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Companhia Siderúrgica Nacional

Companhia Siderúrgica Nacional

Avenida Fario Lima 3400
Sao Paulo, Sao Paulo 04538-132
Brazil
Telephone: (55) (11) 3049-7100
Web site: http://www.csn.com.br

Public Company
Incorporated:
1941
Employees: 10,207
Sales: $3.9 billion (2004)
Stock Exchanges: Sao Paulo; New York
Ticker Symbols: CSNA3; SID
NAIC: 331111 Iron and Steel Mills; 331112 Electrometallurgical Ferroalloy Product Manufacturing; 331419 Primary Smelting and Refining of Nonferrous Metals (Except Copper and Aluminum)

Companhia Siderúrgica Nacional (CSN) is the second-largest steel producer in Brazil. Its fully integrated manufacturing facilities turn out a broad line of steel products, including slabs, hot- and cold-rolled plates, sheets, and coils, plus galvanized and tin-coated steel products for the distribution, packaging, automotive, home-appliance, and construction industries. It produces about half of all galvanized-steel products sold in Brazil and much of the nation's tin-mill products, which are used in packaging containers. More than one-fourth of the company's sales come from exports. CSN is a vertically integrated company that owns its own iron ore, generates most of its own electricity, and has a stake in the ownership and/or operation of the rail and port facilities it uses. It has been described as the most cost-competitive steel producer in the world.

Government-Run Behemoth: 194192

Steel production in Brazil began in the 1920s and was dominated by a company established with Luxembourg and Brazilian capital. With war clouds gathering over Europe prior to World War II, Brazilian leaders became concerned about securing its supplies of steel, so essential to manufacturing in this period. About 70 percent of the nation's rolled-steel products were still being imported. An effort in 1939 to obtain financingin exchange for equityfrom the United States Steel Corporation for an integrated steel mill foundered under opposition from Brazilian nationalists, especially the army. President Getúlio Vargas next invited German industrialists to make an offer. This had the expected effect of catching Washington's attention, and in 1940 the U.S. Export-Import Bank pledged $20 million in financing. Savings banks and pension funds provided half of the initial capital. The Brazilian treasury purchased all the common stock not subscribed to by the public, and for all practical purposes Companhia Siderúrgica Nacional (National Steel Company), founded in 1941, became a government-owned and -operated company.

A virtually uninhabited site about 75 miles west of Rio de Janeiro had already been selected for the plant. Volta Redonda was built from scratch as a paternalistically run company town that also served as CSN headquarters. The company operated the schools and the only hospital in the city. It built and maintained houses for the workers and charged rent well below market value. A 2.5-mile spur was built to link the plant to an existing railway line that carried iron ore from the state of Minais Gerais and imported coalneeded to make coke for the blast furnacesarriving at Rio de Janeiro's port. A hydroelectric plant, completed in 1948, was intended to meet the mill's large power needs.

Steel production began in 1946 and, 20 years later, production had reached about 1.4 million metric tons of ingot steel a year, or about one-third of Brazil's output, which had recently been enhanced by the opening of two other large integrated steel mills. Employment was now about 14,000. On a number of occasions, the government ordered CSN to sell its goods at below-market prices in order to combat inflation, regardless of the effect on the company's own bottom line. It also encouraged the company to borrow money abroad, then used the money to meet its own needs.

CSN in the 1970s was, besides, being engaged in steelmaking, dealing commercially in raw materials and supplies, tin, zinc, manganese, and ferroalloy requirements, and transporting. Its capacity was raised to 1.6 million metric tons of steel a year in 1974 and 2.4 million tons in 1977. It had foreign offices in New York and Japan and sales of 27 billion cruzeiros (about $930 million) in 1979. This was a boom decade for Brazilian steelmaking, with the nation vaulting from 18th to 7th place in world production, and with CSN in the lead.

During the 1980s, by contrast, more steel mills came online in Brazil while national demand stagnated. Moreover, the Brazilian government set steel prices 40 percent below the world price to help other domestic industries, depriving CSN of perhaps $7 billion in potential revenue. The enterprise suffered the first strike in its history in 1984; during the next six years, there were 11 more. The worst was in 1988, when three workers were killed by soldiers. Although CSN's production of ingot steel rose from 3.3 million metric tons in 1984 to 4.1 million tons in 1988, a severe downturn in the Brazilian economy contributed to a fall in production to 3.4 million tons in 1989 and only 2.7 million tons in 1990. As a result, CSN lost over $1 billion that year on revenue of only $1.76 billion, and it had a debt of $2.6 billion.

During that year Roberto Procópio Lima, Jr., was appointed president of CSN and charged with preparing what the Brazilian business magazine Exame called an "obese elephant" for privatization. He reduced the bloated work force of 23,800 by 7,000 despite the combination of a 31-day strike and arson that cost the company hundreds of millions of dollars. He also cracked down on management, dismissing 545 executives. Lima also took on the networks of suppliers, transporters, and subcontractors that were draining CSN of badly needed funds. By encouraging competition, he reduced these costs by 40 percent. All contracts with third parties were reviewed. To break the power of the 23 trading companies conducting two-thirds of CSN's export sales, Lima contracted 20 other companies.

Privatized, Sprawling Giant: 19932000

Sales fell still further in 1991 because the adoption of lower import duties subjected CSN to stronger competition from foreign steelmakers. In addition, Brazilian steel sales were suffering from a world economic recession and the fall of the Soviet Union, which had been a big buyer. Even so, the company was able to reduce its debt by $1 billion and to register small profits in 1991 and 1992. CSN was sold at auction in 1993. The purchaser was Valepar S.A., a consortium in which one of the principal partners was the Vicunha textile group. Other members of the consortium included state-owned Companhia Vale do Rio Doce (CVRD), Brazil's biggest mineral company; Banco Bradesco S.A, Brazil's largest privately owned bank; and Previ, the pension fund run by state-owned Banco do Brasil S.A., Brazil's biggest bank. Some 12 percent of the enterprise was set aside for CSN's employees.

CSN produced a record 4.6 million metric tons of ingot steel in 1993 and achieved a profit of $70 million, its largest ever. The fewer but more productive 15,000 workers enjoyed a real increase in wages of 30 percent over 2 years. A six-year modernization program estimated to cost $900 million was adopted, including construction of a thermoelectric plant to meet future power needs. However, Lima left the enterprise in early 1994, since he did not have backing from the new owners, who carved up the administration into areas that they individually controlled. Without a strong hand at the rudder, CSN postponed plans for the new power plant and a decision to dismiss 4,000 workers over 3 years, an action deemed necessary to keep the enterprise competitive in controlling expenses. Despite another record profit, the company's return on its liquid net worth was much lower than that of its main privatized rivals, Usinas Siderúrgicas de Minas Gerais S.A. (Usiminas) and Acesita S.A.

This period of indecision ended in 1995, when one of the large shareholders withdrew from the consortium and Vicunha's chief executive, Benjamin Steinbruch, became CSN's chairman of the board. A young, dynamic, and extremely ambitious entrepreneur, Steinbruch acquired, in 1996, a 7 percent interest in newly privatized Light Servicios Eletricidade S.A., the main power distributor in the state of Rio de Janeiro and was chosen to be the utility's chairman. CSN also purchased interests in several hydroelectric plants. The following year Valepar paid in excess of $3 billion to purchase the Brazilian government's stake in CVRD, with Vicunha as the lead partner. Steinbruch now controlled both companies as well as Vicunha. CVRD was the world's largest producer and exporter of iron ore, and the largest diversified mining company in the Americas. Moreover, it owned about 10 percent of CSN itself. "Bringing CSN and CVRD together made very good sense," Steinbruch told Jonathan Wheatley of Business Week in 2000. "Both have mining interests, both have steel, both have logistics. It gave us the chance to bring together three sectors in which Brazil is very competitive."

Steinbruch appointed a woman, Maria Sílvia Marques Bastos, to be CSN's chief executive officer at the end of 1998. During that year the company took 51 percent of a joint venture with Germany's Thyssen-Krupp Stahl A.G. to build GalvaSud, a galvanizing plant in Brazil, mainly for the auto sector. It was completed in 2000 in Porto Real City, Rio de Janeiro. CSN also built a joint-venture cold-rolled strip mill and galvanizing plant for civil construction and home appliances in Araucária City, Paraná.

Company Perspectives:

Our mission is to increase value for our shareholders, maintaining our position as one of the world's lowest-cost steel producers while maintaining a high EBITDA margin. With this in mind, we intend to strengthen our position as a global player, optimizing our infrastructure assets (our mines, ports and railways) and their competitive cost advantages.

By 1999 Brazil had fallen into another of its intermittent economic crises, forcing the nation to devalue its currency, the real. The devaluation made it more difficult for CSN to make payments on the $800 million in dollar-denominated debt that Steinbruch had incurred to make acquisitions. He sold CSN's stake in Light in 2000. And, since he had fallen out with Bradesco and Previ, he sold CSN's stake in Valepar to them on the last day of 2000. At the same time, Bradesco and Previ sold their Valepar stakes in CSN to Vicunha for BRL 1.5 billion ($773 million) in debentures. They also won the right to buy iron ore from CSN's own mines at their option.

New Century, New Challenges

Now more firmly in Steinbruch's hands, CSN was Exame 's enterprise of the year in 2001. The 238-mw thermoelectric power plant, using as fuel CSN's own industrial gases, was completed in late 1999 in Volta Redonda and was supplying 60 percent of the company's needs. During 19992000 two hydroelectric plantsItá and Igarapavain which CSN held a stake came on line. With the completion of these projects, CSN became one of the few Brazilian enterprises to generate not only enough electricity to meet its own needs but to sell to others. The company's considerable investment in infrastructure and logistics was also bearing fruit. A rehabilitated rail line in which CSN had taken a stake was bringing in, on time, a supply of low-cost iron ore to Volta Redonda from the company's Casa de Pedra mine in Minais Gerais. Coal and coke were being sent by the railroad to the mill from the port of Sepetiba, Rio de Janeiro, where CSN held a share in the operating concession for the coal and container terminals. Another rail line in which CSN held an interest brought limestone and dolomite from its Arcos mine to the mill. The steel plant itself had been modernized at a cost of $1.5 billion.

The enormous gain in productivity yielded bonuses for CSN's now-reduced work force of about 9,000 to 10,000. In return, they were held to a code of ethics. In order to combat corruption, the purchasing office was moved from Volta Redonda to Sao Paulo. An incentive program that included stock options attracted not only well-qualified engineers and other technical personnelalways a company strengthbut also commercially adept executives. About two-thirds of CSN's 617 women were working in the steel mill, traditionally a masculine venue. It had been discovered that women were better than men at details such as detecting flaws in metal sheets. The company's president also provided a feminine touch; since she didn't like the workers' uniforms, she promoted a competition that resulted, by electronic vote, in a different choice. (In 2002, however, Steinbruch assumed the presidency as well as the chairmanship of CSN.)

Privatized CSN did not please everybody, however. After the company reduced its commitment to Volta Redondoselling the hospital, for exampleattention turned to its woeful environmental record. For more than half a century CSN had tossed industrial waste into the river that supplied the metropolitan region, resulting even in genetic deformities in children. Gases spewed out by the mill's chimneys were held responsible for compromising the immune systems of the population in general. Landfills contained solid wastes. CSN agreed to spend BRL 180 million (about $60 million) on 133 projects. The company installed a system installed to convert industrial gases for cogeneration, sold the solid waste for pavement, and filtered the liquid waste. Local residents remained unhappy, however. CSN owned almost 20 percent of the land in Volta Redonda and, under Steinbruch, fenced in several community soccer fields, closed an environmental reserve, and repossessed areas mostly used by retired mill workers to grow vegetables.

CSN purchased bankrupt Heartland Steel Inc. of Terre Haute, Indiana, in 2001 for $55 million plus the assumption of its $19 million in debts. It was renamed CSN LLC. The purpose of the acquisition was to gain a foothold in the United States, sending excess slabs of steel to Heartland's cold-rolling mill for conversion to value-added products. Steinbruch explained to Nelson Blecher of Exame, "Our major strategy is to make CSN a multinational. We have to compete in the world market as an equal in order to stay in business. That is the challenge."

Widely honored for its efficiency and low cost of production, CSN also earned a reputation as a cash cow for its shareholdersespecially for Vicunha Siderúrgica S.A., which now owned 46.5 percent of CSN. The financing of Vicunha's buyout of its partners was met from CSN's profits; in fact, in 200001 CSN paid out more in dividends than it collected in profits. This created new financial pressures that Steinbruch met by selling half of CSN's majority stake in the Itá power plant in 2001. He sold its interest in the smaller of its two rail lines in 2003. He also proposed, in 2002, a merger with the Corus Group, the British-based second-largest steelmaker in Europe. The deal foundered, with each party blaming the other. It would have created the fifth-largest steelmaker in the world, with Corus holding the larger share but assuming $2.66 billion in debt from CSN.

Corus had been tempted to merge with CSN in part because of the prospect of gaining access to cheap iron ore from the huge Casa de Pedra mine. China's voracious appetite for iron ore to feed its steel mills was driving up prices for the mineral and thereby helping to improve CSN's bottom line. The company made itself self-sufficient in tin by acquiring Cia. Metalic Nordeste, owner of a tin mine and smelter, in 2002 and purchased a half-share in Lusosider S.A., a Portuguese manufacturer of galvanized metal products and tin plate, in 2003. In 2004 CSN enjoyed its best year ever, earning $855 million on revenues of $3.9 billion. That year it purchased Thyssen-Krupp's share of the GalvaSud plant. CSN produced 5.6 million metric tons of crude steel in 2004, 17 percent of Brazil's output. Nevertheless, it lost its longstanding leadership in steel output and revenue in 2003, when Gerdau S.A. merged with Aços Minas Gerais S.A. to form Gerdau Açominas S.A. Vicunha Siderúrgica S.A. held 40.5 percent of the company in 2005, having recently sold a 6 percent stake to a government development agency.

Key Dates:

1941:
Founding of CSN as a government-owned and -operated company.
1946:
Steel production begins at CSN's mill in Volta Redonda, a newly created city.
1977:
Steelmaking capacity at the mill has reached an annual 2.4 million metric tons.
1990:
Debt-ridden CSN begins firing workers and cutting other costs to prepare for privatization.
1993:
Recently sold at auction, CSN earns its biggest profit ever.
2000:
Cross-ownership ends between CSN and CVRD, a storehouse of iron ore.
2004:
CSN enjoys its best year ever, with record production and profits.

Principal Subsidiaries

Cia. Metalic Nordeste; CSN Energia S.A.; CSN Panama S.A. (Panama); CSN Steel Corporation (United States); GalvaSud S.A.; Indústria Nacional de Aços Laminados S.A.; Lusosider Projectos Siderúrgicos S.A. (Portugal; 50%).

Principal Competitors

Companhia Vale do Rio Doce S.A.; Gerdau S.A.; Usinas Siderúrgicas de Minas Gerais S.A. (Usiminas).

Further Reading

Baer, Werner. The Development of the Brazilian Steel Industry. Nashville: Vanderbilt University Press, 1969.

Benson, Todd, "Brazil's Steel Giant and Its Company Town Are on the Outs," New York Times, May 17, 2005, p. C4.

Blecher, Nelson, "O brilho do aço," Exame, July 11, 2001, pp. 42-52, 54, 56.

Brooke, James, "Brazil Shakes Up Its Steel Industry," New York Times, May 28, 1990, p. 29.

Correa, Cristiane, "A major isputa do mercado brasileiro," Exame, August 31, 2005, pp. 42-45.

Dieguez, Consuelo, "O futuro em jogo," Exame, February 20, 2002, pp. 56-58.

Goulart, Rubeny, "Eles agora querem usar black-tie," Exame, September 30, 1992, pp. 42-44.

, "Feudos de aço na usina," Exame, May 10, 1995, pp. 74-75.

Kandell, Jonathan, "The CVRD Factor," Institutional Investor, October 1997, pp. 191-92, 195-96.

Kepp, Michael, "The Billion-Dollar Woman," Latin Trade, September 1999.

Pfeiffer, Margarida O., "Arms of Iron and Steel," Latin Trade, July 2005, p. 66.

Smith, Tony, "Deal to Take Over Brazilian Steel Maker Falls Apart," New York Times, November 14, 2002, pp. W1, W7.

Vassallo, Cláudia, "Um negócio quase perfeito," Exame, August 21, 2002, pp. 86-92.

Wheatley, Jonathan, "Twilight of a Latin Mogul?," Business Week, June 28, 2000, p.

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