FOCUS: Brazilian metals sector faces risk of low energy supply in times of drought

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A drought has reduced water reservoirs in Brazil, mainly in the southeastern and midwestern states, leading to soaring electricity costs and fears of blackouts or even mandatory power rationing that could affect supply and demand for metals.

Steelmakers are expected to face few direct impacts from the declining energy supply, as most producers generate their own electricity.

“There is always some impact on steel production, but it will probably be a small impact,” said Carlos Loureiro, president of the national flat steel distribution association Inda.

“There is a movement to shift production towards times when electricity consumption is lower in the country, but so far we have no signs that a company is reducing its steel consumption due to of the possibility of rationing of electricity, ”added Loureiro.

Steel production has picked up in the country, balancing supply and demand fundamentals and supporting high domestic prices.

Fastmarkets price assessment for monthly domestic hot rolled steel coil, exw Brazil was 7,500 to 7,800 Reais ($ 1,400 to $ 1,457) per tonne on September 10, unchanged from July 9, when it fell from 7,300 to 7,775 Reais per tonne on June 11.

But concern is growing among manufacturers and pundits, with end users being the weakest link in a possible power shortage.

Hydroelectric crisis
In May, the national electricity grid operator ONS estimated there could be a deficit of 12.7 gigawatts (GW) in November amid the lowest rainfall in 91 years – since the country started tracking those data.

ONS data shows that at the end of 2020, 64.84% of the country’s electricity production came from hydropower plants, with its share falling to 52.46% in September 2021. According to the Ministry of Mines and Of the country’s Energy, 70% of the reservoirs are in the south-eastern and central-western regions, where the drought is worse.

In its latest update, Friday, September 24, the ONS said the Southeast and Midwest reservoirs could end October at just 12.60% of capacity.

To counter the hydroelectric crisis, the Brazilian federal government has increased the use of thermoelectric power stations, made plans to reorganize the transmission of electricity from better-supplied regions and launched a voluntary electricity demand reduction program. .

Companhia Brasileira de Alumínio (CBA), one of the two companies in Brazil that still have aluminum smelters in operation, has decided to join the consumption reduction program, he said on September 16. But production is expected to remain unchanged, shifted to times of the day other than peak demand times.

At the beginning of September, the Brazilian steelmaker Gerdau said he was ready for all energy scenarios. The company produces part of its own electricity, in particular at its integrated factory in Ouro Branco, where 60 to 70% of its energy consumption is self-generated.

“We have production facilities all over the country and we can move production as needed,” Gerdau’s Brazilian vice president and chief operating officer Marcos Faraco said on “Gerdau Day” on September 2.

Higher energy costs
But the measures announced have a flip side: the energy produced by thermoelectric power stations is more expensive.

According to the energy market information service Megawhat, the electricity system charges which were around 5 to 8 reais per megawatt hour (MWh) last year, before the escalation of the hydropower crisis, have passed. at nearly 40 reais per MWh.

From October 2020 to July 2021, these total charges amounted to 7.8 billion reais. Megawhat noted. For the remaining five months of 2021, the cost is estimated to total 7.4 billion reais, he said.

This impact was larger than normal due to the fact that thermal power plants represent a larger share of the country’s total electricity production. The ONS said thermoelectric power plants accounted for 25.34% of total production in September; their share was 20.16% at the end of last year.

Rising energy costs worry 83% of Brazilian industrial companies, according to a poll published in August by the Brazilian industrial confederation CNI.

“The risk of energy shortage is real and everyone is trying to prepare for it,” said Roberto Wagner Pereira, CNI energy expert.

Another problem is the lack of electrical availability at thermal power plants, mainly due to maintenance work, Ana Carla Petti, co-managing director of Megawhat, told Fastmarkets.

“We are running almost 28% downtime [of thermal power plant capacity] this year, ”Petti said. “The ONS has requested the postponement of downtime for maintenance, but at this rate, we have [an average of around] 17 GW of available power [of roughly 21 GW total capacity]. “

The Brazilian association of major industrial consumers of electricity, Abace, believes that the impact of rising energy costs is already being felt. “We have been paying this invoice since the end of last year,” Technical General Manager Fillipe Soares told Fastmarkets.

For now, Megawhat is not planning a mandatory power rationing program in the country, but he believes power shortages could become common during the busiest hours of the afternoon.

But Soares said there are scenarios where there won’t be a power deficit.

“In some calculations, the ONS expects this additional power to be under contract until November,” Soares said. “If we can reduce consumption, chances are there will be no blackouts until November.”

But that will depend on the amount of precipitation for the rest of the year, and that’s a source of uncertainty, experts say.

The rainy season in Brazil becomes more intense in November, fueling hopes that water reservoirs will fill up. But Megawhat pointed out that there is an almost 70% chance that the La Niña weather phenomenon will affect the weather between November 2021 and January 2022, potentially reducing rainfall and exacerbating factors contributing to a potential power shortage.

So far, the ONS has succeeded in securing up to 237 MW of energy from its consumption reduction program for September.

“For now, it’s in line with what was expected. It is possible to save more [power] as more and more companies understand the program and see the results it can bring, ”Executive President of the Brazilian Aluminum Association Abal, Janaina Donas, told Fastmarkets.

But Megawhat’s Petti thinks that might not be enough.

“Industry participants told us that they have a lot of contract deliveries, which makes it more difficult to reduce energy consumption,” she said. “More optimistic estimates speak of an average reduction of 1.5 GW, or 2% of the 69 GW needed for 2021. This flexibility may be insufficient.”

Risk of electricity shortage
The worst-case scenario, according to industry groups, would be for an electricity shortage to materialize.

“The aluminum industry is extremely sensitive to this because the electricity supply is constant and blackouts are always a concern,” Donas said.

Energy accounts for the majority of input costs for the aluminum industry, and a power failure would put equipment at risk.

Fastmarkets’ assessment of the premium P1020A aluminum, delivered to São Paulo region was $ 360-400 per tonne on September 21, unchanged from August 24, when the valuation rose $ 40 from $ 320-360 per tonne the week before.

“This voluntary reduction plan is the best solution. This way we can maintain production, which we might be prevented from doing in the event of compulsory rationing, and especially in a blackout scenario, ”Donas said.

But according to the latest CNI poll on the matter, 55% believe that electricity rationing is likely to occur, while 7% are certain that electricity will be rationed.

“An electricity deficit would be brutal for industrial sectors [in Brazil]”Abrace’s Soares said.


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