* Scrap producers seek to block tax proposal
* Steel mills want gov't to tax scrap exports
* Steelmakers say local scrap supply not enough
* Mills seek levy as rising costs hurt profit
By Guillermo Parra-Bernal
SAO PAULO, Nov 6 (Reuters) - Brazil's largest steelmakers and scrap metal producers are at odds over a potential scrap export tax, a dispute that underscores the high level of protection that local industrial conglomerates enjoy.
Representatives of the scrap metal sector, which employs more than 1.5 million people, began an offensive on Tuesday with lawmakers and government officials to block steel industry lobby Instituto Aço Brasil's proposal to implement the tax, which it submitted to the Ministry of Development, Trade and Industry this month.
The levy may allow mills to control costs by limiting scrap producers' pricing power, said André de Almeida, a legal director for Instituto Nacional das Empresas de Sucata de Ferro e Aço, a group representing the scrap sector known as Inesfa. Currently, the 10 million tonnes of scrap produced in Brazil are sold at a 33 percent discount to international prices.
Scrap is the main ingredient used to make steel in electric arc furnaces. It is widely used by Gerdau SA, the nation's largest producer of long steel; Votorantim Siderurgia, a unit of Grupo Votorantim, and the local unit of ArcelorMittal . Scrap producers export 0.2 percent of annual production, Almeida said.
"The largest steel groups want the government to create this tax because they are not willing to pay a fair price for the scrap they consume," Almeida said. "Is it fair that millions of people have to pay in order to sustain the profit margins of those groups?"
Marco Polo de Mello Lopes, executive president of Rio de Janeiro-based IABr, as Instituto Aço Brasil is known, s aid in a phone interview that the motivation behind the tax is "imposing a barrier to countries that block our exports of steel-related products" and "not an action against the scrap sector."
Two-thirds of Brazilian scrap metal is exported to countries, which like China, India and Iran, impose restrictions to the entry of Brazilian value-added products on to t heir soil, Lopes noted. "Our tax proposal is simply a matter of trade reciprocity," he said.
The dispute comes as Brazil's steel industry faces one of its worst crises in years. Mills in Brazil are grappling with global steel overcapacity and weak prices, rising costs for some raw materials such as coal, and a domestic output glut.
"Instituto Aço Brasil and the mills in general are not against exports of scrap. What is motivating us is a trade issue, nothing else," Lopes said.
President Dilma Rousseff's administration has stepped up protection of steel and other industrial groups by hiking taxes on imports of some products, slashing taxes on payrolls and ensuring demand for flat and long steel products by home appliance and auto makers as well as homebuilders.
Almeida, who on Tuesday is scheduled to meet lawmakers to explain the consequences of a potential tax on scrap exports, said the sector is comprised of about 3,000 small and mid-sized firms and 850,000 independent collectors.
The attempt to restrict Brazilian scrap exports comes as steel scrap prices trade at their lowest levels in more than two years.
The price of scrap in Shanghai has fallen 25 percent this year, according to Steel Home's scrap index . Scrap delivered at U.S. mills is also trading at some of its lowest levels in two years.
In São Paulo, the country's largest market for scrap metal, prices per kilogram of the material are at 0.30 reais compared with an average estimate of 0.45 reais abroad, according to Inesfa estimates. During the financial crisis of 2008, scrap producers resorted to exports for survival, after local prices sank to the equivalent of 0.10 reais a kilogram.
"We generate more scrap then we consume. Since the scenario for exports is favorable and there is no risk of a shortage in the local market, we don't understand this anticompetitive initiative from Instituto Aço Brasil," Inesfa's Almeida said.
IABr's Lopes rebutted that view, saying that "demand for scrap metal in the local market outpaces supply ... we have a chronic supply problem that might only escalate if exports jump."