RISK MANAGEMENT

Markets and Business Cycle

   In Brazil, the Gerdau Group has expanded its business through exports. In 2002, these were responsible for 20.7% of sales volume, allowing the Company to maintain its level of activity and increase the flow of foreign currency into the country. During this year, presidential elections brought a period of great volatility for the financial markets, also affected by the climate of uncertainty regarding other economies around the world. As a consequence, the value of the Brazilian real against the US dollar varied 52.3% over the year, while the interest rate, managed following an orthodox model, was raised to 25% to keep inflation under control.

   The devaluation of the Brazilian currency resulted in a 77% increase in the volume of exports by the Gerdau Group. This added demand was met through greater use of production capacity at the mills, without straying from the focus on servicing the domestic market.

   For 2003, the Brazilian Central Bank predicts growth of 1.95% in the country’s GDP, superior to the 1.5% achieved in 2002. This should be reflected favorably in the demand for long steel products, the sector in which the Gerdau Group’s activities are concentrated.

   In the first half of 2002, the Group’s operations in Argentina were restructured, transforming the SIPSA rolling mill in San Luis province into a wholly-owned subsidiary of Sipar, in which the Gerdau Group holds a 38.2% stake. This new structure allows for the maximization of business opportunities and strengthens the results of the two companies.

   The International Monetary Fund’s expectation is that Chile will experience economic growth of around 3.1% in 2003, which should sustain the strong demand for steel products in the region. The IMF expects Argentina to experience GDP growth after four years of recession, while the tendency of the Uruguayan economy is to reverse its negative performance.

   In 2002, the United States and Canada experienced GDP growth of 2.4% and 3.4%, respectively. The coming year promises reductions in these levels.

   The expectation is that steel imports to North America will continue to decline as a result of the weaker dollar and increased steel prices on the international market. In this context, Gerdau’s operations should experience improvements as a result of internal adjustments and the implementation of systems for improved customer services and reduced operating and logistics costs.


Foreign Exchange

   The internationalization of the Gerdau Group has resulted, over the years, in a natural protection of assets against exchange rate variations. The geographical distribution of its assets and the generation of revenues in a number of countries minimize the effects of fluctuating currency values, reducing their impact on the balance sheet.

   In the consolidated results, the investments abroad counterbalance the negative effects of the devaluation of the Brazilian real on US dollar-denominated financial liabilities in Brazil. The opposite effect occurs when the real appreciates against the dollar, reducing the value of foreign investments.

   Exports and financial swaps, in which the exchange risk is transferred to Brazil’s currency risk, have also contributed to reducing the impacts of exchange rate variations on results.


Financial Information

   The Company’s assets are managed within a conservative and defensive approach. With this focus, the Gerdau Group has developed asset protection strategies, through the creation and monitoring of indicators that are stricter than those required by the financial market.

   This process uses widely recognized indicators such as interest cover ratio and total debt/total market capitalization.


Technology

   The Group invests constantly in the modernization of its units. This practice represents an average annual investment of US$ 200 million, which allows Gerdau’s units to operate with the most up-to-date technology available in their sectors.