ANALYSIS: Tight Brazilian ethanol inventories trigger record high domestic prices

Brazil's total ethanol inventories were at 3.34 billion liters as on May 31, a plunge of 28% from a year earlier, showed data released June 16 by the Ministry of Agriculture and Livestock. The tight stocks pushed domestic prices to record high levels for May.

A total 3.26 billion liters, or 97.7%, of the country's inventories are based in Brazil's Center-South, which is also the largest ethanol producing and consuming region.

In the CS region, ethanol inventories dropped 26.8% on the year by end-May, which explained part of the price support observed in the spot market even in the second official month of the 2021-22 CS crop, when usually there is an increased product availability.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at an average price of Real 3,566/cu m in May, a spike of 99% on the year and the highest-ever for the month.

On June 17, Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 3,420/cu m.

Of the ethanol stocked in CS Brazil, E100 hydrous ethanol accounted for 65%, or 2.1 billion liters, down 26.6% on the year. The lower year-on-year inventory was triggered by a combination of partially reinstated fuel demand in the country and smaller volumes of cane crushed in the period.

Cumulative cane crushed from April 1 to June 1 was at 129 million mt, down 10.88% on the year, converting to a drop of 6.66% in total ethanol production, showed latest industry association UNICA data. From the demand side, hydrous sales from January to April were at 6.42 billion liters, up 1% on the year, according to the National Petroleum and Biofuel Agency.

Meantime, anhydrous inventories had a similar cut at 1.14 billion liters on May 31, down 27% on the year.

Producers from CS Brazil have been shifting since mid-September 2020 a larger volume of their total ethanol production toward anhydrous to guarantee domestic supply. However, the closed arbitrage to import anhydrous from the US since August 2020, combined with an increased gasoline demand, has capped anhydrous spot availability in Brazil.

Brazilian ethanol imports from January to May were at 211 million liters, down 73% on the year, while gasoline demand from January to April increased 2.5% on the year.

The Brazilian gasoline has a 27% anhydrous ethanol blended.

In a tight market, the anhydrous premium over hydrous ethanol reached an average of 14.4% in the spot market in the first two months of the 2021-22 CS crop.

NNE region

In Brazil's North-Northeast -- a region with a historical structural ethanol deficit -- the combination of shrunken imports since May 2020 and regional producers maximizing sugar production in the local crop 2020-21 resulted in an even worse scenario for ethanol inventories.

Anhydrous stocks in the NNE region added 41.9 million liters on May 31, down 41% on the year, while hydrous totaled 34.8 million liters -- a plunge of 65.4%.

That tight scenario has also been converted to a record high price for the period in the region.

The Platts anhydrous ethanol DAP Suape benchmark was last assessed June 11 at Real 4,015/cu m -- a spike of 82% on the year. Despite the surge, the import arbitrage including a 20% import tariff was closed at Real 938/cu m, according to latest Platts calculations from June 11.

In case of a non-tariff product, anhydrous ethanol from the US could land in Suape at Real 4,140/cu m, still above the Platts NNE Brazil ethanol assessment and proving a still closed arbitrage.