Brazil

Chinese mutual funds are turning to metals and other commodities to create wealth for investors and Brazil is the latest producer-nation to cut back steel production.

Free Download: The March 2016 MMI Report

Chinese Mutual Funds Bet on Commodities

China’s mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country’s mammoth resource sector will drive up prices for raw materials.

Brazil Will Cut Steel Production

Brazil will produce 32.9 million metric tons of raw steel in 2016, 1% less than last year, as the sector wrestles with a slump in demand amid the worst recession in a generation, the Brazil Steel Institute said on Monday.

Free Sample Report: Our March Metal Buying Outlook

Steel sales for the year are expected to fall 4.1%, to 17.4 mmt BSI President Marco Polo de Mello Lopes told reporters at the industry association’s headquarters in Rio de Janeiro.

We are accustomed to blaming the world’s ills on China’s slowdown and the collapse in commodity prices but in the case of Brazil, once the darling of the investment community with Asian levels of growth and seemingly limitless potential, it is the seeds laid down in those good times just a few years ago that are the cause of so much concern now.

Free Download: The February 2016 MMI Report

True, the country has been rocked by a corruption probe of epic proportions, with past and present presidents deeply implicated in the process and political stasis gripping the ruling classes as a result. Brazil’s woes, though, go far beyond the Petrobras scandal, as bad as it is.

Brazil’s Economy Shrinks

The economy shrank by 3.8% last year and is on track to shrink a further 3+% this year in its worst recession since official records began. According to the Financial Times, “GDP in the fourth quarter suffered a contraction of 5.9% compared with the same period a year earlier,” Brazil’s statistics agency, the Instituto Brasileiro de Geografia e Estatística (IBGE), said. “All of the components of internal demand showed falls.”

Christ, symbol of Rio de Janeiro, standing on top of Corcovado Hill, overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil

The statue of Christ  overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil, is gazing upon a far smaller economy these days as Brazil deals with a massive corruption probe. Source: Adobe Stock/ReadytoGo.

Just five years ago, in 2010, Brazil’s economy was growing at 7.6%. The slowdown is not so much the drop in export earnings from commodities, although that has had a severe impact, but more the policies of President Dilma Rousseff’s left-leaning government and that of her predecessor Luiz Inácio Lula da Silva, who were both constantly interfering in industry, implementing price controls as part of their populist agenda and encouraging aggressive lending by state banks.

As the economy has slowed, confidence has collapsed and tax revenues have fallen as expenditures have continued to rise on the back of enormous federal salary and pension commitments. Although agriculture has held up moderately well, industry has collapsed, down 6.2% last year leading a peak to a trough fall in GDP of 7.2%, said to be the worst recession since the 1930’s.

Real Loses Real Value

Industry’s performance is all the more worrisome since the depreciation in the Real against the US dollar, down 30% in the last year, should have aided exports and shielded domestic producers from foreign competition. Meanwhile, government revenues are falling as tax income is falling, the budget deficit has ballooned to 10%, one of the world’s largest the FT says.

Not surprisingly, unemployment has increased dramatically, from about 4% in 2014 to 7.6% in January, while real wages have contracted, with the burden of job losses falling mostly on the young. Bruno Rovai, economist with Barclays in New York is quoted as predicting unemployment will reach double digits as the recession drags on. One example of the growing pain is bounced checks in Brazil have hit their highest level for the month of January since records began in 1991 at 2.41% of all cleared transactions, while inflation is back and is expected to breach the upper limit of the central bank’s target range of 6.5% this year.

Free Sample Report: Our March Metal Buying Outlook

Brazilians had better make the most of their upcoming 2016 Olympics party because the good times are not expected to roll again until a lot of hard decisions, and even harder actions, are taken to dismantle the damaging policies current and recent governments have inflicted.

The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.

LME Revenue Soars

The London Metal Exchange posted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing  Ltd.— said on Wednesday.

Free Download: The February 2016 MMI Report

The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.

Samarco Owners Reach Deal With Brazil

Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.

Free Sample Report: Our February Metal Buying Outlook

Samarco, a joint venture between Vale SA and BHP Billiton, will pay 4.4 billion Brazilian reais in the three years following the agreement that is expected to be signed today.

 

Brazil’s gross domestic product fell by a record 4.5% year-on-year in the third quarter, confirming expectations that Latin America’s largest economy is in for its worse recession since the 1930s.

Source: Financial Times

Source: Financial Times

Brazil’s left-leaning president, Dilma Rousseff, presided over an economy where unemployment rose to 7.9% in September, up from just 4.7% in October of last year, inflation is running at more than 10% for the first time since 2002 and Brazil’s government budget deficit is now at 9.5% of GDP according to the Financial Times.

What Happened to Brazil’s Economy?

Brazil has a rising middle class and, for a resource-rich emerging economy, it also has a substantial domestic consumer market but household consumption fell 1.5% in the third quarter, while services dropped 1%. Weak harvests for coffee, sugarcane, oranges, cotton, wheat., forestry and cattle husbandry contributed to an agriculture sector contracting by 2.4% compared with the previous three months and both industry down 1.3% and investment down 4%.

Free Sample Report: Our Annual Metal Buying Outlook

The trade balance made a positive contribution to growth, the FT said, but this was mostly due to a crash in imports down 20% quarter-on-quarter rather than a large increase in exports, which grew only 1.1%, helped by the weaker real.

Source: Financial Times

Source: Financial Times

Keepin’ It Real

Not surprisingly, the Brazilian real has fallen more than 30% in a year, partly due to the deteriorating economy and partly due to the fall in commodity prices that has undermined all resource exporters.

The fall, though, is worrisome because interest rates are at 15% — usually an incentive for foreigners to buy the currency but with inflation at 9% the net rate is more like 6, still a fall of 30% while interest rates are at 15% — that doesn’t say much for investor confidence in Brazil.

Problems at the Top

Dilma Rousseff’s government seems paralyzed, on the one hand unable to bring themselves to enact the austerity measures needed to help balance the books, and on the other swept up in the country’s biggest corruption scandal in which the state-owned energy company Petrobras admitted to 6 billion real ($1.6 billionn) in losses… so far.

Neither the economy nor the currency is expected to recover anytime soon. Q4 of this year and much of next year could be little better than Q3. Rousseff could be ousted, or resign, making way for a more fiscally sound government to take charge but she could equally cling on to the next election in 2018 although her rating is said to be at an all time low of just 8%.

The only silver lining according to Lee Alston, Ostrom professor at Indiana University and a research associate at the National Bureau of Economic Research, writing in the FT, is that compared to previous crises, particularly corruption scandals, this time those in charge are holding the government to account, especially the judiciary, public attorneys, the TCU and the federal police.

Free Download: Last Chane for The November MMI Report

They have investigated, prosecuted and even imprisoned previously untouchable business leaders and politicians involved in corruption. While these changes are not likely to improve the economic situation in the short term they do hold out hope for the future and will instill confidence in foreign investors that the country is coming of age.

There is a close linkage between emerging markets and commodity prices. This connection becomes stronger for net commodity exporters. The two most notable examples are Russia and Brazil, both of which are commodity and energy exporters. These two countries have been two of the hardest hit among emerging markets.

Russia market vectors (Black). Brazil iShares (Orange)

Russian market vectors (Black). Brazilian iShares (Orange) since 2012. MetalMiner analysis with data from Stockcharts.com.

These markets have historically moved with commodity prices. When commodities fall, exporters of commodities make less money which is bad for their economy. In many cases, the movement of these markets helps to give clues to future moves in commodities.

Free Download: MetalMiner’s Top Service Centers Guide

As we can see in the chart above, Russian (in black) and Brazilian (in orange) stock markets have been in bearish mode since 2011. Both, however, rallied this year but we can see that the rally is falling short of their previous peaks. The recent drop also coincided with falling commodity prices worldwide since April.

What This Mean For Metal Buyers

Weakness in emerging markets validates weakness in commodity prices. The dollar is still strong while commodities and emerging markets fall. It’s hard to become bullish on commodities until we start seeing some divergences.

FREE Download: Last Week for the May MMI® Report.

Along with steel, aluminum was once one of South America’s major growth products and the source of considerable pride for several Latin American countries.

Rapid Decline

But for a variety of reasons, the decline in aluminum output has been rapid and dramatic. A recent Reuters article states that according to International Aluminum Institute numbers, February’s regional run-rate was the equivalent to 1.33 million metric tons per year. A year ago it was 1.80 million. At its peak in 2008, it was 2.70 million tons. South America was once a major exporter of metal to world markets.

Free Download: Cut Your Aluminum Shipping Costs

In 1994 Brazil was the third-largest and Venezuela the fourth-largest source of aluminum imports into the United States. Now, both countries import. We recently wrote about the state of the Venezuelan aluminum sector. Chronic underinvestment due to the gradual bankrupting of the once-buoyant Venezuelan economy has left the country’s two smelters a shadow of their former selves.

Venalum had a nominal capacity of 430,000 mt per year but production last year declined to just 110,000 mt and the company has warned customers it can’t even meet internationally expected purity norms for standard P1020 grade. Alcasa, the other plant with a headline capacity of 170,000 mt, is only producing about 29,000 mt.

Woe is Brazil

Brazil’s decline is even more tragic.

Technically, the country’s smelters are perfectly capable of operating at capacity but high costs have seen the industry decimated in recent years. Alcoa curtailed two pot-lines at the 440,000-mt-per-year plant over the course of 2013 and 2014, according to Reuters, and now the third and last will also be mothballed. It’s the fifth, and largest, Brazilian smelter to be shuttered since 2009 following on the heels of the company’s Pocos de Caldas smelter, which had been operating since 1970, becoming fully shuttered in May of last year.

The Valesul smelter was closed in 2009, while Novelis closed its Aratu plant in 2010 and its Ouro Preto plant in 2014, the paper reports.

What’s Left

There are now only two primary smelters left operating in Brazil: Norsk Hydro‘s 460,000-mt-per-year Albras and CBA‘s 475,000- mt-per-year Sorocaba. National production has fallen from a peak of 1.67 million mt in 2007 to 962,000 mt in 2014, a figure that is now set to fall further with the closure of Alumar.

The reasons are two-fold: first, cost and second lack of power as the country has experienced a prolonged period of drought resulting in falling power output from the once-seemingly limitless hydro-electric facilities.

How bad is it? The power situation is so bad, Brazil will have to import power from Argentina and Uruguay this year. On the cost side, power and raw materials have become so expensive smelters cannot even compete with the benefit of the world’s largest physical delivery premium. According to Platts the Brazilian delivery premium is $590 per mt over the London Metal Exchange, way higher than Japan, Europe or the USA and  the premium is remaining stubbornly high as premiums elsewhere begin to ease.

On the back of rapidly rising domestic smelting capacity and a growing economy, Brazil invested in considerable downstream processing capacity that is now having to compete for imports of primary metal in order to keep functioning. Not surprisingly, those same processors are finding it nigh-impossible to compete in international markets, a dramatic and rather tragic turnaround from the last decade when South America’s aluminum industry held out so much promise.

Spring has sprung here at MetalCrawler and beleaguered commodity markets are hoping for a renewal themselves as steel production is predicted to fall in Japan, the once-mighty aluminum industry in Brazil faces another shutdown and new shipment rules could cause even more back-ups in transportation of North Dakota oil.

New Oil Shipment Rules

Following a spate of explosive accidents involving North Dakota crude oil, the state on Wednesday began requiring companies to remove certain liquids and gases from oil before it’s loaded onto rail cars, a move industry and state regulators believe will make for safer shipments.

Free Download: Cost Certainty for Overseas Oil Shipments

The rules, developed over the past year, require all crude from the oil patch to be treated by heat or by pressure to reduce its volatility before being loaded onto train cars. The new rules require North Dakota crude to have vapor pressure below 13.7 pounds per square inch, which is less than the 14.7 psi threshold national standard recognized as stable. Winter-blend gasoline that contains 10% ethanol is rated at 13.5 psi.Industry officials initially balked at the regulations, saying the state’s crude was being unfairly singled out and the new standards would slow production and increase costs.

Japanese Steel Production Falls to 6-Year Low

Japan’s crude steel output for April-June is forecast to drop 7.8 percent from a year earlier to the lowest for the quarter in six years, the Ministry of Economy, Trade and Industry (METI) said on Thursday.

The fall would mark the latest in a series of signs of economic slowdown, clouding the outlook for Prime Minister Shinzo Abe’s drive to reflate the economy and spurring calls for more monetary stimulus.

South American Aluminum Production Wanes

US aluminum producer Alcoa announced this week the full shuttering of its Alumar smelter in Brazil.

Alcoa and minority partner BHP Billiton curtailed two potlines at the 440,000-metric-tons-per-year plant over the course of 2013 and 2014. Now the third and last will also be mothballed.

It’s the fifth, and largest, Brazilian smelter to be shuttered since 2009 – a major retreat for what was once one of the world’s top producing countries.

Reuters’ Andy Home writes that’s it’s symptomatic of a broader decline in primary aluminum production in South America.

Crude oil fell sharply again as the International Energy Agency (IEA) cut its forecast for global oil demand for the 5th time. The lack of demand has been attributed to weakening global conditions and increasing supplies, especially coming from the US shale revolution.

See why our Auto MMI® is a leading indicator: download the Monthly MMI® Report.

Crude oil is now at its lowest level since 2009, hurting anything tied to oil production. This can be reflected in the stock market of countries that export energy. The biggest foreign losers are  Russia, Canada, and several oil-rich South American economies such as Brazil and Venezuela.

EFA ishares since 2013 (developed countries excluding US and Canada)

EAFE ishares since 2013 (developed countries excluding US and Canada). Source: MetalMiner

Weakness in foreign developed markets can be seen in the chart above. The EAFE index (tracking 21 developed countries but excluding the US and Canada) is at its lowest level in 15 months. Most of the losses come from countries in central and eastern Europe with economies tied to Russia.

Emerging markets ishare (EEM) since 2013

Emerging markets ishares (EEM) since 2013. Source: MetalMiner

On the other hand, falling commodity prices are making emerging markets fall even more sharply. EEM ishares (tracking stocks in developing countries) fell by 17% in the past three months. The two biggest losers are oil producers Russia and Brazil, whose stocks markets fell by 48% and 35% since July.

Meanwhile, the US economy is in better shape than foreign economies, but it’s not immune to weakness in foreign countries. US stocks started to weaken in December and they will probably remain under pressure until the situation in foreign economies starts to stabilize. This will strongly depend on what crude oil does from here.

MetalMiner welcomes guest contributor Suriya Anjumohan, a lead analyst at Beroe Inc., which specializes in tracking various steel markets and related alloys. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

This is the final part of his white paper on Brazil’s aluminum foundry industries.

Although there are numerous strategies, with the changing dynamics of the markets these strategies need to be reevaluated in order to minimize the risk involved, especially in the procurement context. When the mitigation strategies looked from a conservative front can be divided into two broader verticals, namely:

• Juggling among the contract options using various price negotiation levers

• Innovation through demand side management (DSM) applications

Price Negotiation Levers

Electricity Consumers in Brazil can negotiate with suppliers on their electricity contract price based on their knowledge of certain parameters of the industry. A clear understanding of their consumption pattern and knowledge about the supplier’s generation mix can give consumers an upper hand over suppliers during the final negotiation of contract prices.

BeroeBrazilGraphic7

Source: Beroe Analysis

Read more

MetalMiner welcomes guest contributor Suriya Anjumohan, a lead analyst at Beroe Inc., which specializes in tracking various steel markets and related alloys. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

See why our Auto MMI® is a leading indicator: download the Monthly MMI® Report.

On Monday, Anjumohan detailed how energy prices are impacting Brazil’s aluminum production industry. This section goes into further detail about the status of Brazil’s foundry industry.

Brazil is the 7th-largest producer of metal castings considering total global production in 2012. For 2013, it is estimated that the Brazil’s metal production to be 2.96 million metric tonnes. As an exporter, in 2012 Brazil catered about 8.5% of US metal castings demand. Since 2011, Brazil has dropped significantly as an exporter of castings to the US. This is primarily due to the gain the in the Brazilian real against the dollar and the impact of higher energy cost in metal castings production.

Top Metal Castings Producing Regions (in millions of metric tons)

BeroeBrazilGraphic6

The automotive industry is the major end use industry which drives metal castings production in Brazil. In 2014, the Brazilian automotive sector is expected to have challenges with stagnant or moderate growth. Despite increasing focus on productivity and cost optimization, profitability and competitiveness remains low.

Most of the aluminum produced in Brazil is consumed for domestic demand, especially for the automotive industry. Considering aluminum castings which are produced in Brazil, 95% are consumed locally. However, 5% are exported. With the rise in electricity prices and a supply deficit for aluminum as a raw material for castings, supply security could be an issue for the end use industries in years to come. Read more