The water crisis intensifies and the government announces new measures: what are the impacts for actions and for inflation?

SAO PAULO – Amid the worsening of the water crisis, two announcements were made by the Ministry of Mines and Energy and by the National Electric Energy Agency (Aneel) which were closely monitored by the market.

The first announcement was of a new banner for energy tariffs, called “water scarcity”, which will run until April 30, 2022. The banner was raised to R$ 14.20 per 100 kWh and the increase in the bill light will be 6.79%.

In addition, a voluntary market demand reduction program was announced. Whoever saves electricity, from this Wednesday (1) until December 31st, will earn a credit in the January 2022 account, which can reach R$50 for each portion of 100 kWh reduced. To do so, the consumer needs to consume less over this four-month period and achieve an average reduction of at least 10% compared to last year. The measure applies to domestic consumers, commerce and industry.

According to the Ministry and Aneel, the estimated reduction in consumption considering 20% ​​adherence to the program is 1.41% (or 0.9 gigawatt).

Credit Suisse points out that, as a reference, the National System Operator (ONS) stated in the last report that 5.5 gigawatts should be added to the system (whether with greater supply or less demand) to ensure more reasonable reservoir levels.

“Thus, we believe that this program is useful, but that additional measures will be necessary”, evaluate Carolina Carneiro and Rafael Nagano, analysts at Credit. Among the measures are more dispatch of thermal plants and energy imports.

For them, the voluntary demand reduction program may have a slightly negative impact for distributors, as volumes are expected to decelerate – although the impact is limited considering the possibility of an economic equilibrium order and potential sales of energy on the spot market, restricted to 5% of total demand. On the other hand, the tariff increase should help cover working capital for distributors.

Morgan Stanley, in turn, evaluated the measures announced the day before as positive, believing that the initiatives minimize the risks of the sector, that is, of rationing, also highlighting the relevant impacts, notably for the distribution segment. “On the positive side, the new tariff flag mainly avoids working capital pressure. On the negative side, this could imply relatively lower volumes and potentially higher defaults (all conditions being equal) in the medium term”, analysts assess.

For the generators, in turn, the Credit points out that the lower demand with the energy saving measures should worsen the final impacts of the GSF (water risk measure). In this case, Cesp (CESP6) would be the most impacted, although analysts believe it is already in the price, while Omega Generation (OMGE3) is not impacted and Engie (átivo=EGIE3]) has a limited impact. Transmitters such as Alupar (ALUP11) are not affected.

But the Swiss bank’s analysts point out: “we continue to assess that monitoring hydrology is essential in the current scenario.”

Morgan sees that the best positioned players in the sector are Energisa (ENGI11, Equatorial EQTL3, CPFL (CPFE3) and Transmissão Paulista (TRPL4), all with an overweight recommendation (exposure above the market average) by the bank.

Pure generators such as Cesp, with an overweight recommendation, and AES Brasil (AESB3), with an underweight recommendation (exposure below the market average), were the most affected by the hydrological crisis. But analysts point out that Cesp is attractive enough to offset such risks.

It is also worth noting that, in analyzes on the subject, analysts recurrently highlight names such as generators Omega (OMGE3), of wind energy and Eneva (ENEV3), of thermal energy, as relative winners in this scenario of water crisis, given the search for new energy sources (see more here). By the way, the shares OMGE3 and ENEV3 registered gains of about 5% in this Wednesday’s session.

Inflation now and GDP later

The impacts go beyond variable income. Morgan Stanley raised its forecast for the Extended Consumer Price Index (IPCA) for 2021 from 6.9% to 7.8% with the new tariff flag, in line with other houses that also see inflation approaching 8 % in this year

BofA also now expects the official inflation jump to be 7.75% at the end of 2021, compared to a previous projection of a 7% increase. For 2022, the expectation is that inflation will advance 4.0%, against an estimate of 3.8% previously.

Likewise, XP Investimentos now projects inflation for 2021 at 7.7%, above the previous estimate of 7.3%. And Banco Santander assesses revising its projection to 8%, as the government’s decision increases the existing “upward bias” for price increases in the country (see more by clicking here).

It should also be noted that the water crisis is identified as a risk factor for the economy, especially taking into account the projections for 2022.

“What makes me most worried is going forward, fourth quarter, year 2022. The water risk, if it materializes, next year’s GDP has a chance of moving towards zero,” said the research director for Latin America from BNP Paribas, Gustavo Arruda.

Read more: Economists see risks accumulating after disappointing Q2 GDP and revise projections for activity

“It’s not our base scenario, but it has to be taken into account. Low reservoirs is not something that can be resolved quickly. What we learned is that the risk is small, but it is increasing”, he said. He calculates growth of around 5% this year and 1.5% for 2022 without considering the water issue.

Luka Barbosa, economist at Itaú Unibanco, believes that for every 1% drop in energy consumption, GDP loses 0.2 percentage point. However, he assesses that, although the water crisis is an important risk, the probability of rationing is 10% in his accounts, which he still considers low. Barbosa’s calculations point to a GDP growth of 5.7% this year, falling to 1.5% in 2022.

Impact of deteriorating scenario in mining and steelmaking

In addition, in another report, Caio Ribeiro, an analyst at Credit Suisse in mining and steel, highlighted scenarios for the sectors if the hydrological situation in Brazil continues to deteriorate. That is, in case of rationing or energy shortages.

In his assessment, Brazilian steelmakers seem to be the most exposed to a scenario of energy shortages or rationing, due to the fact that revenues come mainly from domestic sales and also because industrial customers tend to have relatively high electricity needs.

While there are ways for them to offset production cuts, demand for steel would be more negatively impacted versus demand for pulp, paper or iron ore.

On the other hand, Suzano (SUZB3) and Klabin (KLBN11) seem to be the most resilient companies in this scenario, as their self-generation capacities are considerable, and Suzano is even a net exporter of electricity) and most of their revenues come from from abroad.

Credit Suisse also points out that, during the 2001 rationing, steelmakers were affected in different ways. At the time, CSN’s sales volumes (CSNA3) dropped 22% in the third quarter compared to the second quarter of 2001. Usiminas (USIM5) was able to adapt, reducing non-essential activities and buying excess electricity from the market. Usiminas’ production cost rose 6% in the third quarter of 2001, year-on-year, and sales volumes remained relatively stable, down 0.5% in the same comparison.

Gerdau (GGBR4) was able to redirect its production and comply with mandatory requirements, cutting mini-mills and transferring part of production to southeastern Brazil, where there was no mandatory reduction in energy consumption. For Gerdau, gross production remained stable.

The bank emphasizes that CSN is currently 65% ​​self-sufficient in energy, and Gerdau is more dependent on energy purchases, with a self-sufficiency of around 20%. But geographic coverage can help ensure operational flexibility to modulate impact. Usiminas is 24% self-sufficient.

In the mining sector, Vale (VALE3) generates 68% of its own energy. But as the revenue comes mainly from abroad, the bank says it expects demand for Vale’s products to continue. In addition, 100% of energy purchases are linked to long-term contracts.

(with information from Reuters)

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