Gerdau's Strategic Shift: Capital Reallocation and Growth in North America Amid Brazil's Regulatory Headwinds

In the ever-shifting landscape of global steel, Gerdau's 2025 strategic reallocation of capital has positioned it as a case study in balancing regional risk and reward. With Brazil's domestic market mired in regulatory stagnation and import-driven margin compression, the company has pivoted aggressively toward North America, where U.S. tariffs and infrastructure demand are fueling a renaissance in domestic steel production. This shift is not merely a reaction to adversity but a calculated, long-term play to create shareholder value through geographic diversification and operational resilience.

North America: The Engine of Growth

Gerdau's North American operations have become the cornerstone of its 2025 strategy. In Q2 2025, the region contributed 61.4% of the company's consolidated EBITDA, a historic high driven by robust demand in non-residential construction and the tailwinds of U.S. Section 232 tariffs. These tariffs, which now sit at 50% for many steel imports, have effectively shielded domestic producers from predatory pricing, allowing Gerdau to capture higher margins.

The company has funneled BRL1.6 billion in capital expenditures into North America in 2025, with a focus on expanding flat steel capacity in Texas and Michigan. These projects, adding 450,000 tons of annual production, align with the U.S. government's push for industrial revival under policies that prioritize domestic steel in sectors like shipbuilding and infrastructure. Gerdau's CEO, Gustavo Werneck, has emphasized that the U.S. market is no longer a “growth opportunity” but a “strategic imperative,” with the company now operating 11 plants across the U.S. and Canada.

The results speak for themselves: North America's order backlog has returned to 75+ days, a sign of sustained demand, while steel prices have risen across most product lines. UBS analysts have upgraded Gerdau to “Buy,” projecting a 32% increase in 2026 EBITDA to BRL13.2 billion, largely due to North American expansion and improved spreads.

Brazil: A Market in Peril

Contrast this with Brazil, where Gerdau's growth is stifled by a toxic mix of high import penetration (26% in Q2 2025) and bureaucratic inertia. The Ministry of Development, Industry, Trade, and Services (MDIC) has been criticized for its slow implementation of anti-dumping measures, leaving local producers vulnerable to foreign competition. Gerdau's Brazilian operations saw a 20% drop in EBITDA quarter-over-quarter in Q2 2025, despite a 7.8% increase in long steel shipments.

The company's capital allocation in Brazil, however, remains a long-term bet. 80% of Q2 2025 CAPEX was directed to the region, including the Itabiritos iron ore project and the Ouro Branco flat steel expansion. These projects aim to enhance vertical integration, reduce raw material costs, and offset Brazil's structural disadvantages—such as natural gas prices that are five times U.S. levels.

While these investments are yet to yield returns, Gerdau is advocating for urgent policy reforms. Werneck has publicly called for “hard quotas and faster implementation of trade defense measures” to protect the domestic industry. The company's patience is rooted in its belief that Brazil's market, if stabilized, could become a strategic asset rather than a liability.

Shareholder Value: Dividends and Buybacks

Despite the drag from Brazil, Gerdau has maintained a disciplined approach to shareholder returns. In Q2 2025, the company distributed BRL239.5 million in dividends and repurchased 68% of its 2025 share buyback program, spending BRL686.1 million. These actions, paired with a 1.50% dividend yield, underscore management's confidence in the company's intrinsic value.

The company's financial flexibility is further bolstered by a “GREAT” credit rating and a P/E ratio of 9.42, well below the steel industry average. Recent debt issuances totaling US$650 million in bonds and BRL1.4 billion in debentures have extended Gerdau's debt maturity profile and strengthened liquidity, providing a buffer against market volatility.

The Strategic Playbook for Long-Term Value

Gerdau's 2025 strategy is a masterclass in capital reallocation:
1. North America as a Profit Engine: Leveraging U.S. tariffs and infrastructure demand to secure high-margin growth.
2. Brazil as a Long-Term Bet: Investing in vertical integration and advocating for regulatory reforms to unlock future value.
3. Disciplined Shareholder Returns: Balancing reinvestment with dividends and buybacks to reward investors.

The risks are clear—Brazil's policy delays and global trade tensions could persist—but the rewards for patient investors are substantial. North America's EBITDA margin of 14.6% in Q2 2025 highlights the region's profitability potential, while the company's 12% free cash flow yield projected for 2026 makes it an attractive value play.

Investment Thesis

For investors seeking exposure to a steel company with a dual strategy of near-term growth and long-term resilience, Gerdau offers a compelling case. The North American expansion is already paying dividends, while Brazil's challenges, though daunting, are being addressed through operational and political advocacy.

Recommendation: Buy Gerdau shares for a 3–5-year horizon, with a focus on its North American growth trajectory and potential policy shifts in Brazil. Monitor import penetration rates and trade policy developments in both regions, but remain confident in the company's ability to adapt and thrive.

In the end, Gerdau's story is one of strategic agility—a company that recognizes the limits of its domestic market but has the global reach, capital, and leadership to pivot toward where the money is. As the U.S. steel renaissance takes hold and Brazil inches toward reform, Gerdau is poised to deliver value across both ends of its operations.