Brazil’s cheap power plan hits the utilities sector while metals and mining companies gain

Brazil’s drive to make electricity less expensive wiped out $6.4 billion in market value for utilities, while making winners of metals and mining companies from Alcoa Inc. (AA) to ArcelorMittal.

Electricity is their biggest expense, totaling 40 percent of costs for aluminum producers, according to Rio de Janeiro state industry group Firjan. Alcoa Chief Executive Officer Klaus Kleinfeld qualified Brazilian energy costs as “unbelievably high” in a May 4 speech, after the New York-based aluminum producer said in a March statement it was considering cutting output in the country.

President Dilma Rousseff is forcing utilities in Brazil, where companies pay more than double U.S. and Chinese electricity prices, to cut rates by as much as 28 percent in a bid to stoke economic growth and make companies more competitive. The reductions will be a requirement for utilities renewing operating licenses through 2017.

“This is a historic decision by the government and the right step at an important time for the Brazilian industry,” Augusto Espeschit de Almeida, chief executive officer for Luxembourg-based ArcelorMittal (MT)’s long steel businesses in South America, said in e-mailed comments. The government “has taken important decisions to improve the competitiveness of the industry,” he said.

Melbourne-based BHP Billiton Ltd. (BHP) and Vale SA (VALE5), the world’s largest mining companies, and ArcelorMittal, the top steelmaker, are among the biggest clients of utilities such as Belo Horizonte, Brazil-based Cia. Energetica de Minas Gerais, the country’s No. 1 power company by market value, according to data compiled by Bloomberg.

A 28 percent cut in electricity rates would reduce average fixed costs for Brazilian materials makers and manufacturers by 4 percent, according to the Brasilia-based national industry confederation.

“Alcoa is encouraged by the measures adopted by the Brazilian government for reducing electricity costs to help industries remain competitive,” spokeswoman Libby Archell said in an e-mailed response to questions.

Brazilian utility shares dropped an average 6.8 percent last week, the industry’s second-biggest loss in 82 countries, according to data compiled by Bloomberg. Cia. Energetica de Sao Paulo, Brazil’s second-largest power generator by capacity, sank 28 percent the day after the announcement, its biggest drop since its initial public offering in August 2006. Centrais Eletricas Brasileiras SA (ELET6), the Rio de Janeiro-based state-run utility, was also among utilities that led losses on Brazil’s benchmark Bovespa (IBOV) index on the same day.