Brazil

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.

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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.

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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.

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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.

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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.

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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

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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

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.

Last week, Anjumohan detailed how energy prices are impacting Brazil’s growing automotive production sector. This section goes into further detail about the effect of energy prices on aluminum smelting there.

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From a short term prospective (2-3 yrs.), it is anticipated that the Brazilian electricity sector won’t be able to implement diversification and the volatility in electricity prices will continue to prevail. Although from a long term prospective (5-10 yrs.) the prices will become more competitive with advent of fuel diversification in the coming years there-by giving industries an upper hand during energy/electricity procurement.

Source: CCEE, Beroe Analysis
Source: CCEE, Beroe Analysis

Curtailment of aluminum smelting facilities in Brazil

Brazil is struggling against time to avoid power blackouts and electricity rationing as a drought prevents the water-rich nation from recharging its hydroelectric-powered dams. Brazil was once the world’s sixth-largest producer, a major player with an integrated chain from bauxite mining to primary aluminum production.

However, now, Brazil is the eighth major aluminum producer, preceded by China, Russia, Canada, the USA, Australia, United Arab Emirates and India. World primary aluminum production increased by about 3% in 2013 compared with production in 2012. New capacity in China accounted for most of the increased production. The major primary aluminum producers in Brazil are Albras – a joint-venture between Norwegian Norsk Hydro and Japanese consortium Nippon Amazon Aluminum, Alumar – a partnership between multinational resource group BHP Billiton, Pittsburgh-based aluminum giant Alcoa, and Rio Tinto‘s Alcan subsidiary, Novelis do Brasil Ltda., Votorantim Metais, and Alcoa Alumínio. In recent times, the production of Brazilian aluminum companies is at the lowest level in 12 years amid high power costs and metal price declines. Though the electricity prices for the producers were reduced by 7.8%  for the previous year, still the power cost remains as the industry’s main hindrance.

Aluminum Production in Thousands of Metric Tons

BeroeBrazilGraphic4

Source: US Geological Survey, Beroe analysis.

Over the last 20 years Brazil attracted many global aluminum producers due to good-quality, accessible bauxite reserves with expectations of ample cheap energy supplies because of hydroelectric dam projects. Today, the nation finds itself in the middle of the worst dry spells in its modern history. In recent times many metals and mining majors have stopped expanding their aluminum capacities in Brazil and some companies are expected to trim their exposure plans to the region. Aluminum smelters are electricity consumers wherein power consumption accounts for about half of the cost of refined metal production.

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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.

Brazil is South America’s largest consumer market. Among the other emerging economies it is still considered as a bustling market with a lot of potential customers.

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The Brazilian automotive industry is one of the fastest-growing automotive manufacturing markets in the world which accounts for almost 20% of the country’s GDP. Based on strong growth in the last few years, Brazil has now become the fourth-largest automotive market globally next to China, the USA and Japan. The dual effect of strong domestic demand with tax incentives has seen the regions automotive sector witness strong growth compared with unsteady global demand. In total, there are about 57 plants, which in 2013 produced 4.3 million vehicle units by production and are estimated to reach 5.7 million units by production in 2016 with a CAGR of 8-10% over the period 2013-16.

BeroeBrazilGraphic1

Source: OICA, Statista

The Brazilian government is actively deterring vehicle imports and working to encourage the construction of assembly plants there. This made most of the domestic and international automakers are set up new factories in Brazil at a steady clip. Chery Automobile is setting up its new factory there and it is a vivid example of Chinese industries expanding in the Brazilian market.

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Brazil, once the darling of the natural resources sector, is looking sicker by the month.

For two decades, the lure of high-quality bauxite and iron ore coupled with the expectation of low power costs from vast hydroelectric potential encouraged firms like Alcoa and Norsk Hydro to invest in alumina and aluminum smelters, and steel companies like ThyssenKrupp to invest in basic steel production, expecting Brazil to become the source of valuable low-cost refined basic metals.

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We all know what happened to Thyssen – after multibillion-dollar write-offs, the firm is divesting itself of its Americas project and now Vale is divesting itself of its 22% stake in Norsk Hydro as it exits the aluminum sector altogether.

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With Turkey’s account balance and Prime Minister Erdogan’s political career not looking so hot, and with Kirchner’s Argentina battling inflation, emerging markets don’t appear to be all that healthy at the moment.

Brazil’s Cup Doesn’t Overfloweth

soccer player kicking high

Not helped by Argentina’s ills, neighboring Brazil has mounting problems too, which no amount of razzmatazz around the forthcoming FIFA World Cup and Olympics will dispel.

Argentina is Brazil’s biggest export market for manufactured goods. Dependent mostly on internal consumption and with reserves of about $375 billion, Brazil has considerable leeway to manage shocks, the FT observes. When the Brazilian real started to depreciate rapidly last year, the country responded with a $60bn currency intervention program; it is now raising interest rates to try to support the currency, already at 10.5% and rising, hence the outlook for Brazil’s manufacturing sector is not good.

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