CS Brazil hydrous ethanol ex-mill and pump prices at record highs

Ethanol prices in Brazil's Center-South continue to break record highs as demand returns to pre-pandemic levels while stocks remain tight overall near the end of the regional harvest.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 4,605/cu m on Oct. 29, a record high price, up Real 2,130/cu m, or 86% since the start of the year.

Domestic anhydrous ethanol was also assessed at a record high of Real 4,555/cu m ex-mill Ribeirao Preto, up Real 2,020/cu m or 80% in 2021.

"Ethanol prices will remain on an upward trajectory until current demand drops to a level which balances demand and supply for the current harvest," said a Rio de Janeiro-based trader. "The question is how high will ethanol prices climb before adequate destruction in demand occurs."

Southeastern consumers facing difficult decision at pump

The hydrous ethanol (E100) price at the majority of fuel retail stations in Brazil's Southeast region broke through Real 5/liter, a record-high price, in the week ended Oct. 30.

The pump price of E100 in the Center-South is expected to increase an additional Real 0.25-0.65/l or around 5-13% in the near term because the pass-through of ethanol price increases at mills in the Center-South has an average five to 15-day time lag.

Hydrous ethanol ex-mill Ribeirao Preto has increased 5.4% during the past five days and 13% over the last 15 days, according to Platts data.

In the week ended Oct. 30, the price differential at the pump between gasoline and hydrous ethanol (E100) in the Center-South was Real 1.491/liter, according to data from the National Petroleum and Biofuel Agency, above the Real 1/l mark which typically encourages consumers to switch to hydrous.

Consumers with flex-fuel vehicles can opt for gasoline, which has a blend of 27.5% anhydrous ethanol, or E100.

The average price differential in H2 October was Real 1.511/l, up from Real 1.417/l in H1 October.

The Southeast hydrous ethanol price ratio to gasoline was 77.03% -- around 10% above the 70% threshold that discourages demand from consumers for hydrous ethanol, or E100, because of its lower energy content.

"Although the Southeast hydrous ethanol price ratio to gasoline is well above 70%, a price chasm greater than Real 1.5/l between gasoline and E100 will encourage consumers to fill their cars with less expensive hydrous ethanol," said a Sao Paulo-based trader. "An average light duty vehicle tank size of 50 liters equates to a price saving greater than Real 75 when refilling with E100."

Lower ethanol production

Center-South ethanol production during H2 October is expected to be down from H1 October because an estimated 70% of Center-South mills have now ended for the season, while the weather remained suboptimal for crushing during H2 October, with an estimated 3-4 days lost to rain. Rainfall was 46% above the average for the time of year, coming on the heels of H1 October rainfall around 79% above average.

Ethanol production from sugar in CS Brazil was down 40.3% from a year earlier at 1.24 billion liters in H1 October, according to industry group UNICA. Hydrous ethanol production accounted for 647 million liters of the total, down 50.7% on the year, with anhydrous ethanol output down 22.5% at 590 million liters.

Petrobras gasoline price increase

Rising international energy prices combined with weakness in the Brazilian real have been the primary reasons for the record-high fuel costs in Brazil.

State-controlled Petrobras instituted an average gasoline price increase of 7.05% at refineries Oct. 25. The company has increased the ex-refinery gasoline price by 72.8% thus far in 2021.

The real has depreciated 8.7% against the dollar in 2021 to Real 5.6438 on Oct. 29.

The import parity price for imported gasoline is a moving target and any large price movements in the international energy markets or the real/dollar exchange rate will be followed in the near term by an equivalent Petrobras price change for ex-refinery gasoline.

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.

"If international energy markets including ICE Brent Crude and NYMEX RBOB futures priced in US dollars continue to increase, the Petrobras average gasoline price at refineries will likely continue to increase, thus increasing competitiveness for ethanol at the pumps," said a second Sao Paulo-based trader.

ICMS tax 90-day freeze

The National Council for Financial Policy (Confaz) approved on Oct. 29 a 90-day freeze on the ICMS tax on fuel in all states in Brazil from Nov. 1 to ease the pressure for consumers.

The consensus among market participants is that the freeze on the ICMS, which is calculated using the prior 15-day weighted average price to consumers, will do very little to curtail ethanol price increases caused by current demand and supply fundamentals or future Petrobras gasoline price increases.

"The ICMS tax being frozen at a multi-year high price and will do little in regards for an immediate tax relief for consumers," said a third Sao Paulo-based trader.