Into the fire - View from the top – Magnesita Refractários SA

By Mike O'Driscoll
Published: Monday, 21 September 2009

IM interviewed Thiago Rodrigues, Global Chief Financial Officer, Magnesita Refractários SA, Brazil

Overall, how is the industry performing?

TR: The refractories industry is very dependent on the steel volume market (not price) and, to a lesser degree, the cement market. The steel market ex-China suffered a decline of 35% in produced volume between Q308 and Q109, directly impacting revenues of the industry. The cement market was much less affected, mainly because of governments’ stimulus programs.

Magnesita counter attacked the crisis reducing fixed costs, especially regarding the workforce (a fixed cost in Brazil), controlling investments, and paying closer attention to working capital. Also, Magnesita improved its product mix, focusing on higher margin goods, selling excess sinter to trading companies in order to generate cash. As a result, Magnesita profitability margins are coming back to historical levels.

When and where do you foresee the earliest, and most likely sustained recovery?

TR: China’s steel market was the least affected by the economic crisis. In fact, China continued to produce steel and is responsible for 50% of world steel production, compared to 35% six months ago. In Brazil, the volume produced is closer to pre-crisis levels now at 35m. tpa (run rate), and Magnesita expects this uptrend to continue because of the competitive advantages to produce steel in the region (labour costs, proximity to iron ore mines, quality). We see clients planning to open mills in the Brazil, which is a clear indication that produced volumes will grow during the next couple years. Also, distributors aggressively de-stocked in the last few months, another indicator of market recovery.

How do you see the industry structure evolving?

TR: Magnesita is prepared to grow organically and through acquisitions, since the company’s vision is to become the largest and most profitable refractory company until 2012. The refractories industry is still too fragmented and we imagine that it will keep consolidating. More than 50% of industry players have insignificant market share. The main factors influencing the industry will be the ability to align interests with clients, global presence in order to better serve clients, and low cost access to raw materials. Magnesita’s business model, based on steel volume, puts the company in position to profit from this trend.

Which are the main challenges in refractory mineral supply?

TR: The main challenges are intrinsically related to the industry’s future: alignment of interests with clients since the steel industry is increasingly trying to reduce fixed costs; establishment of global presence because we need to serve clients in every part of the world; and access to quality raw materials (magnesite or dolomite) at a low cost, because this is what will ultimately determine the profitability and quality of the refractories produced. Magnesita is the only refractory company fully vertically integrated, which means that we have presence in the whole value chain, controlling the production of raw materials to providing integrated solutions in refractories to our clients, going through the production of a range of different refractories to each specific client. Another competitive advantage of Magnesita is the size of its mines (more than 200 years of high quality magnesite, the biggest open pit in the world). Magnesita can produce sintered magnesia with 98.4% of purity, which other companies can only produce using seawater in a much more expensive process.

What are the chief challenges and opportunities facing the industry?

TR: The main challenge and opportunity to the global refractories industry is to establish a solid presence in China, due to the increasing participation of this country in the steel and cement production. First movers will have a great advantage because it is a nascent high growth market, and the opportunity to set standards and win clients in China will ultimately provide financial strength to compete in more difficult markets, as Europe, for example. Magnesita has a plant in China which is producing in full capacity at 120,000 tpa, and we have plans to double the capacity in 2010, since we have all our production sold out until the end of the year. We will be the largest refractory company in 2012, and China plays in a key role in our vision.

For views from the PRE and TRI see p.90