CS hydrous ethanol plunges Real 930/cu m from mid-April highs

Platts assessed hydrous ethanol ex-mill Ribeirão Preto at Real 3,675/cu m May 31, down Real 930/cu m from the most recent high in mid-April and down Real 225/cu m on the week, according to S&P Global Commodity Insights data.

Center-South ethanol prices decreased on the week ending May 31 primarily because the Chamber of Deputies approved May 25 that the ICMS, a tax on the circulation of goods and services, will be capped at 17%.

The ICMS tax capped at 17% will increase gasoline's competitiveness over ethanol in many regions of Brazil and will ultimately cause ethanol prices to fall in the near-term, according to multiple market sources.

Sao Paulo state, the largest fuel consumer in Brazil, currently has a 25% ICMS tax on gasoline and 13.3% on hydrous ethanol.

"Center-South ethanol prices decreased May 25 through May 27 after the news of the 17% ICMS tax cap because a dominant market participant entered the market early in the morning with offers substantially lower each succeeding day in the Ribeirao Preto region," a Sao Paulo-based trader said. "In addition, demand for hydrous ethanol remains weak in Sao Paulo state because most distributors remain firm with higher prices posted at their gas stations."

Although the proposed bill capping the ICMS tax at 17% is expected to be approved by the senate in the coming weeks, the market has almost fully discounted the tax reduction, according to several market sources.

Hydrous ethanol ratio to gasoline around 70%

"A reduction in the ICMS tax on gasoline should keep the hydrous ethanol price ratio to gasoline at or above 70% in the near-term, thus supporting gasoline's price competitiveness over hydrous ethanol in the near-term," said a second Sao Paulo-based trader.

The Southeast hydrous ethanol price ratio to gasoline decreased to 70.24 in the week ended May 28, compared with 70.85% in the week prior, National Petroleum and Biofuel Agency data showed.

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

The absolute price differential between gasoline and hydrous ethanol at the majority of the gas stations in Center-South Brazil was at Real 2.149/l May 28, above the Real 1 mark that typically encourages demand from consumers.

A price differential of Real 2.149/l between gasoline and E100 could encourage consumers to favor less-expensive hydrous ethanol when considering savings of about Real 108 while refilling an average-sized tank.

Sugar regains premium over ethanol production, ex-CBIOs

Brazilian ethanol's production premium or discount to sugar, which shows what product is most profitable to produce, reached a 40-point discount to NY11 July sugar futures as of May 31, according to S&P Global data.

A 20.2% collapse in Center-South Brazil's hydrous ethanol price and a 2.0% depreciation in the Brazilian real against the US dollar April 18-May 31 were the primary reasons that ethanol's production premium flipped to a discount to sugar since hitting a triple-digit premium during the first half of April. NY11 July sugar futures were down around 3.9% over the same period.

Ethanol production would maintain around a 15-point premium to sugar if one were to add decarbonization credits into the premium calculation. The CBIO, equivalent to 1 mt of CO2 not released into the atmosphere, is an instrument issued by biofuel producers and importers to ensure Brazil attains its decarbonization targets.

Petrobras ex-refinery gasoline price movements

"A Petrobras ex-refinery gasoline price increase could nullify any proposed reduction in the ICMS tax on gasoline," said a third Sao Paulo-based trader.

Brazil's government has changed Petrobras leadership three times thus far in 2022 in hopes that each CEO change will result in a quick solution for Brazil's complex energy dependence on foreign imports in an extremely volatile market environment -- a crucial policy during an election year.

"Given it is an election year, the high frequency of Petrobras leadership changes, and the recent shrinking import price parity lag with gasoline, there is low probability that Petrobras will increase the ex-refinery gasoline price in the near-term," said a fourth Sao Paulo-based trader.

Market participants use Petrobras ex-refinery gasoline price increases as a discounting mechanism for ethanol prices because the gasoline price increase ultimately felt by consumers at the pump will put pressure on hydrous ethanol prices in the near term. Any changes in the ex-refinery price of gasoline can alter the delicate price balance between gasoline and hydrous ethanol prices, thus affecting the hydrous ethanol price ratio to gasoline.