Brazilian aluminium import market to take a backseat: 2023 preview
Supported by stronger market conditions and higher production capacity, the Brazilian aluminium industry will depend less on imports and will instead prioritize locally-produced metal in 2023, market participants told Fastmarkets
Decisions to expand capacity and make the country’s aluminium market more closed off to foreign material supported these expectations, participants said.
Anticipating that imports would become less attractive and more difficult to enter the country, domestic producers were already raising premiums for deliveries in the first quarter of 2023.
Fastmarkets’ latest assessment of the aluminium P1020A premium, delivered São Paulo region was $380-420 per tonne on December 28, up by $30-40 per tonne from $340-390 per tonne a fortnight earlier.
Meanwhile, Fastmarkets’ assessment of the aluminium P1020A premium, cif dup Brazilian main ports was $280-300 per tonne on December 28, stable from the previous fortnight, when it had narrowed downward by $10 per tonne from $280-310 per tonne on November 29.
The import premium hasn’t risen since May 31, when it increased by 1.94% to $520-530 per tonne, and has been in a freefall ever since.
“This is the moment you sit and wait,” one trader source said. “On one hand, it will be more difficult to bring in foreign metal due to duties, but on the other, a strong currency exchange policy from the new government can make imports much cheaper and bring new life into this market.”
A second trader source also said that there would be difficulties importing aluminium billet: “The import market will for sure shrink for both ingots and billet, because domestic premiums are just more attractive.”
Fastmarkets assessed the aluminium 6063 & 6060 extrusion billet premium, cif Brazilian main ports at $480-530 per tonne on December 30, unchanged on a fortnightly basis, but down by $70 per tonne from $550-600 per tonne on December 2.
The premium was higher than $600-650 per tonne DDP offered domestically, because duties and overall costs would bring import prices close to $700 per tonne DDP.
On the other hand, higher scrap needs meant that secondary supply tightened in Brazil, making buyers turn more to imports.
“It has been a dogfight for scrap here in the past few months. Some producers need more input and there is simply not enough generation,” the first source said.
Changes to the market
Four factors were key in contributing to this shift in the Brazilian alumimium market: two regarding domestic output, and two in foreign trade.
The first one was the Alumar smelter, in the northeastern Maranhão state, restarting operations after remaining idled for seven years. The smelter, which is jointly owned by Alcoa and South32, has 447,000 tonnes per year (tpy) in installed capacity and began re-energizing its potlines around April 2022.
This addition increased Brazilian installed capacity for primary aluminium to nearly 1.4 million tpy, a level not seen since 2014.
Second, Novelis completed a major expansion in rolling aluminium capacity in September 2021, followed by an announcement that the company would invest in a second expansion that is expected to be completed in the first half of 2024. The projects aim at increasing capacity to 750,000 tpy from 580,000 tpy.
Recycling capacity at Novelis’ Pindamonhangaba plant, in the southeastern São Paulo state, was increased to 490,000 tpy from 390,000 tpy, and Companhia Brasileira de Alumínio (CBA), in addition to restarting its No3 smelting line and planning to do so for the No1 line, will add secondary billet capacity and increase recycling to 180,000 tpy by 2023.
In foreign trade, 2022 marked the end of a duty-free import quota for primary aluminium, which had been in effect in Brazil for eight years. In addition, the government will apply a 14.88-14.93% countervailing duty on Chinese rolled aluminium products like sheet and foil from April 2023.
“If you take into account all the new primary metal capacity and our scrap recovery rates, you realize Brazil will be more than well-supplied next year,” an industry source told Fastmarkets.
Brazil’s aluminium scrap recovery rates are around 55%, higher than the 28% global average. However, soaring consumption has been leading to a surge in imports in recent years due to tight domestic supply.
A third trader source said that, “the truth is the industry resolved some of their cost issues, [London Metal Exchange] prices are healthier and they wanted that market share from imports, so they invested and now can supply a large portion of the country’s needs.”
Aluminium consumption in Brazil has been growing, lending support to these capacity increases. Demand for the metal hit an all-time high in 2021 and is expected to have risen 4.93% to 1.66 million tonnes in 2022, according to industry group ABAL.
After several smelters closed in the last decade, primary aluminium imports were pivotal in ensuring that climbing end-user demand was met. In 2022, for example, 350,000 tonnes were reserved in the import quota for cargoes to enter into the country without being subject to duties, which were cut to 4.80% until December 2023.
But Brazilian smelters were already focusing on offering metal at lower costs and gaining market share. Only 187,130 tonnes in licenses had been granted under the quota by December 9.
“Volatility for foreign exchange [rates], LME prices and global premiums played a part in making imports uncompetitive,” the first trader source said. “With CBA selling more primary aluminium and Alumar coming back [online], domestic material was the safer choice.”
Local producers were more aggressive than usual, which was reflected in the slim margin between delivered and import premiums, which was at the lowest point since Fastmarkets began assessing both markets in 2014. Through December 13, the DDP premium was 5% higher than CIF levels on average.
Since then, the difference between the premiums has increased to 26%, compared with 24% in 2021 and at least 40% in previous years.
“There has been no competition for imports, especially in the second half [of the year],” the second trader source said.
In addition, the countervailing duties on Chinese aluminium sheet and some types of foil are expected to change the rolled products market significantly.
In January-November 2022 – the latest data available –, Brazil imported 121,435 tonnes of rolled products, a 16.88% year-on-year increase from 103,893 tonnes. Chinese material accounted for 85,108 tonnes, 70.09% of the total, up by 21.05% from 70,306 tonnes, 67.67% of the total, in the same comparison.
Attention to scrap
“Verticalization and fair trade are key to strengthening the Brazilian aluminium industry,” ABAL executive president Janaina Donas told Fastmarkets. The next step was to focus more on scrap generation, she added.
Brazil’s aluminium scrap generation hit a record high of 719,900 tonnes in 2021 — up by 10.46% from 651,700 tonnes in 2020 — and became a viable alternative for primary metal during 2022, along with scrap imports.
In the first 11 months of 2022, for example, the country imported a record 187,803 tonnes of aluminium scrap, a 41.57% jump from 132,659 tonnes in the corresponding months of 2021. Most of the material was imported from Mexico (82,494 tonnes) and Paraguay (21,071 tonnes).
“We need to incentivize and regulate the scrap sector, which will be central in helping reduce carbon emissions for our industry even further,” Donas said, adding the country already emits less than the world average — 4.5-6.5 tonnes of CO2 equivalent per tonne of primary aluminium compared with 16 tonnes of CO2 equivalent per tonne of primary aluminium globally.