Brazilian ethanol traders brace for two-way volatility

Whether it is another move up or a dive down, Brazilian ethanol traders are bracing for a rough ride, after oil benchmark volatility, constant speculation over a potential price cut for gasoline by state-controlled Petrobras and sugarcane harvesting developments across the country's main production regions sparked a month of roller-coaster prices for the biofuel in September.

In Brazil, consumers with flex-fuel vehicles can fill their tanks with hydrous E100 ethanol or gasoline, which has a blend of 27% anhydrous ethanol. Market participants use Petrobras ex-refinery price changes as a discounting mechanism for ethanol value because, ultimately, any gasoline price cut could ultimately put downward pressure on spot hydrous values in the near term. Conversely, consumer demand tilts toward relatively cheaper hydrous ethanol at the pump when gasoline prices increase.

Platts, part of S&P Global Commodity Insights, assessed hydrous E100 at Real 2,870/cu m ex-mill Ribeirão Preto on Sept. 13, its lowest in the month, while major supplier groups slashed their offer levels to attract potential buyers and concerns over Petrobras hung over the market.

One week later, spot values seemed to have hit a floor and were lining up for a possible recovery, as these worries had somewhat dissipated. Platts assessed hydrous E100 at Real 2,960/cu m ex-mill Ribeirão Preto on Sept. 20, as more constant interaction between the two ends of the trading table encouraged sellers to raise their offer levels.

But after a brief spell of strength, Center-South Brazil ethanol prices decreased late last week, with significant price drops were heard across all main production microregions. On Sept. 30, hydrous traded in Ribeirão Preto drifted down to Real 2,900/cu m after a mostly unattended last trading session of the month, with chances for Petrobras to slash gasoline values still at bay. The gap between gasoline prices in Brazil and those abroad was 6% (or Real 0.17/liter) early on Oct. 1, according to the fuel importers' consortium ABICOM, up from 3% a week earlier.

In the greater São Paulo region, CIF Paulínia hydrous ethanol faced similar ups and downs through September. Platts' assessment for the product launched on Aug. 1, reflects bids, offers and transactions of volumes delivered by truck, pipeline and rail, as well as inter-tank transfers at distribution hubs based in Paulínia. Deals on an ex-mill basis are not included to prevent distortion.

Capacity constraints, cash flow needs

Brokers close to producers said that tanking capacity constraints and short-term cash have also posed a challenge for mills at a time when sugarcane crushing activities are at a peak in Center-South states such as Goiás, Minas Gerais and São Paulo.

Burnt sugarcane from fires in late August has resulted in a more ethanol-driven production mix due to a reduction in industrial efficiency in the conversion to sugar. Sugar's share of the crush for the first half of September in Center-South mills stood at 47.9%, compared with 51% a year earlier, data from trade association UNICA showed Sept. 27.

There is expectation that October, a month in which demand is seasonally high, could bring a more comfortable supply-demand balance for producers – a sentiment encouraged by the electoral period in Brazil, which tends to boost car traffic on highways.

But most analysts see small- to medium-sized mills strategically selling ethanol at reduced prices to ease storage capacity, hampering the upside price potential in the short term. That top Brazilian fuel retailers have been mostly away from significant spot acquisitions for the past month only adds to the speculation regarding a bearish bias in the Center-South market.

"Sure, chances of volatility would decrease considerably if some mills planned things better," one consultant told Commodity Insights on Sept. 30. "But I would also argue that it is historically correct for prices to fall now because sugarcane crushing is in full swing and there is lots of product available."

In his view, shared by many in the market, spot ethanol prices will only gain real strength when the end of the Center-South sugarcane crushing is in sight, traditionally in mid-November.

Different regions, similar problems

Tank storage capacity has also been a critical issue for sellers of anhydrous ethanol in the Northeast when making business decisions. Both buyers and brokers have said that suppliers with volumes in hand at terminals in Ipojuca, Pernambuco state, have shown little resistance to trimming their initial offers to close deals and offload volumes in hand due to tanking space limitations.

On the other end of the negotiating table, buyers are still mostly relying on long-term contracts to guarantee supplies. In Brazil, term contracts usually contain a clause allowing distributors to take 10% more product on top of their contractual commitments at the same price. That reduces the need for these companies to rely on the spot market for replenishments.

Spot prices for ethanol negotiated at the port of Suape retreated 3% to Real 3,191/cu m from Sept. 23-27, the lowest level since June 21, after falling 6.7% in the previous three weeks. It marks the longest downward streak of Platts' weekly average since late 2023.

Sugarcane crushing, meanwhile, is picking up steam, resulting in ample supply options in the region. Mills in Alagoas, Maranhão, Paraíba, Pernambuco and Piauí are increasingly offering spot lots for sale. An increase in cabotage operations (coastal shipping and waterway operations), as well as tariff-free ethanol imports from other Mercosur countries, also play a part in hampering stability.

The price drop, however, has helped entice at least some demand, despite most incoming bids being considerably below "workable levels" for most sellers, which indicate how far price ideas currently are between the two ends of the negotiating table. For some suppliers, dismissing those bids is also a question of preventing prices from bottoming out to the point of devaluing their inventory over the long run.

"I do not want to be the one to blame for the market going down," one seller said when asked about his absence from recent spot negotiations. "I would rather let the others sell cheaper and deal with the consequences."