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 Inc (NYSE:AA) and Norsk Hydro ASA (NHY.OSLO) to invest in alumina and aluminum smelters, and steel companies like Thyssenkrupp AG O.N. (TKAG.XETRA) to invest in basic steel production, expecting Brazil to become the source of valuable low-cost refined basic metals.
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.
Brazil has one of the largest reserves of hydroelectric power in the world, but projects are well behind schedule and last September the country suffered its eighth serious power outage in three years. Tito Martins Jr., chairman of the Brazilian Aluminum Association, is quoted in Bloomberg as saying rationing is “almost certain” within a year if urgent steps are not taken to address the lack of power capacity. 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.
Brazilian Aluminum companies are producing at the lowest level for 12 years amid high power costs and metal price declines, a process that power rationing will only make worse. Power outages are the worst catastrophe to hit an aluminum smelter, as liquid metal solidifies in the pots, causing huge damage and lengthy repairs.
Yet even as Alcoa, who has been cutting primary capacity around the world, announced it was shuttering capacity in Brazil, Norsk Hydro pushed on with the takeover of Vale’s share of their joint alumina facility.
Alcoa 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%-owned by BHP Billiton Ltd (BHP), will cut output by 97,000 tons, Bloomberg reported. Norsk Hydro may yet come to regret increasing its exposure as it buys Brazil’s vast Paragominas bauxite mine from Vale, a deal which won’t be fully completed until 2016, an article in Aluminium Leader reported late last year.
Brazil’s output of primary aluminum fell 15% in February from a year ago to 90,900 metric tons, the lowest since December 2001. Production slid 9.2% to 1.3 million tons in 2013, the third consecutive annual drop in spite of a 7.8% reduction in power costs introduced last year to help high-energy consumers.
Brazil may have been better advised spending its money and expending its energies building an adequate power, road and rail infrastructure rather than stadiums and housing for the Soccer World Cup and Olympics, neither of which will help the Brazilian resources sector achieve the glamor for which it once aspired.