Decomposition analysis of changes in final energy use of the industrial sector

5.2.2.1. Activity effect

Figure 5.16 presents the evolution of the final energy use of Brazil’s industrial sector by branch and as a whole. The average overall growth rate of the final energy use for this sector was 4.3% per year during the 1970–2000 period. Figure 5.16 shows the impact of the 1981–1983 and 1990–1992 economic recessions in the overall trends. During the period considered here, final energy use by the non-ferrous metals, mining and quarrying, pulp and paper, chemicals, and iron and steel branches increased at growth rates above the average growth rate of the overall industrial sector.

Figure 5.17 shows the results of the final energy use decomposition analysis for the industrial sector, including the activity, structure and intensity effects and the term of interaction. The activity effect was the most important effect behind final energy use changes in industry during the 1970s and in the 1990–1995 period. During the 1980s and in the 1995–2000 period, structure and intensity effects were more important.

The activity effect was minor in the 1980–1985, 1985–1990 and 1995–2000 periods. The economic performance of the industrial sector in these periods was strongly impacted by tight economic policies implemented by the Government to deal with the balance of payments crises in 1981–1983, the exacerbated inflation in the late 1980s and early 1990s, and the international financial crises in the second half of the 1990s, respectively. Such factors, as well as international price fluctuations, have strongly influenced the magnitude of the activity effect over the past three decades.

0.00

1970 1976 1982 1988 1994 2000

PJ used by energy sector/PJ supplied by energy sector

FIG. 5.15. Ratio of final energy use by the energy sector to final energy supplied to all other sectors (including household and non-energy use) [5.15].

500

1970 1974 1978 1982 1986 1990 1994 1998

PJ

Mining and quarrying Non-metallic minerals Iron and steel Non-ferrous metals Chemicals Food and beverages Textiles Pulp and paper Other industries

FIG. 5.16. Final energy use of the Brazilian industrial sector by branch [5.15].

491

1970–1975 1975–1980 1980–1985 1985–1990 1990–1995 1995–2000

PJ

Total change Activity Structure Intensity Term of interaction

FIG. 5.17. Decomposition of final energy use changes in the Brazilian industrial sector [5.11–5.15].

5.2.2.2. Structure effect

Table 5.2 shows the industrial value added shares for the 1970–2000 period. Figure 5.18 shows the evolution of industrial value added by branch during this period. Throughout the period, the greatest structural change in the industrial sector was in the ‘other industries’ category, with a 9%

gain. ‘Other industries’ include machinery, equipment, electrical devices and construction. All other branches experienced marginal share reductions over the whole period, except for marginal gains in chemicals and in pulp and paper.

The impact of the II PND on the industrial structure from 1975 to 1985 is revealed in the increased shares of some of the energy intensive branches (non-ferrous metals, chemicals, and pulp and paper), but also in the higher shares of other industries up to 1980. From 1985 on, the energy

intensive branches started exporting significant shares of their production, not only because of the poor economic growth of the Brazilian economy (which reduced domestic demand for basic materials), but also because of Government incentives to export associated with the balance of payments crises and electricity underpricing (especially in the case of aluminium). The Government tax incentive schemes have not yet been entirely removed (see, for instance, Comple-mentary Law 87 of 13 September 1996, the so-called Kandir Law), nor have the electricity prices been totally corrected for energy intensive branches (cross-subsidies with other industrial branches and with the residential and commercial sectors; see Fig. 5.14).

Although the value added shares of the energy intensive branches (non-metallic minerals, iron and steel, non-ferrous metals, chemicals, and pulp and paper) remained below 28% during the whole period, those branches accounted for the lion’s share of the industrial sector’s final energy use

— rising from 51.8% in 1970 to 65.1% in 2000. This trend points towards increasing energy intensities in the energy intensive branches of the industrial sector. However, if the situation for some branches is analysed using physical output instead of value added, the structural stability of energy intensive branches may be misleading. Figure 5.19 shows the evolution of iron and steel’s value added and crude steel production. While the value added of this branch remained relatively constant at US $ PPP 8–

12 billion, the production increased from 8 Mt in 1975 to about 28 Mt in 2000. The profitability of the iron and steel branch was affected by long term TABLE 5.2. INDUSTRIAL SECTOR VALUE ADDED* BY BRANCH (%) [5.11–5.14]

Sector branch 1970 1975 1980 1985 1990 1995 2000

Mining and quarrying 1.3 1.5 2.2 3.2 1.8 1.4 1.2

Non-metallic minerals 4.8 4.9 4.8 3.7 4.0 3.6 3.4

Iron and steel 4.2 4.3 2.9 3.7 3.0 3.1 3.6

Non-ferrous metals 5.6 5.9 6.9 6.8 6.0 5.6 4.7

Chemicals 7.2 8.1 8.0 10.9 9.3 8.3 8.5

Food and beverages 12.9 11.8 10.5 11.5 9.5 10.8 11.0

Textiles 8.0 5.2 5.6 5.4 4.8 2.7 1.6

Pulp and paper 2.1 2.1 2.4 2.5 1.9 2.1 3.1

Other industries 53.8 56.2 56.6 52.3 59.7 62.4 62.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

* Based on producer prices.

0 50 100 150 200 250 300 350 400

1970 1974 1978 1982 1986 1990 1994 1998

Mining and quarrying Non-metallic minerals Iron and steel Non-ferrous metals Chemicals Food and beverages

Textiles Pulp and paper Other industries Billion US $ PPP, at constant 2000 prices

FIG. 5.18. Industrial sector: Value added at producer prices [5.11–5.14].

downward trends in international steel prices, by a shift towards low value added steel products in the product mix and, as in the energy sector, by the Government’s use of State owned steel companies to control inflation in the 1980s and early 1990s, before these companies were privatized [5.38]. Such circumstances hide the actual growth in the production of the iron and steel branch in Brazil, as well as its impact on the country’s economic structure.

5.2.2.3. Intensity effect

As shown in Fig. 5.17, the intensity effect on the industrial sector was negative in the 1970–1975 and 1980–1985 periods, but positive in all other periods. In particular, from 1990 to 2000 the intensity effect in Brazil did not offset the activity effect. On the contrary, it actually reinforced the activity effect. In fact, in 1985–1990, when the activity, the structure and the term of interaction effects were all negative, the intensity effect compensated for all of them. Nevertheless, a more detailed analysis of the situation shows that the industrial sector as a whole was not so inefficient in this period.

Figure 5.20 shows the evolution of final energy intensity by branch and for the industrial sector as a whole. Some branches — such as iron and steel, and pulp and paper — experienced volatile but net upward trends in their energy intensities. Other branches had relatively stable trends throughout the period. The resulting overall final energy intensity of the industrial sector registered a slightly upward trend of about 0.4% per year. Such a trend, in fact, results from a complex combination of intra-sectoral trends, since the overall industrial energy intensity is an average of the energy intensity

coefficients of the different branches weighted by the share of each branch in the industrial sector.

Although energy intensities for the energy intensive branches show an increasing trend, there is evidence that such trends are related more to international price depressions and changes in product mix towards lower value added products than to inefficient energy technologies. Figure 5.21 compares final energy intensity and specific final energy use for the iron and steel and the pulp and paper branches. In the case of iron and steel, a major difference is observed between the energy intensity (based on value added) and the specific final energy use (based on physical output). In the case of pulp and paper, the two indicators were highly correlated until 1989, when a major increase in the energy intensity (based on value added) took place. According to some industrial competitiveness surveys performed in Brazil, similar trends were

0

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

0

Crude steel production (Mt) Iron and steel value added (US $ PPP)

Mt Billion US $ PPP, at constant 2000 prices

FIG. 5.19. Iron and steel branch: Value added at producer prices and crude steel production [5.11–5.14, 5.37].

0

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Mining and quarrying Non-metallic minerals Iron and steel Non-ferrous metals Chemicals Food and beverages Textiles

Pulp and paper Other industries Industry MJ/US $ PPP, at constant 2000 prices

FIG. 5.20. Evolution of final energy intensity by industrial branch [5.11–5.15].

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

0

Iron and steel (physical) Pulp and paper (monetary) Pulp and paper (physical) Iron and steel (monetary)

MJ/kg MJ/US $ PPP, at constant 2000 prices

FIG. 5.21. Final energy intensity versus specific final energy use (physical final energy intensity) in the iron and steel and pulp and paper branches [5.11–5.14, 5.37, 5.39].

observed in most of the energy intensive industrial branches in the country [5.40, 5.41].

A strategy that aims at enhancing sustainable energy development in Brazil should be aware of such evidence. Promoting structural changes towards less energy intensive industries and towards a higher value added industrial product mix is as important as promoting energy efficiency to enhance sustainable energy development in the country.

On the one hand, the development of a shipbuilding industry that exports ferry boats, and of the Embraer Corporation, which builds and exports aircraft, are two examples of downstream expansion that have added value to Brazilian natural resources (it is not mandatory that the same corporation be involved in all steps, but it is fundamental to develop downstream links in the production chain). On the other hand, the steel and aluminium industries are two examples of industries that have shifted to a lower value product mix as part of a business strategy on the international market. Both strategies are possible; it is a matter of choice and of whether the proper environment exists (public policies and sectoral regulation play important roles in establishing such an environment).

5.2.3. Decomposition analysis of changes in final