequipa's sales this year?
Munailla: Demand is forecast to be higher than our production this year so we're having to supplement our own output with imports that make up around 20% of physical sales.
Market growth has been bypassing our production every year for the past seven years so we have undergone an expansion project every year.

BNamericas: Has the company's market share increased during that time or was it just market growth prompting higher sales?
Munailla: Our market share leveled out a couple of years ago. It's simply market growth that has prompted us to boost sales on existing product lines. We have also incorporated new lines.

BNamericas: Has the company been successful in transferring the higher cost of raw materials to its products?
Munailla: The thing that worries me about growth is the rising cost of our products, which we have had to increase because of the higher cost of our raw materials.
It is true that last year and this year some major private investment projects have been launched in the areas of mining and commerce, where the impact of high prices for our products is much less than in housing.
However, demand from those two sectors is still not as considerable as in housing.

BNamericas: What portion of your sales goes to the housing sector?
Munailla: Housing easily consumes about 65% of demand in the country and our [sales are] relatively in line with that.
We probably have more of a share in the housing market than Siderperú, which sells more crushing balls to the mining sector.

BNamericas: Your company isn't involved in that business?
Munailla: Yes, but very little. We only entered that market a couple of years ago. We are more focused on construction and we are trying harder to gain more of a presence in the metal-mechanics industry.
In fact, we're trying to diversify outside of the construction sector.

BNamericas: Why?
Munailla: Peru's coffers are full. There is plenty of money, but what's missing is the ability to employ those resources efficiently so they can be transformed into infrastructure projects.
However, in recent months we have seen higher demand from municipalities for infrastructure projects.
But at the same time, our principal market is housing and, on that market, over half of our demand is for do-it-yourself construction jobs which are informal projects built by residents living in the very structures being built.
Formal construction for buildings and other types of structures is still hovering around 25% of Peru's entire construction market.

BNamericas: There has been talk about a real estate boom in Peru right now. Why is the do-it-yourself type of construction still so important?
Munailla: Construction requires a lot of physical labor and this boom in real estate construction means an abundance of construction workers. Construction workers have more regular work now, whereas they did not before. But the majority of them haven't even established their own domestic housing situation.
If a worker has money that he didn't have before, the first thing he is going to do is invest in his home, but he probably doesn't have full access to the loan market so he has no other option but to build his house gradually and informally.
There are others, like young people who live with their families or workers who did not previously have stable employment but now do, that could get access to loans but that would mean waiting to establish job history before getting a loan. Since they don't want to wait, they are also candidates for do-it-yourself types of construction.

BNamericas: But they're still your clients.
Munailla: Of course. But if steel supply did not have to be so focused on do-it-yourself construction products, I think it would drive growth in the country more efficiently.

BNamericas: How has the formal construction sector been performing in terms of housing or other types of construction?
Munailla: The sector grew 16% last year and we are expecting about 20% this year.

BNamericas: It appears that the financial crisis affecting the rest of the world isn't very applicable in Peru.
Munailla: No. Last year, Peru grew 9% and this year it's not likely that growth will be less than 8%.
And public investment is still much smaller that private because of the inefficiency of state organizations for resource management. It's difficult for a country that has been managing scarcity and poverty for so many years to learn how to be wealthy.

BNamericas: But even then, performance at Aceros Arequipa has improved consistently because of growth in the country and this year the company is expanding yet again. Can you give some details about that?
Munailla: It's a project that we hope to have ready by the first quarter of 2010.

BNamericas: Wasn't it previously scheduled for the last quarter of 2009?
Munailla: Originally yes, but now we expect it to be 1Q10 because of the time providers need, since they are in high demand. We plan to invest around US$280mn to reach capacity of more or less 1Mt/y with expansions - first at our Pisco plant and also at the Arequipa operation.

BNamericas: Does the company plan to expand beyond 1Mt/y at a later date?
Munailla: Yes, of course. But in order to give specific figures, we would need logistics and market studies, which are underway.

BNamericas: In terms of the market and the tremendous growth in the country, do you feel there is any chance of a third participant entering the market and growing along with Aceros Arequipa and Siderperú, like Ternium or ArcelorMittal?
Munailla: We are familiar with them and they have always expressed interest in entering Peru through one of the two current players.

BNamericas: Since Siderperú is controlled by Brazilian company Gerdau, does that mean Gerdau might also be interested in Aceros Arequipa?
Munailla: The way things are in the steel industry around the world right now, I don't think there is any independent company like us that hasn't received a knock on the door. So far, we have always said no.

ABOUT THE COMPANY:In terms of production, Aceros Arequipa has been one of Peru's two largest steelmakers for over 40 years with plants in Pisco and Arequipa.
The company trades on the Lima stock exchange.

By Pablo Gaete