Hydrous ethanol follows price rally in international energy markets

New York — Hydrous ethanol prices in the Center-South Brazil have increased 7.5% or 120 Real/cu m ex-mill Ribeirao Preto since the most recent low price of Real 1,595/cu m ex-mill Ribeirao Preto on April 27.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 1,720/cu m Tuesday.

Hydrous ethanol prices in the Center-South have experienced a fraction of the much larger positive price move experienced in international energy markets during the previous two weeks.

NYMEX RBOB June futures have increased more than 63%, and ICE Brent Crude July futures have increased more than 45% from their lows set on April 22.

Petrobras announced an average gasoline price increase of 11.5% Wednesday, which will be instituted at refineries Thursday. This large increase in the Petrobras gasoline price at refineries reflects a recovery in international energy markets and will mark the reversal of a previous 12 gasoline price cuts instituted in the market this year.

A Petrobras increase in gasoline prices at refineries will put upward pressure on hydrous ethanol prices in the near-term because of a decrease in consumer demand for gasoline.

Petrobras cut gasoline prices at refineries by more than a cumulative 50% for the year prior to today's announcement for an increase, which has put downward pressure on hydrous ethanol prices in the first few months of 2020 because of an increase in consumer demand for gasoline.

Petrobras utilizes a fuel pricing policy, which include international energy and foreign exchange components, to ensure Brazilian domestic prices are in line with international markets.

"I am expecting stronger ethanol prices in the Center-South in the near term as international energy markets rally from record low prices," said a Sao Paulo-based trader. "Petrobras will increase the price of gasoline at refineries to follow the upward price trends in international gasoline and crude oil prices, thus putting upward price pressure on ethanol."

LOWERED EXPECTATIONS FOR WAIVER OF PIS AND COFINS TAXES

The Ministry of Agriculture and Mines and Energy was expected to release during the past few weeks an official statement regarding a relief package for the sugar and ethanol industry.

The relief package was expected to contain the suspension of the collection of taxes on ethanol production (PIS/COFINS), the increase of taxes on gasoline (CIDE) and guaranteed storage of 6 billion liters of ethanol.

The suspension of the collection of taxes on ethanol production will most likely not come to fruition, but the increase of taxes on gasoline, domestic and imported, was confirmed as a high probability Monday. Mills were planning to double their efforts to convince the government for approval of the suspension of PIS/COFINS taxes, albeit with lowered expectations.

Proposals are for CIDE to increase from Real 0.10/l to Real 0.30/l and gasoline imports to be taxed at 15%. The increase in CIDE will increase the competitiveness of hydrated ethanol, which competes with gasoline at the pumps.

The likely decision to not suspend the PIS/COFINS taxes caused distributors to cease their strategic waiting for purchasing ethanol sans taxes, and their buying commenced on Monday driving hydrous prices higher.

Although the increase of gasoline taxes have a high probability of occurring, there are many hurdles to cross before they can be implemented. The federal government can increase the CIDE via a decree, which has a formal 90-day period for debate commencing upon its formal signing. The 15% tax on gasoline imports will go into effect immediately after government approval and there is no 90-day arbitration period.

Many large refiners including Petrobras are a major opponent to an approval of an increase on gasoline taxes and plan on fighting any demands for approval of the tax increase.

HYDROUS ECONOMICALLY ADVANTAGEOUS OVER GASOLINE IN SOUTHEAST

Hydrous ethanol still remained economically advantageous over gasoline for drivers in southeastern Brazil, weekly data showed.

In the week that ended Saturday, the hydrous ethanol price ratio to gasoline was 65.12%, down from 65.28% in the prior week and below the 70% threshold that encourages consumers to fill their tanks with hydrous ethanol, or E100, according to data released Monday by the National Petroleum and Biofuel Agency.

The hydrous ethanol price ratio to gasoline has not been this low since the first week of December, 2019.

Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or 100% hydrous ethanol, or E100. Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, due to hydrous' lower energy content.

Hydrous ethanol remained at an economic advantage over gasoline due to the lag between Petrobras' gasoline price decreases at refineries and the time fuel retailers change their prices at the pump.