50-Minute Blackout is Signal for Brazil Investors to Sell

At 3:30 p.m. on Jan. 19 in Sao Paulo, trader Pedro Paulo Afonso’s instant message blew up with questions from asset managers.

A phone on the operations desk rang, then another and another, and soon all 15 traders at TOV Corretora, one of Brazil’s biggest brokerages, were hearing the same thing: a power failure had swept across half of Brazil. Sell utilities.

By the end of trading a little more than an hour later, all but two of the Ibovespa index’s 68 members were down, with the utility industry leading the way. CPFL Energia SA, Brazil’s second-biggest power company by revenue, dropped 7.3 percent for its largest one-day decline since October 2008.

The alarm caused by the 50-minute blackout illustrates the concern investors have that a drought cutting hydroelectric output could trigger energy rationing this year, tipping Latin America’s largest economy into a recession. Power rationing in 2001 trimmed 1 percentage point off gross domestic product growth, the central bank estimates.

“People remember all too well what happened the last time,” Afonso, who is the brokerage’s investment director, said in a phone interview on Jan. 20 from Sao Paulo. “With all the problems we already have in Brazil, the feeling was: ‘Oh no, another rationing is all that we need.’”

Higher Taxes

An increased risk of rationing comes as higher taxes, budget cuts and rising interest rates are already weighing on the growth outlook. Economists in a central bank survey published Jan. 19 cut their 2015 growth forecast for a third straight week to 0.4 percent. On top of that, a corruption scandal is drying up access to credit for state-run oil company Petroleo Brasileiro SA and the nation’s top builders.

Brazil’s national grid operator, known as ONS, said in a statement on its website that it asked some electricity distributors to turn off their lines for about 50 minutes starting around 3 p.m. on Jan. 19 after power use peaked and transmission problems were reported. Temperatures that day topped 36 degrees Celsius (97 degrees Fahrenheit) in Sao Paulo and Rio de Janeiro, increasing electricity demand for air conditioners. The ONS said the blackout was not caused by a lack of power supplies.

That hasn’t eased fears of a shortage. The worst drought in eight decades has drained the main hydroelectric reservoirs to record lows, paring output at dams that supply about 70 percent of Brazil’s power. Reservoirs in Brazil’s Southeast and Central West fell to 17.6 percent on Jan. 20 in the middle of what is traditionally Brazil’s rainy season, compared with 31.4 percent in January 2001.

35% Chance

Itau BBA in a Jan. 20 report estimated there’s a 35 percent chance of rationing this year, up from 26 percent previously. It said the power cut the day before illustrated “the extreme stress” in the grid. Brazilians can expect more blackouts starting in February, when demand usually peaks, said Ricardo Savoia, director at energy consultant Thymos in Sao Paulo.

“We are already at the limit -- any increase in demand or plant failure can disrupt the system,” he said in a telephone interview.

The fact that power was restored about an hour after the blackout shows the “robustness” of Brazil’s integrated power grid, said Andre Pepitone da Nobrega, a director at energy regulator Aneel. While Brazil’s system remains dependent on hydroelectricity, generators have expanded into energy sources such as natural gas, nuclear and coal.

Heavy Users

“This is without a doubt a year that demands attention,” Pepitone said in an interview in Brasilia on Jan. 20. “We need to hope it rains.”

Heavy energy users like petrochemical producer Braskem SA, auto-parts maker Iochpe-Maxion SA and the manufacturer of copper and alloy products Paranapanema SA will probably be hit the hardest, said Bruno Piagentini, an investment analyst at brokerage firm Coinvalores. Braskem fell 7.7 percent on the day of the blackout, the most on the Ibovespa. Shares were up 1.5 percent to 13.32 reais as of 12:15 p.m. in Sao Paulo trading.

Braskem’s press office declined to comment on how it would be affected by an eventual power rationing in Brazil, as did Iochpe-Maxion’s investor relations office. Paranapanema’s and CPFL’s press offices didn’t respond to e-mails seeking comment.

“Other companies such as steelmakers also will suffer because, even though they have their own electricity generation, their clients don’t and may reduce output and the acquisition of raw materials,” Piagentini said. “The effects for the Brazilian economy will be very negative.”

Credit Ratings

Severe rationing in the form of mandatory consumption cuts or rolling blackouts can hurt growth, potentially pressuring credit ratings on Brazil and utilities, said Daniel Kastholm, Fitch managing director of Latin America corporate finance. Kastholm said he was at a conference focused on Latin America recently and the hot topics of concern focused on Petrobras, the corruption scandal and a credit freeze affecting builders.

“There was a lot of discussion about Brazil, and I don’t remember the word drought being mentioned once,” he said in an interview in Sao Paulo. “What I think this blackout does is serve as a huge reminder to the market that we’re in a very difficult situation with regard to energy supply.”

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