Brazil's ethanol distributors, producers in crisis management mode

Ethanol distributors and producers in Brazil have been adapting to the plunge in domestic demand caused by coronavirus pandemic.

Special crisis management teams at each of the largest ethanol firms have been organized to meet on a regular basis to develop and implement strategies to ensure catastrophic losses are avoided.

One of the largest fuel distributors has already declared force majeure -- a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event occurs, such as the current pandemic sweeping the globe.

Many market participants were anticipating force majeure will become more common in Brazil if the pandemic does not end soon.

Planned investments have been postponed and salaries and bonuses have been cut at a few distribution companies. The majority of distributors continued to make minimum and punctual purchases for their immediate ethanol requirements because of the lack of broad demand.

Sales of ethanol in the Center-South have fallen 50%–60% in the past two weeks because of the drop in demand due to a major decrease in light duty vehicle use in major cities according to several industry sources.

There have been estimates that transportation activity has declined as much as 70% in some major cities. Crisis management teams are trying to predict how long demand will be depressed and when it will return to pre-pandemic levels.

"If the current crisis worsens we have not ruled out the possibility of strategically closing a small percentage of our less profitable gas stations until demand returns to normal," said a distributor based in Sao Paulo.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 1,595/cu m ($301/cu m) Thursday, the lowest level since July 14, 2017, when it was at Real 1,585/cu m.

Hydrous ethanol prices ex-mill Ribeirao Preto are down over 35%, or Real 875/cu m, since January 1.

A prominent seller has remained a dominant market force in the Center-South over the past three weeks with aggressive offers driving down prices multiple times each week, by as much as Real 100/cu m on the day.

Market participants were expecting larger producers to continue aggressively selling ethanol to balance their stocks to cash on hand, so as to be better prepared for ongoing depressed demand. If demand remains low than producers will need extra cash reserves to meet payroll and other short-term cash intensive liabilities.

POTENTIAL BRIGHT SPOT FOR PRODUCERS

The collapse in ethanol prices has opened a window of opportunity for mills to maximize their sugar production at the start of the harvest to take advantage of the high premium sugar is paying over ethanol and the weak Brazilian real.

Market participants estimated the 2020/21 sugar crop will have greater than 43% of cane directed to sugar production. This is in stark contrast to estimates earlier in the year for around 34% of cane used for the manufacturing of sugar for the 2020/21 sugar crop.

A few major ethanol producers were able to strategically hedge the majority of their expected 2020/21 sugar production at an average price above 14 cent/lb when sugar prices rallied in January and February.

The ICE May NY11 sugar futures contract settled Thursday at 10.29 cent/lb, a 2.37 cent/lb premium to hydrous ethanol in raw sugar equivalent.

The Brazilian real has fallen more than 30% against the dollar since January 1. A weak Brazilian real makes sugar exported from Brazil very attractive to foreign buyers due to their increased purchasing power.