Consequential Pressure on Brazil Automotive Industry: Impact of Aluminum Supply Curtailment and Energy Price

Brazil, an emerging market which is considered as an automotive manufacturing hub in South America is highly dependent on renewable resources for power generation. In Brazil the variation/spikes in electricity prices are relatively higher due (M-o-M ranges from 30-60%) to the preponderance of hydroelectric generation in the fuel mix. Any change due to seasonal conditions (Drought/Heavy rainfall) impacts electricity price significantly as 78% of the total installed capacity comes from hydro. Considering the previous year (2013), the electricity prices in Brazil is expected to have 130 - 140% hike for the year 2014 and the trend is expected to follow for the years to come. The rise in electricity cost and challenging global market conditions made certain major aluminum producers in Brazil to curtail their production. The major aluminum producer in Brazil, Alcoa and BHP Billiton Ltd (JV) together curtailed about 244000 aluminum smelting capacity. The export of aluminum for the H1 of 2014 went down by 29%. In 2015, Brazil domestic industry is estimated to become a net importer of aluminum. In global level, aluminum markets are expected to face huge supply deficits in the 2014 and 2015. The supply deficits are expected to be in the range of 1 million ton and 1-1.5 million ton in 2015. Further it is estimated that the aluminum price would increase by about 4.6% over the period 2014 and 2015. The Brazil automotive industry highly depends on the domestic foundry industry for the supply of aluminum die castings. With the capacity curtailment and with increased electricity price there could be supply security issue for aluminum castings for the future demand of Brazil?s automotive sector.