2019 PREVIEW: Al producers back to investing in Brazil with demand set to grow

Expectations of further recovery in Brazilian aluminium demand are prompting investments that will increase production capacity in the country, while companies try to strengthen competition with imports.

Novelis and Companhia Brasileira de Alumínio (CBA) are expanding at their sites in the southeastern state of São Paulo on estimates that consumption from packaging, transportation and construction businesses are set to grow in the next decade.

Novelis revealed on November 13 a $175-million plan to enhance recycling, re-smelting and rolling production at Pindamonhangaba, a city in São Paulo. CBA, owned by Brazilian conglomerate Votorantim, plans to invest $7.7 million in expanding its aluminium billet capacity, it said on December 11.

Aluminium products’ apparent use decreased for three consecutive years until 2016, before remaining almost unchanged year on year in 2017 at 1.26 million tonnes – its lowest since 2009 – according to producer association Abal. Demand has recovered in 2018, Abal said, and should end the year at 1.4 million tonnes, still below the all-time peak of 1.51 million tonnes reached in 2013.

The Brazilian aluminium industry is optimistic about president-elect Jair Bolsonaro due to his reputation for being market-friendly and because he has committed to engage in comprehensive tax reform. But there are two sides to this story, with producers concerned that local industry could be damaged by Bolsonaro’s plans to encourage imports.

“Numerous market participants believe the new federal government could unlock investments across industries that consume aluminium,” one trader told Fastmarkets. “If Bolsonaro cut or remove import duties entirely, as he said during the campaign, the next few years could be very good for our segment,” another trader said.

Brazilian aluminium imports reached 522,600 tonnes between January and September of 2018, compared to 378,200 tonnes a year before. The import share of consumption is close to 45%, and growing.
“We calculate domestic supply went up by around 7% in 2018, while imports grew by 36%, especially from China,” Abal’s president Milton Rego stated.

Fastmarkets assessment of the P1020A import premium is at its lowest level since January 23, with some sources believing there could be an additional decrease now that the United States has decided to remove sanctions against UC Rusal. This market environment has already sparked price discounts by local producers, according to sources.

Fastmarkets assessed aluminium ingot premiums in main Brazilian ports at $160-170 per tonne cif on December 18, a significant decrease from this year’s highest level of $290-315 per tonne on April 24.

The premium paid for aluminium extrusion billet was assessed at $300-330 per tonne cif on December 7, down from the $380-400-per-tonne peak on May 18.

Abal has asked Bolsonaro and his soon-to-be minister of economy Paulo Guedes to slow down on import tariff cuts, if there are to be any, and only to action them in parallel with the lowering and simplifying of corporate taxes.

“We find ourselves in a very tough spot, in the midst of two giants clashing,” Abal’s Rego said regarding trade conflicts between China and the US. “We cannot neglect this environment. Aluminium trade is very different than it was a year ago and the whole world is closing themselves off to trade via protectionism.”

Finished aluminium goods consumption is historically linked to gross domestic product (GDP), at a rate of 2:1, CBA’s primary operations director Luis Jorge Nunes said. That means demand could grow up to 6% in 2019, according to his calculations. The transportation and construction segments have more room to grow, CBA’s executive added.

Novelis’ chief operating officer in South America, Francisco Pires, believes the company’s own sales volumes in Brazil could increase by more than 5% in 2019. Novelis mainly supplies the domestic packaging segment but does not disclose regional figures.

“Meanwhile, we are still trying to understand what a trade opening would mean,” Pires said. “This move is somewhat worrisome, as no large country is currently cutting import duties.”