How Three Inches of Rain Could Cut GDP Growth: Corporate Brazil

Whether or not Brazil gets rain -- and lots of it --- in the next few months is likely to be the difference between economic growth or a recession in 2015.

BNP Paribas SA says energy rationing in 2015 as a drought pares hydroelectric output would shave as much as 2 percentage points from gross domestic product. With economists in a central bank survey forecasting growth of 0.77 percent, that would be enough to push Brazil into a recession.

“The biggest risk for Brazil’s economic growth next year is the risk of rationing,” said Pedro Paulo Silveira, chief economist at brokerage TOV Corretora in Sao Paulo. “All the economic indicators that make up GDP are tied to electric energy.”

The worst drought in eight decades means Brazil needs average or above-average precipitation during the rainy season ending in March to avoid rationing for the first time since 2001, according Joao Carlos de Oliveira Mello, CEO of consultant Thymos Energia. Without rain, Brazil would start the dry season with a 50 percent chance of rationing, he said.

“If we get 100 percent of average rainfall during the rainy season, then it’s OK,” Mello said in an interview at Bloomberg’s office in Sao Paulo. “Anything less than 90 percent, and it gets complicated.”

Three Inches

The difference works out to just 3 inches (7.6 centimeters) of rainfall, according to data compiled by Bloomberg News. The Southeast and Midwest, where Brazil’s main hydroelectric dams are located, get an historical average of about 30 inches between December and March, Climatempo weather forecaster said.

Alcoa Inc. has already idled its Pocos de Caldas smelter in Brazil’s Minas Gerais state because of surging energy costs and cut output at another smelter co-owned with BHP Billiton Ltd. Alcoa didn’t respond to a phone call and an e-mail seeking comment.

Electric utility Cia. Energetica de Minas Gerais, known as Cemig, has shut five of the six power turbines at its Tres Marias hydroelectric plant after water levels fell to a record, contributing to a 60 percent plunge in net income in the third quarter from a year earlier.

“I don’t think we are going to completely stop Tres Marias, because we’re expecting more rain to come,” Marcelo de Deus Melo, energy planning manager of the utility known as Cemig, said in a telephone interview from Minas Gerais state. “The fact is we’re generating less energy than we’ve sold in contracts, which is exposing us to high spot-market prices.”

Utilities Tumble

The market value of Brazil’s biggest utilities from Cemig to CPFL Energia SA has plunged 30 percent to $38.9 billion since the start of September. Companies this year have been forced to buy energy in the spot market at record prices and resell it at a loss at government-set price caps in order to meet supply contracts. CPFL didn’t respond to a phone call and e-mail seeking comment.

Output at companies from petro-chemical producers like Braskem SA and manufacturers would also take a hit if Brazil is forced to ration energy for the first time since 2001.

“We have long-term contracts, but if the whole system fails, there is no way to protect ourselves contractually,” Braskem Chief Executive Officer Carlos Fadigas said in an interview at Bloomberg’s office in Sao Paulo. “We already generate 20 percent of the energy we consume.”


Steelmaker Usinas Siderurgicas de Minas Gerais SA, or Usiminas, is the most vulnerable to rationing, followed by Cia. Siderurgica Nacional, or CSN, and Gerdau SA, Moody’s Investors Service Inc. Senior Analyst Barbara Mattos said in a report today.

“Energy rationing would depress industrial output at a time of weakening demand and soft commodity prices,” she said. “Steelmakers rank among Brazil’s largest industrial consumers of electricity and are vulnerable to rationing both in terms of supply costs and local demand.”

Usiminas, CSN and Gerdau didn’t immediately respond to e-mail requests for comment.

Weather forecaster Somar Meteorologia forecasts rain to come in under or at historical levels between December and February in the Southeast and Midwest. At the same time, temperatures will likely be above average during the Southern Hemisphere summer, which will boost energy consumption as Brazilians turn on their air conditioners, said Marcio Custodio, meteorologist at Somar.


“We won’t have a dry season like we did last summer but rains are not going to be enough to compensate for the drought two years in a row,” he said by telephone from Sao Paulo.

Current forecasts mean Brazilian hydropower reservoirs will end the rainy season this year with just a third of what’s needed to guarantee energy supplies in 2015, said Carlos Feu, co-owner of energy consultant Ecen, in a telephone interview from Sao Paulo.

“If we don’t have a lot of rain from December on, when it’s needed to boost reservoir levels, Brazil could already have energy shortages in some areas during peak summer electricity usage,” he said.

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