Pig iron outlook hazy ahead of Brazil tariffs

A decision must be made soon because of the pre-financing aspects of purchasing pig iron from Brazil.

Brazilian purchases of pig iron are usually pre-financed by buyers, whether they be steelmakers or traders. The buyers issue a Letter of Credit (LC).

An LC permits the seller to draw up to 85% of its value as partial deliveries are made into inland warehouses. This is in advance of the actual contracted shipping date of the entire cargo from the port of loading. After the cargo is loaded, the remaining 15% is drawable from the LC less a financing charge.   

This means for August cargoes, the shipments into the inland warehouses should be taking place now. That’s because it takes time to ship the pig iron to the coastal marshaling area where the cargoes are transferred to the port, and loaded onto vessels for shipment to the US.

Once payment is made for these partial shipments, the material is technically the property of the buyer under a Forwarder’s Cargo Receipt (FCR). So, those funds are not recoverable by buyers in the event of an order cancellation, at least not without a lengthy court battle depending on the terms of the contract. 

It is unclear at this point whether these shipments for previously contracted material for August shipment have been made. But sources say it is likely some have been made in order to meet the requirement of August shipment.

The latest reports from our sources in Brazil indicate there have been no decisions made by US buyers about August shipments. The assumption is the increased tariff will become operative on Aug. 1 unless pig iron is exempted or a trade or political deal is struck.

There has been some speculation the Brazilian producers could share the tariff burden with US mills to keep material flowing. If each shared the tariff equally, it would cost each party approximately $100 MT at current pricing levels. 

SMU spoke with a Brazilian trader about this likelihood.

“The idea is good,” he said. “But the consequences can be very severe. Do not see any producer capable to reduce $100 per metric ton (mt) in their price and remain profitable!”

The trader added: “It’s a $5-million tab on a 50,000 mt shipment.”  

So, the pig iron trade from Brazil to the US remains disrupted until the tariff threat is official. The feeling is if the tariff increase stands, the disruption will persist and the unintended damage will accrue to both sides.