A drought has reduced water reservoirs in Brazil, mainly in southeastern and midwestern states, leading to an electricity cost spike and fears of blackouts or even mandatory power rationing that could affect metals supply and demand.
Steelmakers are expected to face few direct impacts from lower energy supply, since most producers generate their own electricity.
“There is always some affect in steel production, but it will be likely a small impact,” according to Carlos Loureiro, president of national flat steel distribution association Inda.
“There is a movement to change production to periods where power consumption is lower in the country, but so far we have no signs of any company reducing steel consumption because of the possibility of power rationing," Loureiro added.
Steel output has recovered in the country, balancing supply-demand fundamentals and supporting high domestic prices.
Fastmarkets’ price assessment for steel hot-rolled coil domestic monthly, exw Brazil
was at 7,500-7,800 Reais ($1,400-1,457) per tonne on September 10, unchanged since July 9, when it rose from 7,300-7,775 Reais per tonne on June 11.
But concern has been growing among manufacturers and experts, with end users the weakest link in a potential power shortage.
In May, national power system operator ONS estimated that there could be a 12.7-gigawatt (GW) deficit in November amid the lowest rainfall in 91 years - ever since the country began tracking that data.
Data from ONS shows that, by the end of 2020, 64.84% of the country’s electricity generation came from hydroelectric power plants, with its share dropping to 52.46% in September 2021. According to the country’s ministry of mining and energy, 70% of reservoirs are in southeastern and midwestern regions, where the drought is worse.
In its latest update, on Friday September 24, ONS said southeastern and midwestern reservoirs could finish October at just 12.60% capacity.
To counter the hydroelectric crisis, the Brazilian federal government increased the use of thermoelectric plants, made plans to rearrange power transmission from regions with better supply and launched a program of voluntary power demand reduction.
Companhia Brasileira de Alumínio (CBA), one of two companies in Brazil that still have active aluminium smelters, has decided to adhere to the consumption reduction program
, it said on September 16. But output is expected to be unchanged, shifted to times of the day other than peak demand hours.
In early September, Brazilian steelmaker Gerdau said it was prepared for any energy scenarios. The company generates some of its own electricity, especially at its Ouro Branco integrated mill, where 60-70% of its energy consumption is self-generated.
“We own producing facilities all over the country, and we can move production as needed,” Gerdau vice president and head of Brazilian operations Marcos Faraco said during "Gerdau Day" on September 2.
Higher energy costs
But the announced measures have a downside: Energy generated by thermoelectric power plants is more expensive.
According to energy market intelligence service Megawhat, electricity system charges that were around 5-8 Reais per megawatt-hour (MWh) last year, before the hydroelectric crisis escalated, have risen to almost 40 Reais per MWh.
From October 2020 through July 2021, those total charges amounted to 7.8 billion Reais. Megawhat noted. For the five remaining months of 2021, it is estimated that the cost will total 7.4 billion Reais, it said.
This impact was larger than normal due to thermal plants taking a bigger share of the country’s total electricity generation. ONS said thermoelectric plants accounted for 25.34% of total generation in September; their share was 20.16% at the end of last year.
Higher costs of energy are a concern to 83% of Brazilian industrial companies, according to a poll released in August by Brazilian industrial confederation CNI.
“The risk of energy shortage is real, and everyone is trying to get prepared for it,” CNI energy expert Roberto Wagner Pereira said.
Another issue is the lack of power availability of thermal power plants, mainly due to maintenance work, Megawhat co-chief executive officer Ana Carla Petti told Fastmarkets.
“We are running close to 28% unavailability [of thermal power plant capacity] this year,” Petti said. “The ONS has been asking for maintenance downtime to be postponed, but at this rate, we have [an average of around] 17 GW of power available [of roughly 21 GW total capacity].”
The Brazilian association of major industrial power consumers, Abrace, believes the impact of higher energy costs is already being felt. “We have been paying this bill since late last year,” technical managing director Fillipe Soares told Fastmarkets.
For now, Megawhat does not foresee a mandatory power rationing program in the country, but it believes power shortages may become common during the busiest hours in the afternoon.
But Soares said there are scenarios in which there will be no power deficit.
“In some calculations, the ONS expects this additional power will have to be under contract until November,” Soares said. “If we can cut consumption, there are chances that no power shortage will happen until November.”
But this will depend on the amount of rainfall for the rest of the year, and that is a source of uncertainty, experts say.
The Brazilian rainy season gets more intense in November, fueling hopes that water reservoirs will fill up. But Megawhat emphasized that there is an almost 70% chance that climate phenomenon La Niña will affect the weather between November 2021 and January 2022, potentially reducing rainfall and exacerbating the factors contributing to a potential power shortage.
Up until now, the ONS managed to secure up to 237 MW of energy from its consumption-cutting program for September.
“For now, that is in line with what was expected. There is potential to save more [power] as more companies understand the program and see what results it can bring,” the executive president of Brazilian aluminium association Abal, Janaina Donas, told Fastmarkets.
But Megawhat’s Petti believes it might not be enough.
“Industry participants told us they have many deliveries under contract, which makes an effective power consumption cut harder,” she said. “More bullish estimates talk about a 1.5 average GW reduction, or 2% of 69 GW needed for 2021. This flexibility might be insufficient.”
Power shortage risk
The worst-case scenario, industry groups agree, would be if a power supply shortage were to materialize.
“The aluminum industry is extremely sensitive to this because there is constant electricity supply, and power outages are always a concern,” Donas said.
Energy represents the majority of input costs for the aluminum industry, and a blackout would put equipment at risk.
Fastmarkets’ assessment of the aluminium P1020A premium, delivered São Paulo region
was $360-400 per tonne on September 21, unchanged since August 24, when the assessment rose by $40 from $320-360 per tonne the previous week.
“This voluntary reduction plan is the best solution. This way, we can maintain production, which we could be prevented from doing in the case of a mandatory rationing, and especially in a blackout scenario,” Donas said.
But according to CNI’s latest poll about the issue, 55% believe electricity rationing is likely to occur, while 7% are certain that electricity will be rationed.
“A power deficit would be brutal for industrial sectors [in Brazil],” Abrace’s Soares said.