Brazilian aluminum companies, producing at the lowest level in 12 years amid high power costs and metal price declines, expect authorities to ration supply as a drought curbs hydroelectric generation in the country.
Rationing is “almost certain” within a year, Tito Martins Jr., chairman of the Brazilian Aluminum Association, which represents companies in the eighth largest aluminum-producing nation, told a conference in Sao Paulo today.
While electricity prices for producers were reduced 7.8 percent last year, power costs remain the industry’s biggest hindrance, said Martins, who is chief executive of Votorantim Metais. Brazil won’t be competitive again in aluminum if it doesn’t rethink its energy pricing model, he said.
Martins’ comments echo research by Citigroup Inc., which estimates a 94 percent risk of power rationing. President Dilma Rousseff’s attempts to force utilities to cut rates in Brazil, where companies pay more than double U.S. and Chinese prices, backfired as spot prices surged to a record amid the worst drought in decades. Power-intensive industries such as aluminum are suffering the most, said Wilson Brumer, a board member at Helsinki-based Metso OYJ and former head of Vale SA.
“The aluminum industry runs a serious risk of disappearing if the lack of industrial competitiveness is not confronted and the energy problem is not solved,” he said from Belo Horizonte, Brazil. “With this energy prices, it’s impossible to produce at competitive costs.”
A decision last week by Alcoa Inc., the largest U.S. producer, to trim output from two Brazilian aluminum smelters will further reduce production of the metal used in drink cans and aircraft in the country.
“If nothing changes, others will follow Alcoa’s steps,” Martins said today during the opening session of an annual industry gathering. “There is no sign that aluminum prices are going to recover over the next five years.”
Brazil’s output of primary aluminum fell 15 percent in February from a year ago to 90,900 metric tons, the lowest since December 2001. Production slid 9.2 percent to 1.3 million tons in 2013, the third consecutive annual drop.
Alcoa, which last year curtailed capacity at smelters in the U.S., Canada and Italy, said on March 28 that it will shutter 147,000 tons at its Sao Luis and Pocos de Caldas plants. Pocos, in the southeastern state of Minas Gerais, will be fully idled while Sao Luis, a smelter in the northeast that’s 40 percent-owned by BHP Billiton Ltd, will cut output by 97,000 tons.
Aluminum for three-month delivery on the London Metal exchange has dropped 5.7 percent in the past year while the Brazilian real lost 11 percent against the U.S. dollar. The metal rose 0.6 percent to $1,795.50 a metric ton in London today.