Form 20-F - Gerdau

Rate) on its stockholders’ equity or 50% of the income for the fiscal year, whichever is greater. The payment of
interest on stockholders’ equity as described herein is subject to a 15% withholding income tax. See “Item 10 –
Taxation”
B. CAPITALIZATION AND DEBT
Not required.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required.
D. RISK FACTORS
The steel industry is cyclical and has experienced a series of crises over the last few years. In the United
States, where a significant portion of Gerdau’s productive assets are located, the steel sector has undergone an
extensive process of reorganization, including buyouts, bankruptcies and Chapter 11 filings. In Brazil, this cyclicality
is less pronounced, with risks in that country relating to domestic market conditions and government decisions.
The relevant risk factors for Gerdau S.A.’s operations relate to scrap, iron ore, energy and imports, where
these exist, as well as Gerdau Ameristeel’s efforts (in North America) to incorporate the productive assets of the
former Co-Steel. There are also political risks.
Risk factors relating to the Company and the Steel Sector
Changes in steel scrap prices and a reduction in supply would affect the Company’s production costs and
operating margins
The main metallic input for Gerdau’s mini-mills is the scrap used in electric arc furnaces, corresponding to
67.7% of total crude steel output in 2003. Other important raw materials include pig iron, iron ore (used in blast
furnaces and in the DRI plant), and ferroalloys. Brazilian mills normally use a mixture of scrap and pig iron due to the
lower yield of steel scrap in Brazil. In North America, by contrast, mini-mills normally use 100% steel scrap.
Although international steel scrap prices are essentially determined by the U.S. domestic market (since the
United States is the main exporter of scrap) scrap prices in the Brazilian market are determined by internal supply and
demand. The price of steel scrap in Brazil varies from region to region, and reflects regional demand and
transportation costs. Gerdau Açominas is the largest consumer of steel scrap in Brazil, sourcing it from more than
4,000 suppliers. An increase in steel scrap prices and the consequent reduction in the supply of scrap to Gerdau’s units
would affect the Company’s production costs and reduce its operating margins. “See Item 4 – Business Overview”.
An increase in iron ore prices and a supply shortage in the domestic market would adversely affect the
Company’s integrated process units
Gerdau Açominas uses iron ore to produce pig iron at its Barão de Cocais and Divinópolis units, in the state
of Minas Gerais. Iron ore is also used to produce sponge iron at its Gerdau Usiba unit, in the state of Bahia. These
three units represent 12.1% of total crude steel output by Gerdau S.A. and 20% of total production by its Brazilian
units.
By contrast, the Ouro Branco mill uses iron ore as its main metallic input for the production of steel,
accounting for 25.3% of total crude steel output by Gerdau Açominas S.A. The iron ore used is of fine grain quality,
and is transformed into sinter in a sintering unit. An increase in prices and a shortage of iron ore in the domestic
market would adversely affect the steel producing capacity of Gerdau Açominas’ integrated process units and could
reduce profit margins. “See Item 4 – Business Overview”.
An interruption in the supply or shortage of electrical power would seriously affect the production process
in the Company’s electric arc furnace melt shops
Steel production is an energy-intensive process, especially in melt shops with electric arc furnaces. For these,
electricity represents a significant cost component, as does natural gas, which is used in certain mills mainly for
reheating prior to the rolling process. The interruption or the rationing of the supply of electrical power would have a
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