Hydrous ethanol price parity not seen decreasing despite gasoline price hike: sources

Santos — Brazilian oil company Petrobras' average gasoline price hike of 7.93% is not expected to increase the economic advantage of the biofuel E100 over the fossil fuel, market participants said.

The state-led oil company announced the increase on Jan. 18, which will be implemented on Jan. 19 on an ex-refinery basis.

More than 80% of the light vehicle in Brazil are flex-fuel, which means that drivers can fill their tanks with E100 or gasoline. The fossil fuel in the country has a mandatory blend of 27% anhydrous ethanol. The fuel's choice is usually economically driven and consumers will generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, because of hydrous ethanol's lower energy content.

In the week ended Jan. 16, hydrous ethanol price parity against the gasoline in the Southeast region was at 69.40%, down from 69.61% in the prior week, showed data published by the Brazilian National Agency of Petroleum, Gas and Biofuel, or ANP.

Despite the price scenario favoring the E100 consumption, most of the ex-mill price hike observed in the last working days of the prior week was not reflected at the pumps until Jan. 16, but might start to reach consumers in the week starting Jan. 18.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto on Jan. 18 at Real 2,580/cu m, up 3.2% on the week. Part of that price increase can be explained by the higher ICMS tax applied for ethanol producers from Sao Paulo state as of Jan. 15. The tax was increased from 12% to 13.3%.

Considering the gasoline ex-refinery price increase to be implemented on Jan. 19 at 7.93% and the hydrous ethanol ex-mill price assessed by Platts at 3.2% higher on the week, the E100 price parity over gasoline could technically move down to 66.36%, widening the hydrous price advantage over gasoline in the Southeast region.

Distributors' perspective

There was a consensus between the two largest fuel distributors that the gasoline ex-refinery price increase will be totally reflected at the pumps within the current week. However, they do not see it translating in a favored price parity for hydrous.

"Our hydrous sales in January has been lower than initially forecast, with that higher gasoline price part of this sales difficulty will be offset," said a major fuel distributor, adding that a major change in the price parity was not expected.

A regional distributor reported that the hydrous profitability was too low in recent months, mainly in Goias and Minas Gerais. After the gasoline price adjustment, the distributors were expecting an opportunity to move up the biofuel price in these states.

Among the three major distributors, just one was not certainly expecting a stable price parity and emphasized that any hydrous ethanol price change at the pumps will mostly depend on the market movement.

"If our competitors do not change hydrous price for their retails, there is no reason why to do it and take the risk to decrease our market share," said the ethanol trader, who added that hydrous profitability has been stable in the last months.

Gasoline import parity

According to the Brazilian Association of Fuel Importers, or Abicom, Petrobras gasoline price in Brazil was between Real 0.35/liter and Real 0.28/liter lower than the import parity price and therefore the price increase at an average Real 0.14/liter was not enough to offset the closed import arbitrage.

"Import arbitrage remain consistently closed, with import operations unfeasible in all Brazilian ports," said Milena Mansur, a researcher from Abicom.

Petrobras' market share for gasoline was 77% in 2020. The balance of 23% was supplied by other companies, who were not economically encouraged to import gasoline into Brazil.