Brazil’s drive to make electricity less expensive wiped out $6.4 billion in market value for utilities, while making winners of metals and mining companies from Alcoa Inc. to ArcelorMittal.
Electricity is their biggest expense, totaling 40 percent of costs for aluminum producers, according to Rio de Janeiro state industry group Firjan. Alcoa Chief Executive Officer Klaus Kleinfeld qualified Brazilian energy costs as “unbelievably high” in a May 4 speech, after the New York-based aluminum producer said in a March statement it was considering cutting output in the country.
President Dilma Rousseff is forcing utilities in Brazil, where companies pay more than double U.S. and Chinese electricity prices, to cut rates by as much as 28 percent in a bid to stoke economic growth and make companies more competitive. The reductions will be a requirement for utilities renewing operating licenses through 2017.
“This is a historic decision by the government and the right step at an important time for the Brazilian industry,” Augusto Espeschit de Almeida, chief executive officer for Luxembourg-based ArcelorMittal’s long steel businesses in South America, said in e-mailed comments. The government “has taken important decisions to improve the competitiveness of the industry,” he said.
Melbourne-based BHP Billiton Ltd. and Vale SA, the world’s largest mining companies, and ArcelorMittal, the top steelmaker, are among the biggest clients of utilities such as Belo Horizonte, Brazil-based Cia. Energetica de Minas Gerais, the country’s No. 1 power company by market value, according to data compiled by Bloomberg.
A 28 percent cut in electricity rates would reduce average fixed costs for Brazilian materials makers and manufacturers by 4 percent, according to the Brasilia-based national industry confederation.
“Alcoa is encouraged by the measures adopted by the Brazilian government for reducing electricity costs to help industries remain competitive,” spokeswoman Libby Archell said in an e-mailed response to questions.
Brazilian utility shares dropped an average 6.8 percent last week, the industry’s second-biggest loss in 82 countries, according to data compiled by Bloomberg. Cia. Energetica de Sao Paulo, Brazil’s second-largest power generator by capacity, sank 28 percent the day after the announcement, its biggest drop since its initial public offering in August 2006. Centrais Eletricas Brasileiras SA, the Rio de Janeiro-based state-run utility, was also among utilities that led losses on Brazil’s benchmark Bovespa index on the same day.
“The government’s attitude acknowledging there is a competitiveness problem is highly positive,” said Adjarma Azevedo, president of the Brazilian Aluminum Association, an industry group that represents companies including Alcoa and Oslo-based Norsk Hydro ASA, Europe’s third-largest aluminum maker.
The group will meet next week to discuss the benefits of the measures after energy costs discouraged investments in past years, Azevedo said in a telephone interview from Sao Paulo. The metal used in airplanes and consumer appliances is among the most energy-intensive industries in the world.
Vale, based in Rio de Janeiro, has bought energy assets in past years to reduce costs and has nine Brazilian hydroelectric plants to support its mining operations. Last year it agreed to buy a 9 percent stake in Norte Energia SA, the group that is building the Belo Monte hydroelectric dam in the Amazon. It has also turned to palm-tree oil and wind turbines to insulate earnings from surging energy rates that represented 13 percent of its costs last year.
For utilities, Rousseff’s measures announced at an event with industry leaders in Brasilia on Sept. 11 mean profits will likely decline, Banco Itau SA analysts led by Marcos Severine said in a note to clients the day after.
The event was “marked by the speechless, stupefied faces of sector specialists and company executives,” the analysts said. “We see relevant downside potential to our earnings” estimates, the analysts said.
Brazilian companies pay on average about 329 reais ($163) per megawatt-hour, Firjan said in its report. Even with a 28 percent discount, the costs would still be higher than in India, China and Russia, the biggest emerging-market economies along with Brazil, according to Firjan data.
“This measure is a first step,” Tatiana Lauria, an industrial competitiveness specialist at Firjan, said in a phone interview from Rio. “There is still a lot of uncertainty about how it will be done and exactly what charges will be reduced in some cases. We imagine the impact will start to be felt next year and will be fully felt by 2015.”
Companies operating in Brazil are also less competitive than emerging-market peers because of other costs such as transportation infrastructure and taxes, Chris Garman, head of Latin American research at the Eurasia Group, said in a phone interview from New York.
“The cost of energy in Brazil is high by any standard among emerging markets,” Garman said. “This is a measure that does increase the competitiveness of the Brazilian industry. That said, it’s not as if this is sufficient to turn the corner.”