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GERDAU SA (GGBR4)

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Gerdau SA : Brazil Gerdau : Net Profit Falls 3% On Costs, Deindustrialization

05/02/2012 | 08:18pm US/Eastern
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(Updates with impact of deindustrialization in first and fifth paragraphs, markets in third paragraph, production in fourth paragraph, iron ore in eighth paragraph, other investments from 10th paragraph)

By Diana Kinch

Of

Latin America's biggest steelmaker, Gerdau SA (GGBR4.BR, GGB), said it registered net profit of 397 million Brazilian reais ($206.77 million) in the first quarter, 3% less than the BRL409 million posted in the first quarter of 2011, as costs rose and the impact of deindustrialization was felt in Brazil.

The result was affected by a "significant increase in costs of raw materials--iron ore, mineral coal and scrap," the company said late Wednesday in a statement. Gerdau said these factors continue to pressure the margins of the company, which registered Ebitda, or earnings before income tax and depreciation, of BRL1 billion, marginally below some analysts' expectations.

Net revenue in the first quarter was BRL9.2 billion, 10% above the year-earlier period, positively influenced by greater demand from the Brazilian construction sector and in the U.S. industrial and energy sectors, Gerdau said. However, demand for specialty steel in Brazil fell, due to clients bringing forward purchases to fourth-quarter 2011, and also fell in Europe due to lower economic activity levels, it said.

Consolidated product sales stayed steady in tonnage terms at 4.7 million metric tons, while production grew 4% from a year earlier to 4.9 million tons, Gerdau said.

Gerdau said that in addition to high raw-material costs, its profitability was hit in the first quarter by the deindustrialization process occurring in Brazil and heavy rainfall in Brazil's Minas Gerais state, which disrupted production and transport operations. The company benefited during the period from a reduction in financial costs, it said.

"Gerdau's performance in the first quarter shows that demand continued heated in some markets, but that profitability levels fell at our operations mainly due to growing production costs and the deindustrialization process in Latin America's steel production chain," Gerdau's Chief Executive Officer Andre Gerdau Johannpeter said in the statement. "In Brazil, the impact of this deindustrialization has been strongly felt in the domestic market."

The company is tackling the situation by managing costs and investing in its own production of iron ore and coal and internal scrap supplies, Gerdau Johannpeter said.

Gerdau plans to achieve self-sufficiency in iron-ore output through investments of BRL838 million in iron ore-mining and related logistics capacity by 2014. During this period, the company's iron-ore output will jump 80% to 11.5 million tons a year from the current 6.5 million tons, it said.

A strategic partner is still sought for its iron-ore operation, which will export production over and above Gerdau's own needs, it said.

The company is also investing on a move into flat-rolled steel production at its Acominas works in Brazil by end-2012.

During the first quarter, the company approved new investments of BRL130 million in expanding its specialty steel production capacity in the U.S. to supply the growing demand from the automotive sector, it said.

Gerdau said it is also increasing its steelmaking and rolled-product production capacity in Colombia to 950,000 tons a year and 1.1 million tons a year, respectively, by 2015 in a BRL192 million investment to meet local-market expansion.

The investments are part of an overall investments program for the 2012-16 period of BRL10.3 billion, of which 70% is directed at Brazil, according to the company.

-By Diana Kinch, Dow Jones Newswires; 55 21 7564 4495; diana.kinch@dowjones.com

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