Feature: Brazilian biodiesel spot prices will fall on reduced blending mandate

On the first working day after the Brazilian biodiesel blending mandate was reduced from 13% to 10% for 2022, the biodiesel spot price was unchanged, though market participants expect lower offers in the coming days.

Market participants said the biodiesel spot price could drop nearly Real 150/cu m, or $26.79/cu m, in the near future.

In the soybean oil FOB Paranagua market, offers plunged to 420 points, or $92.59/mt, over the January (F) futures on the Chicago Board of Trade, down from 500 points or $110.23/mt at market close on Nov. 29. Soybean oil makes up nearly 75% of Brazil's biodiesel feedstock, so any change in the national biodiesel demand will have a direct impact in the feedstock supply, demand and price structure.

The CBOT January (F) contract settled at 55.21 cents/lb Nov. 30, down 307 points on the day and at its lowest level since late September.

"The biodiesel sector is already working with thin margins; therefore the biodiesel cost will follow in line with the feedstock price fall," one of the top five Brazilian biodiesel producers said Nov. 30.

Despite the bearish tone in the market, one of the largest Brazilian fuel distributors kept its bid for biodiesel DAP Paulinia to be delivered in January unchanged on the day at Real 7,000/cu m. One seller lowered its offer Real 120/cu m from Nov. 29.

S&P Global Platts assessed biodiesel DAP Paulinia for January delivery at Real 7,005/cu m on Nov. 30, unchanged on the day.

New trading model

Biodiesel producers and distributors with volumetric targets need to send their term contracts to ANP by Dec. 25 proving the volumes settled, as required by national regulatory agency ANP. However, the new National Energy Policy Council (CNPE) decision about a reduced biodiesel blend brought a new challenge to the market: to revise all the negotiations that were already started.

On Nov. 8, ANP published all the volumes that each producer and distributor would need to settle under term contracts for the first two months of 2022, though the agency was considering a blending mandate at 13% at that time.

According to ANP, the revised volumes considering the 10% blend are expected to be announced between Nov. 30 and Dec. 1, but for market stakeholders who are facing a short deadline of just 25 days to settle contracts, it was considered one more issue to be managed in the new model.

The resolution

Market participants said that the Ministry of Mines and Energy (MME) and the Ministry of Agriculture and Livestock (MAPA) were trying to keep the commitment regulated under the 16/2018 regulation that stated a 13% blend for January and February and a 14% mandate as of March 2022; however, due to economic impact concerns, CNPE decided to discontinue the market guidelines.

"The target was to protect consumers regarding product's price, quality and offer," CNPE said about the decision to lower the blending mandate from 13% to 10%.

Brazilian diesel S10, the price for consumers from Sao Paulo state, rose 52% from an average of Real 3.55/liter in November 2020 to Real 5.38/liter in November 2021, according to the latest data published by the National Agency of Petroleum, Gas and Biofuels (ANP).

The biodiesel mandate was at 11% in November 2020, and was lowered to 10% in November 2021, showing that despite the drop in the biofuel blend, the price for consumers moved in the opposite direction. This suggests that biodiesel is not the only component weighing in consumers' decisions.

In the official statement, CNPE highlighted that the decision considered societal interests in retaining the diesel cost in the country and the maintenance of the National Biofuels Policy, providing predictability, transparency and legal and regulatory security to the sector.

Producing associations did not agree with the statement.

In an official note published by the three largest producing associations, Abiove, Aprobio and Ubrabio, the decision favors the oil industry and is in total discrepancy with the decarbonization commitments signed during the UN Climate Change Conference, where Brazil proposed to reduce greenhouse gas emissions by 50% until 2030.

"The decision was deadly to predictability, disregarded investments made and avoids future investments in the biodiesel sector, with direct impact on the elimination of jobs and green GDP," the note published by the three associations said.

In the public statement, the associations said that applying the B10 mandate, biodiesel production is expected to fall to 6.2 billion liters in 2022, down from the initial estimate of 8.6 billion liters if B13/B14 was kept for 2022.