Commodities 2022: A year of challenges for Brazilian biodiesel market

Brazilian biodiesel producers are concerned about whether they can keep the business running in the country amid the biodiesel blend for 2022 being reduced to 10% from the expected 13%, the new trading model being implemented from Jan. 1 and the many uncertainties over the ICMS tax.

Despite a reduction in the blending mandate, B100 demand is expected to increase in Brazil over 2022 as domestic diesel consumption is expected to rise.

Meanwhile, the market shifting away from an auction model has led to some price uncertainty for producers.

The Brazilian program of production and usage of biodiesel was initiated in January 2005 to define parameters and give the Brazilian producers a sense of market predictability so they could invest in production capacity and the development of new feedstock sources.

A combination of an auction trading system and a mandatory blending increase until 2023 -- a key part of the program -- was discontinued by the Brazilian federal government in late 2021.

Starting Jan. 1, producers and distributors would need to have term contracts of biodiesel equivalent to 80% of the volume traded within the auction environment in the prior year. The National Agency of Petroleum, Gas and Biofuel had imposed a deadline of Dec. 20 for both parties to upload the term contracts agreed to guarantee January and February supply.

In the absence of term contracts from an obligated entity, the company will not be allowed to trade in the spot market.

Some producers were not comfortable settling term contracts without clarity on if they could still consider the ICMS tax as a credit to be paid by the state government.

ICMS is a state tax that can range between 9% to 12% in Brazil.

"Producers don't have the margins to operate without the ICMS tax credit," a producer said, explaining that ICMS will be considered an additional cost and therefore translate to higher prices.

A different producer said that there is no price difference for distributors, who will keep buying biodiesel with deferred ICMS, while the producers will depend on each state's decree to define how much of the ICMS paid will be reimbursed to them.

According to the latest federal announcement, states will have 90 days to publish an official guide on ICMS credits, and this period is expected to start Jan. 3, 2022.

Blending rates

Another strong market consideration is the reduced blend imposed at 10% -- known as B10 -- for the whole of 2022.

That decision was a result of a directive from the federal government to reduce the diesel price for consumers, as the fuel has a major impact on the country's inflation.

The announcement was understood by producers as a step back in meeting decarbonization targets recently committed in the UN Climate Change Conference by the country and against the resolution released Nov. 8, 2018 by the National Council of Energy Policy -- CNPE -- which stated the biodiesel mandatory blend would be at 10% starting March 2018 and increase 1% per year until it reaches 15% in March 2023.

In light of the resolution published in 2018, producers invested in production capacity and Brazil has an installed capacity to produce biodiesel equivalent to a 20% blending rate.

Despite the B10 decision, biodiesel demand is expected to continue to grow compared to 2021, due to overall higher diesel demand expected in the country. S&P Global Platts Analytics estimates a 2% increase in diesel B (diesel plus biodiesel) demand in 2022.

Brazil to export more soybean oil

Brazilian exports of soybean oil are on track to increase in 2022, following a lower-than-expected biodiesel mandate for the year. Since the vegetable oil is the main feedstock for the country's biodiesel industry, any reduction in domestic demand from the initial industry expectation could lead to a surplus of the vegoil, leading to it being eventually exported.

In its December World Agriculture Supply and Demand Estimates report, the US Department of Agriculture raised its view for Brazil's soybean oil exports to 1.45 million mt in the 2021-22 marketing year (October-September), from 1.30 million mt seen in its November WASDE.

A similar upward revision was made by the Brazilian agricultural statistics agency Conab, which now projects soybean oil shipments of 1.53 million mt, from 1.10 million mt previously. The country's oilseeds crushers association ABIOVE raised its estimate to 1.65 million mt, the highest volume since 2015, from 900,000 mt initially pegged.

Market participants do not expect any impact on soybean crush operations from lower domestic soybean oil consumption in 2022 as crush margins remain favorable. Besides, international demand is expected to remain consistent, absorbing the surplus from Brazil.

They added that India's economy is likely to expand in 2022, recovering from the impact of COVID-19. The country is the top global importer of edible oils.