2017 PREVIEW: Brazil’s aluminium exports will decline as domestic premiums rebound

The main factors that boosted Brazilian primary aluminium exports in 2016 are beginning to wane and exports in 2017 are unlikely to see a repeat of this year’s activity, while domestic premiums are expected to rebound and local demand should at least stop deteriorating.

Brazil exported nearly 300,000 tonnes of unwrought aluminium in the first eleven months of 2016, 9% higher year-on-year, according to the country’s foreign trade ministry. Taking into account expected export volumes for December, Brazil’s aluminium exports for the full year of 2016 are set to hit the highest level since 2013.

The higher volumes can be attributed to increased exports from Votorantim’s CBA and from Hydro, which controls Albras.

Higher volumes from both companies more than offset the drop in exports from Japanese consortium Nippon Amazon Aluminium Co Ltd (NAAC) to Japan, following an annual contract NAAC signed with Alcoa, in which the latter receives metal in Brazil and sells the equivalent volume of ingot to Japan from its global plants. The agreement is expected to continue in 2017.

NAAC is an Albras minority shareholder and traditionally exported all of its share of Albras’ aluminium ingot production to Japan

This boost in overall shipments has brought Brazil back into the position of being a net aluminium exporter in 2016. Primary aluminium metal imports in the year to November were about 226,000 tonnes.

Just two years earlier, Brazil was a net importer of primary aluminium, following a series of capacity curtailments. 

What caused the surge in exports?
“This [increase in exports in 2016] is much more a matter of opportunity than a structural change,” Milton Rego, president of Brazilian aluminium association Abal, told Metal Bulletin.

Brazil’s unattractive premiums and depressed domestic demand are behind the surge in exports, according to Rego.

Domestic premiums for duty-paid aluminium ingot fell 27% in the year to December 15 to an average of $220 per tonne delivered to the Sao Paulo region.

In July, it had fallen to $177.50 per tonne in July, the lowest level since Metal Bulletin started the assessment in early 2014.

Such low domestic premiums have undermined the competitiveness of imported ingot, yet they have not been enough to boost local sales, as the country’s economic recession continued to hit end-user demand hard.

Exporting proved to be a more viable alternative for Brazilian producers than stockpiling – even when taking into account even lower premiums obtained for sales abroad.

The shift toward exports in 2016 made even more sense considering low energy prices seen during the first half of the year, which reduced the attractiveness of selling self-generated energy and encouraged aluminium production once again.

The strengthening of the US dollar against the Brazilian Real provided further incentive for Brazilian aluminium producers to export.

‘Escape valve’
“Exports served as an escape valve in 2016, given the weakness of the domestic spot market. But this export drive seems to be already losing momentum,” a trader said.

The main drivers of higher aluminium exports were waning by the end of 2016: energy prices were rising again, the currency rate was more stable and Brazilian domestic premiums were starting to rebound.

Shipments from the southeastern state of Sao Paulo, where CBA operates, began decreasing in the fourth quarter, the same period in which the company postponed some deliveries in the local market and rescheduled export commitments.

This has contributed to a brief supply tightness in the Brazilian market, bringing some upward pressure on premiums especially in November.

But the hike in the US Midwest premiums was a major driver for Brazilian domestic premiums to start rebounding since mid-November. This is because a large number of contracts and spot deals in the country are linked to the US Midwest premium.

Several sources from all sides of the market believe Brazilian primary aluminium premiums in the domestic spot market should continue to rise at least for the early part of 2017.

“The trend for Brazilian ingot seems to be of further premium increases [in the spot market],” a buyer told Metal Bulletin.

“Yet as much as I want to be optimistic about 2017, the new year will still be one of a lot of challenges and these could limit the potential recovery of demand and premiums,” the buyer added.

Uncertainty over performance in 2017 has led to negotiations for supply contracts lasting longer than in the previous year, but most large deals have already been concluded.

Premiums for contract deals have been higher than the current spot market level, according to industry sources, with most deals being concluded at around the US Midwest flat.

Larger tonnage deals were closed at double-digit discounts to the US Midwest premium.

“A lot of players are leaving contract decisions to the last minute and other smaller and medium-sized ones are either closing deals only for the first quarter or taking the risk of the spot market because no one knows what demand will be like,” a trader said.

Could demand pick up?
The long-awaited recovery of aluminium demand in Brazil could happen, at best, from the second half of 2017 onwards.

“The expected recovery of aluminium consumption has been postponed by [Brazil’s] political agenda, [and] the investigations [of corruption scandals] that have been delaying the recovery of Brazil’s economy,” Abal’s president Milton Rego said.

While demand stopped deteriorating in the second half of 2016, consumption is still expected to post an 8% decline on an annual basis, led by the construction and automotive sectors.

“This will make 2016 as bad as 2015, being the third consecutive year of declines for Brazil’s aluminium consumption,” Rego said.

“The market is getting to the levels [seen in] 2008, with a consumption at about 1.2 million tonnes,” he added.

Production prospects
Given the high level of uncertainties related to Brazil’s economic recovery, Abal expects aluminium production to remain stable in 2017, after increasing to 800,000 tonnes in 2016.

In 2015, Brazil’s only two operating smelters – Albras and CBA – produced a total of 772,200 tonnes of primary aluminium.

A significant change in production volumes will come only with an eventual reactivation of capacity at Alumar smelter, owned by Alcoa and BHP Billiton, Rego said.

Other smelters that closed in recent years are not seen as economically viable to be restarted.

Yet industry sources interviewed by Metal Bulletin did not believe that Alumar’s capacity would come back on-stream in the short term.

Moreover, the potential removal of a cabotage tax (a tax for transporting goods domestically) exemption early next year could raise costs and put the industry under additional pressure, Rego said.

Given all of these factors, it is unlikely that Brazil’s primary aluminium exports will continue to grow in 2017, especially if demand starts to pick up again.

Tax-free import quota
Given the limited demand for imported aluminium, the Brazilian government is expected to announce a reduction of the quota for tax-free imported ingot in January, according to Abal.

“This downward revision is due to the fact that when the quota was initially defined, we expected the consumption of aluminium products to fall by 4.8% this year, but we now see a decline of nearly 8%,” Rego told Metal Bulletin.

Unwrought aluminium importers can bring in a total of 550,000 tonnes of ingot free from the 6% import tax over a two-year period that ends in August 2017.