SAO PAULO, Aug 15 (Reuters) - Whichever way Brazil's steel industry looks it sees pain.
At home, the economy is on the brink of recession and demand for the world's most used metal is on the wane. Abroad, Brazilian exports are hampered by a strong currency and global production overcapacity.
What is needed, steel executives say, is widespread reform, including higher infrastructure spending, lower taxes, and a weaker Brazilian real .
But although steel companies talk urgently of a state of crisis, and many analysts and economists agree, little change can be expected soon with a presidential election just two months away.
Last week, Companhia Siderurgica Nacional SA , known as CSN, the country's largest diversified steelmaker, posted a 96 percent drop in quarterly net income. "Only a crazy person would invest in Brazil right now," CSN Chief Executive Benjamin Steinbruch told a conference in Sao Paulo this week.
Strong words for a leader of an industry that remains fiercely nationalistic. The conference began with the national anthem and executives repeatedly stressed their patriotic credentials before sticking the knife in.
The problem for Brazil is that the suffering of its steel industry is both the result of a weakening economy, as demand from the construction and auto sectors drops, and a cause of economic weakness as the high price of steel stops companies investing.
In the past three years economic growth in Brazil has slowed to a crawl with a number of economists suggesting the country may have already fallen into recession. An economic activity index that measures the farming, industrial and services sectors fell in June for a fifth straight month. [ID:nL2N0QL0JR]
The country's auto industry is on track for its biggest drop in sales in more than a decade, and inflation is leaning heavily against the upper limit of the central bank's target range.
Industry group Instituto Aço Brasil expects steel production to fall 2.5 percent this year, with domestic sales down nearly 5 percent.
Benjamin Baptista, CEO of the Brazilan unit of global steelmaker ArcelorMittal, tried to find a silver lining when asked for his forecasts. "It's hard to be worse than it is now," he said.
With the situation at home severe, exporting seems the answer. Steelmakers loathe to reduce production levels because it results in higher costs, politically sensitive job losses and puts companies at a disadvantage if markets pick up.
But international markets are flooded with steel from China, where a rampant increase in production over past decades has dramatically outstripped demand as Chinese growth slows.
Both Usiminas , formally known as Usinas Siderurgicas de Minas Gerais SA and one of the largest steelmakers in the Americas, and CSN say they are looking to export more steel products but acknowledge margins could suffer.[ID:nL2N0QI22H]
The biggest problem is the strong real. Some economists estimate that given Brazil's current account deficit, the real should be at a level of between 2.7 and 3.0 to the dollar.
On Friday it was trading at 2.27 to the dollar. Brazil's central bank intervenes regularly in the market to prop up the currency to keep inflation under control.
Steelmakers expect the real to weaken through to the end of the year, offering some respite. But the exchange rate is not the only problem.
HAVE YOUR CAKE AND EAT IT
According to Sergio Leite, vice-president for sales at Usiminas, the high tax burden in Brazil makes the industry uncompetitive.
He cited a study from Aço Brazil in 2012 that showed Brazilian steel had lower production costs than any of the world's five main producers: the United States, Germany, China, Russia and Turkey.
But "when this steel arrives in the hands of the consumer, with taxes added, it arrives as the most expensive," Leite said.
High taxes, however, are in essence the flip side of the protection from imports the industry enjoys through strict anti-dumping legislation. The steel industry, by asking for lower taxes but a continuing barrier to imports, wants its cake and eat it too.
But the sense that reforms are needed, and will be delivered by whoever wins the election, is gaining traction.
"There is now a consensus from various industrial sectors that reform is needed to improve the tax system, to simplify and reduce bureaucracy," said Luciano Coutinho, president of Brazil's powerful development bank, BNDES.
(Additional reporting by Walter Brandimarte; Editing by Todd Benson; and Peter Galloway)