Brazil waives ethanol import tariff; US import arbitrage remains closed

The Brazilian government has waived until Dec. 31 its 18% import tariff for a handful of products, including ethanol and soybean oil, considered highly relevant to lowering inflation in the country.

The waiver is aimed at reducing the inflationary impact of high international fuel prices after the coronavirus pandemic and amid the Russia-Ukraine war that has spurred higher crude oil prices and transportation costs, the Ministry of the Economy said March 21 in an official note.

Brazil goods and services are mostly transported by roads, so high fuel costs will have an immediate impact on its entire inflation basket, including foods and basic services.

Despite the withdrawal of the import tariff and high domestic ethanol prices, the steep devaluation of the Brazilian real against the US dollar is keeping the import arbitrage from US closed, even in the Brazilian Northeast, where most imports enter the country. According to S&P Global Commodity Insight's calculation, anhydrous ethanol imported from US and delivered March 22 into Suape port would land at Real 4,248/cu m, or Real 348/cu m higher than the Platts anhydrous DAP Suape assessment last published on March 18 at Real 3,900/cu m. In the scenario of 18% import tariff the imported product would land at Real 4,999/cu m.

Market participants do not expect any additional volume to be imported despite the zero tariff.

"Ethanol prices in US are sky rocking, following the corn feedstock," said a US ethanol trader. "There will be no change in the ethanol physical market."

In 2021, Brazil imported 447 million liters of ethanol, a plunge of 56% from 2020 and 75% less than the record high volume of 1.82 billion liters imported in 2017,

Short-term fundamentals picture

In addition to the closed arbitrage for imports from the US, Brazil's largest ethanol producing region, the Center-South, starts on April 1 its 2022-23 harvest season, increasing domestic ethanol availability and potentially lowering prices. The latest estimates from S&P Global point to a total volume of cane to be crushed in the Center-South at 555 million mt, up 5.7% on year, and total ethanol production, including corn at 29.3 billion liters, up 5.8% on year.

Combined with an increased domestic production, Brazilian fuel demand is still behind 2021 and high fuel costs in the country, combined with the economic uncertainties of a presidential election year, do not suggest any change in fuel consumption patterns in upcoming months.

A preview of the official light fuel consumption numbers until February is pointing to a total of 10.2 billion liters, down 12% on year, according to data from Brazil's ANP petroleum and biofuels agency.