ALUMINUM IN BRAZIL: MAJOR CHANGES IN THE PAST 15 YEARS
By Marcelo Massarente, Antonio Serrano, Leticia Machado, Luciana Hara, and Victor Frazão
Marcelo Massarente is a partner, Antonio Serrano is a manager, Leticia Machado
is a consultant, and Luciana Hara and Victor Frazão are associate consultants
at Bain in São Paulo.
Copyright © 2013 Bain & Company, Inc. All rights reserved.
Content and Design: Bain Brazil
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Contents
1.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.
Aluminum demand: consumption history and outlook . . . . . . . . . . . . . . . . . . . . . 3
3.
Value creation potential in a scenario of locally met demand . . . . . . . . . . . . . . . . 7
4.
The competitiveness challenge in some fronts and risks to the entire value chain . . . . 9
5.
Foreseen impact on the aluminum industry and the Brazilian economy . . . . . . . . 15
1
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
1. Introduction
Over the last 15 years, few industries have undergone structural changes so powerful as the aluminum industry
in Brazil. These shifts brought about a new reality on both the supply and the demand side.
Take the upstream segment. Brazil was once the world’s sixth largest producer, a major player with an integrated
chain from bauxite mining to primary aluminum production, or smelting. Alternatives to expand the smelting capacity were actively discussed, with a consistent focus on energy self-generation options to boost competitiveness.
Recycling was a big promise, mainly as a way to guarantee that often informal players could have access to the
metal—or as an attempt by some players to hedge their costs consonant to their needs.
In downstream fabrication, the debate centered on how to boost demand, which for long seemed sluggish. Accordingly, there was research on technology developments for steel and plastic replacement, on how to foster can
adoption in the beverage industry, and even on vertical integration options in consumer markets to encourage
the use of the shiny metal.
Fifteen years later, we find an industry with a very different agenda. Discussions on how to bolster demand continue, but the focus now is on finding ways to go above and beyond Brazil’s intrinsic potential. The debate has
intensified around ways to ensure competitive supplies, particularly for two components of the aluminum chain:
primary production and downstream fabrication.
This article will explore some of these shifts and advance a few predictions on Brazil’s aluminum chain potential
for value creation. We will also take a closer look at the challenges the industry will face if it is to realize that potential over the next decade.
2. Aluminum demand: consumption history and outlook
Aluminum demand in Brazil has seen strong growth in recent years and should remain high in the near future.
Although the competitive advantages of aluminum relative to steel and plastic—recyclability, corrosion resistance,
mechanical strength with lower specific weight, and so on—have long been touted, aluminum was always perceived as an overly expensive material.
A combination of rising incomes and greater awareness of sustainability issues created the conditions for that
demand to begin materializing. Accordingly, domestic demand in Brazil, which fluctuated between 650,000
metric tons and 750,000 metric tons from 1998 to 2004—with no actual growth—, effectively doubled in the
following ten years, jumping to over 1.4 million metric tons in 2013 (see Figure 1).
Today, four industries account for three quarters of aluminum consumption in Brazil (the same quartet behind
most of the demand for the metal globally): Beverages (packaging), Transportation, Construction, and Electricity (see Figure 2).
3
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 1: Brazil has seen strong growth in aluminum consumption in recent years
Apparent aluminum consumption
(thousand tons)
1,500
DP)
xG
5
: 7.
GR
CA
2.1
%(
1,000
CAGR: 1.1% (0.4x GDP)
500
0
1998
2004
2013E
Source: ABAL, IBGE, press clippings
Figure 2: Four industries account for three quarters of aluminum consumption in Brazil
Aluminum consumption, by industry
(2012, thousand tons)
75%
100%
29
19
16
12
25
Total=1,428
8
17
12
80
11
67
60
6
84
88
30
40
83
Foundry
Cables & Wires
20
30
16
Packaging
Destructive
Powder
14
0
Others
Transportation
16
6
Construction
4
Electricity
Source: ABAL Statistical Yearbook 2012
4
Extrusions
Foils
Sheets
Others
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
All four industries grew at a faster clip than the country’s GDP in the period, and saw aluminum consumption
grow (see
Figure 3). Going forward, the outlook remains positive. Unlike steel and cement, widely used dur-
ing a country’s infrastructure build up, the growth curve of aluminum consumption x national GDP can often
slow down, but won’t revert past a certain level of economic development (see
Figure 4).
Brazil should be no exception. The four industries that respond for the bulk of aluminum consumption in the
country show very positive growth prospects. Also, in all of them there are forces pointing to a higher intensity of
aluminum usage. For instance, in the Brazilian auto industry, the aluminum content per vehicle remains small
relative to other countries. Also, emerging trends in these countries should further increase the potential demand
of aluminum by the auto industry (see Table
1).
When all these drivers are factored in, it seems reasonable to expect a continuing growth of consumption at
twice the GDP rate for some time. By our estimates, Brazil could already be consuming between 2.4 million
tons and 2.8 million tons by 2020. Even at these levels, the country would still remain within the expected per
capita consumption range, considering GDP forecasts at the end of the decade. While it took nearly 20 years to
add 1 million tons to total consumption, it is now estimated it will take only seven years to add 1 million tons
more (see
Figure 5).
Figure 3: The industries below grew at a faster rate than GDP over the period, and saw aluminum relative
consumption grow
Growth rate of major aluminum consuming industries
Average annual growth 2004-12 (%)
CAGR
aluminum
ton (2004-12)
3.5
Construction
6.0
5.5
Transportation
Beverages
(Packaging)
Higher aluminum consumption intensity
5.2
11%
• Increasingly, aluminum is used as building material for window
frames, structures, and ceilings—mainly for aesthetic reasons,
durability, and thermal efficiency
5%
• Aluminum has advantages relative to steel—such as greater
security (energy dissipation in collisions) and reduced weight
(resulting in lower fuel consumption and pollutants emission)
10%
• Changes in consumer habits (individual, occasion, and so forth)
have boosted the share of cans in the packaging mix—over 40
percent now for the beer segment, up from ~30 percent
GDP
0
2.0
4.0
6.0%
Note: Construction: sales; Beverages: beer and soft drink sales, in R$; Transportation: number of vehicles manufactured
Source: Nielsen Tendências, ANFAVEA 2013 Yearbook, IBGE
5
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 4: Aluminum consumption should grow in Brazil as average income per capita rises
Apparent aluminum consumption versus GDP (PPP) per capita (2011)
Cement consumption versus GDP per capita (2010)
1,000
Kg per capita
60
Belgium
40
600
400
200
Kg per capita
0
Germany
Japan
Austria
Sweden
China
UK
Turkey
Mexico
India
0
Brazil
Romania
Canada
Argentina
United States
Australia
France
Ireland
Finland
South Africa
20
10
20
30
40
50
GDP per capita (2010 US$K, PPP)
60
Steel consumption versus GDP per capita (2010)
1,000
Kg per capita
Italy
20
0
Swiss
Slovenia
0
800
40
60
GDP per capita (US$K, PPP)
800
600
400
200
0
0
10
20
30
40
50
GDP per capita (2010 US$K, PPP)
Source: ABAL, EIU, WorldBank, ABM, International Cement Review, SNIC, IMF, Bain analysis
Table 1: Automotive industry
Aluminum demand is about to rise in the auto industry, with plenty of benefits
The auto industry is actively looking for solutions to improve the fuel efficiency of cars and reduce carbon emissions. In this
scenario, aluminum will be a key material.
Luxury car makers already make all-aluminum cars (except for interiors)—think of the Audi A8, the BMW 6 Series, the
Mercedes-Benz SLS, and the Range Rover Vogue. Now, the trend is also reaching basic models: the new generation of
the F-150 truck introduced by Ford, leader in the full-size pickup segment in the U.S. market, will have an aluminum body.
Aluminum has plenty of room to grow in the Brazilian auto industry, where the average aluminum content per vehicle
stands at around 110 pounds—whereas in the U.S. and Europe that figure exceeds 300 pounds. A new government
program to boost vehicle technology innovation (Inovar Auto) should raise aluminum demand by the industry, as tax
breaks for cars that reach a set level of energy efficiency should fuel the drive for lighter, more efficient vehicles—with
lower carbon emissions to boot.
Source: Exame magazine, ABAL
6
60
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 5: Aluminum consumption should continue to grow at around twice the GDP rate in the coming
years, and may reach 2.4-2.8 million tons/year by 2020
Brazilian domestic aluminum consumption
(million tons)
3.0
2.4 - 2.8
CAGR: 7-9%
(~2x GDP)
2.0
CAGR: 1.1%
(0.4x GDP)
1.0
0
CAGR: 8.3%
(2.2x GDP)
0.7
0.8
1998
2004
1.4
2012
2020
Source: ABAL, Bain analysis
3. Value creation potential in a scenario of locally met demand
Until now, demand has been met locally, with future growth prospects opening a huge value creation potential.
A closer look at capacity, output and trade balance data from different chain segments up to 2012 (see
6 and 7) shows that Brazil...
Figures
a) ...has easily satisfied the domestic demand and became a strong exporter of Bauxite and Alumina;
b) ...has met the demand of Primary Aluminum and became a net exporter, although the surplus is in steep decline;
c) ...has made the investments required to meet the demand of downstream Fabrication, but saw its trade balance enter negative terrain as competitiveness deteriorated.
As a result, the Aluminum chain managed to add significant value domestically. Investments in the past five years
exceeded the mark of R$10 billion, with over R$20 billion in tax receipts. In 2012, the chain had gross annual
revenues of around R$40 billion (~ 4 percent of industrial GDP) and employed more than 200,000 workers in
direct and indirect jobs.
7
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 6: Brazil met the demand in Bauxite, Alumina and Primary Aluminum, but saw the trade balance
enter negative terrain in Fabricated products
Net imports/exports (thousand tons)
Bauxite
Alumina
7,254
6,203
6,776
6,373
6,745
7,224
4,478
1,913
2004
2008
2010
Primary Aluminum
806
2012
2004
153
719
2004
2008
2010
2010
2012
Fabrication
“Captive exports”
agreements account
for ~ 50%
524
2008
127
390
6
2012
2004
2008
2010
-37
2012
Source: ABAL
Figure 7: Despite the negative trade balance, the downstream Fabrication segment in Brazil has installed
capacity to meet all import needs
Operational installed capacity
(thousand tons)
100%
34,956
11,058
7%
20%
1,688
1,298
17%
24%
4%
80
5%
60
695
66%
48%
27%
3%
40
80%
Use with import
substitution*
71%
52%
20
49%
28%
0
Capacity closed in
the last 5 years
Idle capacity
Exports
Domestic use
Bauxite
Alumina
Primary
Aluminum
2013E
Rolled and
Extrusions
2013E
*Usage rate if imported material were locally produced
Source: ABAL, press clippings
8
Wires, Cables
& Casts
2013E
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
If the entire projected demand for 2020 could be continually met mainly by the domestic industry, and if all the
for-export Bauxite and Alumina projects announced so far went ahead, Brazil could reap even better results (see
Figure 8):
a) investments of ~US$15 billion - US$20 billion (2013-2020 aggregate);
b) ~US$40 billion in tax receipts (2013-2020 aggregate);
c) over 100,000 new direct and indirect jobs created.
Figure 8: Potential value creation in Brazil’s aluminum chain if the supply remained largely local
Projected potential of the aluminum chain in Brazil
Upstream
US$ billion
(2013-2020 aggregate)
40
~40
30
20
Downstream
15-20
10
Upstream
0
Investment
in capacity
expansion
2020
(∆2012)
Bauxite
Alumina
Primary
aluminum
Output
(million tons)
~50
(+45%)
~15
(+55%)
1.8-2.0
(+30%)
Downstream
2.3-2.7
(+80%)
TOTAL
Sales
(US$ billion)
~$15
(+90%)
~$25
(+120%)
~$40
(+110%)
# direct jobs
(thousands)
~40
(+30%)
~145
(+70%)
~185
(+60%)
# indirect jobs
(thousands)
140
(+55%)
Tax receipts
Note: 2020 figures estimates made with US$2.693/ton at the LME (WorldBank forecast)
Source: ABAL, CNI-ABAL, WorldBank, Bain analysis
4. The competitiveness challenge in some fronts and risks to
the entire value chain
The problem is that, unlike in the early 2000s, the competitiveness of the Brazilian chain is now being questioned, and much of that potential outcome is at risk.
In the case of Bauxite and Alumina, the outlook remains mostly positive—the big question is when, and in which
order, announced projects totalling almost 5 million tons/year will be implemented. However, the same cannot
be said of the Smelting component.
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Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
In recent years, Brazil dropped to 8th from 6th largest producer globally, and saw 18 percent of its installed capacity
closed (see
Figure 9). The main barrier in the Primary segment is poor competitiveness in the cost of electricity.
In the most competitive countries electricity accounts for less than a quarter of total production costs, with energy costs below US$35/MWh; in the new frontiers of Africa and the Middle East, that figure can drop to less than
US$25/MWh. Meanwhile, in Brazil, according to ABAL’s 2012 Sustainability Report, the average energy cost
stands at US$68/MWh—accounting for over 40 percent of total production costs.
To make matters worse, a great chunk of the country’s installed capacity operates on outdated technology (Soderberg, or Pre-baked with less than 180 kA), with higher specific energy consumption. With zero prospects of cheap
energy, Smelting operations in Brazil not only fail to justify any investments in technology upgrades, but are also
one of the first targets for closure when global companies are pressed to reduce costs.
Take the case of Alcoa, whose Brazilian operations represent around 10 percent of its global capacity. The company recently announced plans to shrink its global capacity by 11 percent. The closures in Brazil represent around
a quarter of the overall cut, clearly demonstrating that the installed capacity in the country is not competitive when
compared to Alcoa’s remaining alternatives.
It’s worth noting that China, the world’s largest producer, has no cheap energy, and is one of the highest-cost
producers in the current supply curve. But the difference is that, in China, the industry structure is actively managed by the central government, forcing the closing of less competitive capacity (by 2005 all Soderberg had been
Figure 9: In recent years, Brazil has seen the closure of 18 percent of its installed capacity for Primary
Aluminum production
Installed production capacity of Primary Aluminum
(thousand tons)
2,000
1,688
1,593
1,533
Closure examples
1,539
1,500
1,395
• August 2013
- Alumar (Alcoa, BHP Billiton, and RioTintoAlcan joint
venture) announced cuts totalling 92,000 tons
- Alcoa announced production cuts in Poços de Caldas
(Minas Gerais state) totalling 32,000 tons
1,000
• May 2013
- Novelis cut output by 20,000 tons in Ouro Preto
(Minas Gerais)
500
Soderberg
Pre-baked
0
2009
2010
2011
2012
2013*
* As of August 2013
Source: ABAL, press clippings, Bain analysis
10
• 2010
- Novelis closed Aratu (Bahia state) plant (60,000 tons)
• 2009
- Valesul shut down the Santa Cruz (Rio de Janeiro)
plant, with 95,000 tons of installed capacity
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
shut down) and encouraging the opening of new smelters with very high scale and technology (> 400 kA and scales
of over 700,000 tons/year), with lower specific energy consumption and production costs, lessening the problem.
The loss of competitiveness in smelting operations, combined with growing demand, will mean that Brazil will,
in short notice, become a net importer of aluminum. If we take the balance of exports minus imports from 2012
(390,000 tons), and consider that approximately 230,000 tons from that sum are captive exports from Albrás to
Japan (due to the equity participation of the NAAC consortium in the company), and thus not available for local
consumption, then add the approximately 140,000 tons of capacity closures seen at Novelis and Alcoa, it is easy
to see that the country has no maneuver space left. All it takes for Brazil to become a de facto net importer as early
as 2014 is some of the rumors about capacity closures at other players proving real.
It is worth noting that the use of scrap as a substitute for primary aluminum will not be able to solve that conundrum. Brazil has become one of the largest users of scrap; the country has now reached a level from which significant growth is a tough challenge (see
Figure 10). Short term scrap (cans) is now almost 100 percent recy-
cled, while longer term scrap still reflects a period of sluggish demand, and will take some years to change levels.
Importing scrap is an option, albeit one increasingly complicated. Many countries restrict the export of crude
scrap (including South American neighbors), and many potential scrap consumers in Brazil are small businesses
unlikely to have access to financing to bring in significant volumes.
Figure 10: Scrap use in Brazil doubled between 2000-2012, making the country one of the largest scrap
consumers in the world
Brazil is one of the largest users of recycled
aluminum in downstream fabrication
Scrap use in Brazil has doubled since 2000
Scrap consumption/downstream fabrication
Scrap consumption growth
(thousand tons)
40%
600
35
30
20
26
28
~2x
400
18
200
10
0
508
30
China
USA
Japan
UK
Brazil
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: fabrication output = scrap consumption + primary metal consumption
Source: ABAL, COMTRADE 2011
11
2012
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
The current competitive outlook for downstream Fabrication is not shiny, either. As the country’s employment
rate and income grew, and the currency appreciated, Brazil has ceased to be a comparatively cheap-labor country.
Manufacturers are also affected by costly energy (albeit in a much lesser degree than smelters).
Add to that the fact that a large portion of Brazilian manufacturing base is low scale or technologically outdated.
There are a few exceptions, of course—including Novelis’ plant in Pindamonhangaba (in São Paulo state) and
some CBA assets, to name a few examples in Rolling. Extrusion is another case in point: while plants in Brazil
often operate on one or two presses, with output of less than 10,000 tons/year (with only the top two or three
reaching the 30,000 tons to 50,000 tons range), in China it is not uncommon to find plants with over 50,000/year
output, and some have plans to surpass the 100,000/year mark very soon.
The impact of aluminum price on total costs varies for each segment of downstream Fabrication—but it is, at
best, close to 75 percent of total (see
Figure 11). If a shortage of primary aluminum leads to a steep rise in prices,
the impact on the entire chain could be brutal.
The need to import primary aluminum will bring additional challenges to the downstream industry. First, a longer
chain increases the need for safety inventories, as well as the risk of a mismatch of base metal prices from the
time of purchase to that of sale—amplified by the recent concerns over record volatility in global and local premiums (see
Figure 12). Second, the current market is quite unfavorable to physical flows of metal, with large
inventories locked in dedicated warehouses to lend support to speculative moves encouraged both by low prices
Figure 11: The impact of aluminum price varies for each segment of downstream Fabrication; at best, it is
close to 75 percent of total costs
Cash cost share
(%)
100%
10
25
20
80
60
90
40
75
80
20
% other costs
% costs with the metal
0
Rolled
Extrusions
Wires, Cables & Casts
Note: aluminum cost based on LME + premium
Source: Bain estimates
12
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 12: Local premium volatility is close to an all-time high
Ingot historical premium
(US$/tons)
2013
550
Brazil
Premium
Above
US$400
500
450
400
350
2009-12
300
250
200
150
Brazil Premium
US$200-300
Before 2008
Brazil Premium
US$150-200
100
Global Premiums
- Before 2008: up to US$150
- 2009-2012: up to US$250
- 2013: up to US$300
Brazil Premium
- Before 2008: US$150-200
- 2009-2012: US$200-300
- 2013: above US$400
Rotterdam DP Premium
Japan CIF Spot
50
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
US Midwest Premium
Source: CRU website, press clippings, interviews
on the LME and low interest rates. Last, we have the logistic infrastructure problems still plaguing international
flows in Brazil, as well as import tariffs.
The continuing loss of competitiveness in downstream Fabrication would have different impacts on each of the
segments in that chain. In Rolling mills, the most globalized segment of the downstream chain, the reduced competitiveness should be reflected in a strong increase in imports of Sheets and Foil.
Currently, we see capacity being installed beyond the domestic consumption potential in China and the Middle
East, in large and modern facilities. If the primary aluminum premium in Brazil continues to rise, those new
plants would become even more competitive relative to the Brazilian product, even when current import tariffs
are factored in. This risk is amplified by China’s decision to tax exports of Primary Aluminum, which guarantees
the local industry artificially lower prices than in the global market, encouraging local processing for export. Recently, we’ve seen imports of rolled products rise in Brazil due to currency appreciation, with growth exceeding
20 percent in sheets, for instance.
We’ve also seen cases of large-scale imports of finished products to replace domestic production. For instance,
air conditioners and pans, segments that traditionally consumed aluminum plates and sheets, are produced
less and less locally.
13
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Loss of competitiveness in the Extrusion segment should bring about another phenomenon: reduced demand
and replacement by steel or plastic. Worldwide, except for high-performance extrusions or highly standardized
product, this is a local, not global, market. The complexity involved by the sheer number of different items, combined with logistics inefficiencies to importing a less dense and more sensitive material, make imports almost
unfeasible. As a result, even as higher costs will likely be reflected in higher prices and lower margins, the supply
of extrusions should remain mostly local, albeit probably smaller.
Another potential impact in the Extrusion chain involves the supply of Billets, with its accompanying implications. A shortage of Primary Aluminum would most likely lead to imports of Billets, as opposed to Ingots for remelting. In spite of the availability of Billets in the global market, the extrusion industry in Brazil is highly fragmented and still makes ample use of Billets. In that scenario, we could see the disappearance of small players, or
the emergence of a thriving business for importing and reselling Billets.
The Foundry segment should be more severely hit. The effect is quite straightforward: loss of competitiveness
should lead to imports of finished products, especially auto parts. Already, the auto parts chain is struggling under competition in castings, a situation that will only worsen with shortages of local metal (see Table
2).
Table 2: Manufacturers’s testimonies
Industries that rely on aluminum as a material input already feel the impact of lost competitiveness by the local industry
“We buy ingot and liquid aluminum from two major suppliers. As the production capacity of primary aluminum falls, and
concerns over supply continuity rise, we’ve decided to greatly increase our inventories.”
Manufacturing company
“Now we are working with lower levels of [ingot] inventories, but the price has been rising a lot. On the other hand,
importing this type of product is very difficult, since that would require maintaining higher inventories (30 days, instead of
the regular 2-3 days), plus all the logistical challenges (delivery delays, risk of port strikes, long waits for customs clearance,
and so forth).”
Manufacturing company
“Since our customers are automakers, it is very difficult to pass the [cost] increase on, squeezing our margins.”
Manufacturing company
“While [government incentive program] Inovar Auto encourages the use of aluminum in cars, the metal price is a challenge
to the local auto parts industry. Since mid-2012, imports of engine blocks (semi-finished products) have grown, as local
competitiveness fell.”
Automotive industry expert
14
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
5. Foreseen impact on the aluminum industry and the
Brazilian economy
The reduced competitiveness in both the Primary Aluminum and the Fabrication segments will certainly have a significant impact on how much will be captured of the value creation potential discussed at the beginning of this report.
It is hard to predict the exact dimension of this impact, but it is reasonable to imagine a Primary Aluminum scenario
in which not only the Brazilian industry does not add capacity, but continues to see closures. In that case, Brazil
would preserve only the most up-to-date facilities, or the ones with a high proportion of self-generated energy.
Also, the industry wouldn’t see the required large investments in Hot Rolling operations or additional capacity to billets
remelting. In a more pessimistic scenario, we wouldn’t even see the investment needed to sustain the currently
installed capacity in Fabrication, which would contribute to a gradual fall in the local supply.
A relatively straightforward simulation shows that scenario would result in a loss of approximately 35,000 direct jobs;
industry-wide revenues would fall around 20 percent, with less investment and taxes collected. In addition, Brazil’s
trade balance would drop to around US$2.5 billion, from US$5 billion (see Figures 13 and 14).
A major side effect would be a reversal in the current trend of falling industry informality. In the struggle for survival,
it is not hard to fathom some players favoring the informality risks over the certainty of shutting down operations.
The impact is clear: less tax receipts.
Figure 13: In a scenario of no competitiveness recovery, the Brazilian production of Primary Aluminum
and Fabricated products would be below potential
Primary Aluminum and downstream Fabrication production, 2020
(million tons)
3,0
2,5
2,0
1,9
-36%
-27%
1,9
1,2
1,0
Scenario of no
competitiveness
recovery
Potential scenario
0
Primary aluminum
Fabricated products
Source: ABAL, CNI-ABAL, Bain analysis
15
Aluminum in Brazil: major changes in the past 15 years | Bain & Company, Inc.
Figure 14: Loss of competitiveness in the aluminum chain has substantial impact both on the industry and
on the Brazilian economy
-20%
~150
Downstream
5.5
Upstream
Upstream
Potential
5.1
2.5
Downstream
-0.3
Total
-3.0
Not regaining competitiveness
Investments (US$ billion) - 2013-2020
15-20
Downstream
5.4
Not
regaining
competitiveness
~185
Trade balance (US$ billion) - 2020
Potential
Direct jobs (thousands) - 2020
Tax receipts (US$ billion) - 2013-2020
-30%
~40
10-15
-15%
~35
Downstream
Upstream
Upstream
Potential
Not regaining competitiveness
Potential
Not regaining competitiveness
Source: ABAL, CNI-ABAL, WorldBank, Bain analysis
In the long run, it is paramount that Brazil regain its competitiveness in Primary Aluminum production. Policy-led incen-
tives to the technological upgrading of facilities are needed, as well as investments in competitive energy self-generation, and reducing grid power costs. As stated before, ensuring competitiveness in the upstream chain would
help keep downstream components healthy.
The Fabrication segment also needs boosting, either with structural changes in conversion costs (for instance, through in-
centives to upgrade the manufacturing base), or acting on certain drivers to prevent a shortage of Primary Aluminum
to downstream fabrication short- and mid-term (for instance, by improving the importing logistics, encouraging
the opening of LME warehouses in Brazil, working on import tariffs, and seeking tariff preference agreements).
A case in point is Japan. Once a major producer of Primary metal, Japan lost its competitiveness in this area—and
with it, all manufacturing—, but managed to keep the Fabrication segment alive and competitive to this day. South
Korea is another example. The country has no Primary production, but has significant activity in Fabrication. In
a potential scenario for Brazil, the same would happen.
But even that would be an unfortunate development. Unlike Japan, Brazil has vast amounts of competitive feedstock (the country is home to the world’s fourth largest Bauxite deposits). For a long time, it was not only selfsufficient, but an exporter up and down the value chain. When, at last, a solid and thriving demand has developed domestically, Brazil may be doomed to become an exporter of Alumina, a major importer of Primary metal, and,
in all likelihood, of Fabricated products.
16
This work is based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of interviews with industry
participants. Bain & Company has not independently verified any such information provided or available to Bain and makes no representation or warranty, express or implied,
that such information is accurate or complete. Projected market and financial information, analyses and conclusions contained herein are based on the information described above
and on Bain & Company’s judgment, and should not be construed as definitive forecasts or guarantees of future performance or results. The information and analysis herein does
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