Higher biofuel costs amplify concerns on Brazilian blending mandates

Sao Paulo — Rising costs of ethanol and biodiesel in Brazil since mid-2020 have led to industry stakeholders raising concerns regarding the country's ambitious policy to blend more biofuels with transportation fuels like gasoline and diesel to reduce its greenhouse gas emissions.

Brazil's Mines and Energy Ministry, or MME, said on May 13 that the mandate for biodiesel blending with diesel will be lowered from 13% to 10% for July and August. This went against several producers' expectations of a resumption of 13% blending.

The drop in the biodiesel blending mandate has been mostly due to the surge in biodiesel costs. Despite the lower blend imposed in the auction L79, the fuel's cost has surged by 99.68% on average over a year between the L72 and L79 auctions.

According to Brazil's regulation, the biofuel can only be traded within the auction process, which happens on a bi-monthly basis.

Brazil in March had increased the mandatory biodiesel blending from 12% to 13%. However, that target was just considered in the auction L78. In the auction, the producers and distributors traded the volume needed to supply the estimated demand for March and April.

Brazil aims to increase biodiesel blending to 15% in March 2023.

The situation was similar in the ethanol supply chain, with Fecombustiveis, or the National Association of Trade in Fuels and Lubricants, on May 12 raising concerns about the higher ethanol costs and reduced supply.

Ethanol mandate

Fecombustiveis, which has nearly 41,000 associated fuel retailers, released an official letter to the MME requesting the ministry to lower the mandatory 27% anhydrous ethanol blending mandate in gasoline to 18%. The association said that the move is expected to reduce the fuel cost for consumers.

Fecombustiveis cited the rise in anhydrous ethanol's price and the lacking supply as the main reason to support a drop in the national ethanol blend.

S&P Global Platts assessed anhydrous ex-mill Ribeirao Preto on May 14 at Real 3,645/cu m, marking an year-to-date surge of 43.8%.

While the increase in the Brazilian gasoline C price, blended with 27% anhydrous, can be partially attributed to the higher biofuel costs, the rising international oil price and Real's depreciation against the US dollar are considered to be the main factors behind the price surge.

Platts assessed gasoline import parity price delivered in Santos on May 13 at Real 2,674.24/cu m, representing a spike of 34% on the year.

Contrary to the concerns raised by Fecombustiveis, Brazil's sugarcane industry association, UNICA, and FNS, the national sugar-energy forum, said on May 14 that the country was not facing any anhydrous supply risk.

Additionally, UNICA emphasized that ethanol producers had enough inventories to supply the domestic market and that the harvesting of the new Center-South 2021-22 crop had already started in April. As a result, anhydrous offers will show steady growth in a few weeks.

UNICA also cited the lower risk due to the long-term contracts settled by ethanol producers and distributors.

In Brazil, fuel distributors and ethanol producers who traded anhydrous ethanol in the prior crop cycle, need to set long-term contracts of anhydrous equivalent to 90% of the total volume negotiated in the prior year, as a measure to guarantee the country's supply security.

Brazilian emission targets

Biofuel blending is a relevant component of the Brazilian Nationally Determined Contributions, or NDCs, under Paris Agreement to lower its GHG emissions by 43% until 2030 from 2005 levels.

In 2019, the energy sector contributed 19% of the total Brazilian GHG emissions. Within the energy sector, transport activity represented the highest emissions with a 47% share.

The transport sector emitted 196.5 million tons of CO2 in 2019, with the truck and car emissions representing a share of 40% and 31%, respectively. This was despite Brazil's strong biofuel public policy, thus supporting the country's need to keep improving its biofuel mandates and extend the policy to advanced biofuels, such as green diesel and sustainable aviation fuel, to achieve its NDC targets.