Brazil bets on housing to revive the market

Brazil bets on housing to revive the market
05 May 2023

The outlook for Brazil's cement market remains uncertain following weak first quarter volumes, with demand falling 1.1 per cent to 14.6Mt over the firhst three months. This follows a lacklustre performance in 2022, when annual demand fell 2.8 per cent to 62.6Mt. The Brazilian cement association, Syndicato Nacional Da Industria Do Cimento (SNIC), has revised down its expectations for 2023 demand, which it had previously indicated would enjoy growth by one per cent to 64Mt.

A weakening of the market was perhaps overdue, given the extraordinary expansion of domestic consumption during the pandemic, when demand surged by 10.3 per cent in 2020, followed by a robust 6.8 per cent in 2021.

While trends around renovation and construction activity in the self-build sector were the primary drivers of demand over the 2020-21 period, the current softening of consumption can be attributed to high interest rates, inflation and household indebtedness as well as a weakening labour market.

According to UBS, "The local cement market remains impacted by high inflation costs and interest rates, negatively impacting the building sector and real estate activity."

The impact of interests rates on affordability has been felt sharply by middle-income borrowers, with ABECIP reporting an annual 18 per cent mortgage origination drop in January 2023.

But it is in the low-income residential segment where hopes for a demand revival are strongest. Brazil’s historical housing deficit, estimated at 7-8m at the Brazilian Association of Real Estate Developers, means pent-up demand for homes remains elevated, offering great potential for the future growth of the market. In absolute terms, more than one-fifth of the total deficit is concentrated in São Paulo, followed by Rio de Janeiro and Minas Gerais.

Under the new Lula administration, financing programmes supporting the low-income segment, such as “Minha Casa, Minha Vida” (MCMV), are expected to be a central focus of government policy. According to Paulo Camillo Penna, SNIC President, reforms to MCMV could translate into 8-12Mt additional cement demand over the 2023-2026 period. 

Mega projects
Cement consumption may also receive a boost through increased infrastructure and civil construction, which is another aim of the Lula government.

Examples of promising projects include a BRL 1.7bn (US$335m) investment into the Aracruz Industrial Port Terminal in the state of Espírito Santo. Construction began in the 2Q22 and will continue until the 2Q25. The 35.4ha area has three terminals and will accommodate vessels of 60-120m length.

Meanwhile, numerous road projects are earmarked for completion, including the repaving of a 405km stretch of the BR-319 highway between Porto Velho in Rhondônia and Humaitá in Amazonas.

Railway projects are also likely to see higher demand for cement. In January 2023 Brazil's Transport Minister, Renan Filho, announced his ambition to raise the participation of railways in Brazil's logistical system from 20 to 40 per cent by 2035.

On the supply side, there are 91 cement plants in the country owned by 23 industrial groups. The current cement capacity in Brazil is estimated at 94Mta, while production reached approximately 65.8Mt in 2021. Although approximately 30 per cent of production capacity remains idle, the surplus is not excessive but sufficient to ensure that future demand needs can be comfortably met.

Producers are in good shape financially, having managed to stay ahead of cost inflation by increasing cement prices significantly since 2020 by 56 per cent, from BRL450/t (USD90/t) to BRL700/t (USD140/t).

Together with a stable cement demand and potential upside to future consumption, the Brazilian cement sector can look forward to continued prosperity.

Published under Cement News