Brazilian fuel industry aims to boost competitiveness by fighting illegal activity

Brazilian fuel industry groups signed a collective letter Nov. 13 aiming to take steps to fight market irregularities and illegal activity, which represents at least 10% of local supply. Market participants hope the potential changes can support competitiveness in the local market across all levels of the supply chain.

The associations signed a collective letter that included legislative and surveillance suggestions for government officials. Criminality in the Brazilian fuels sector exists in all levels of the supply chain, the groups wrote in the letter. Discussions about illegal activity in the market have persisted in Brazil for more than 10 years.

Fraudulent pumps, fuel adulteration and quality fraud, as well as clandestine blending and irregular gas stations are among the main illegal activities affecting the Brazilian fuel market, according to Brazil's Legal Fuel Institute, or ICL, one of the organizations that signed the letter. The ICL also pointed to tax evasion, default and irregular use of fiscal benefits as issues in the sector.

S&P Global Commodity Insights analyst Joao Lopes said it would be difficult to project the impact on market supply should such measures be effective, but noted supply could tighten if companies' licenses are suspended. For example, Brazilian fuel blender Copape lost its license this July, leading to a gasoline supply reduction in the domestic market, according to Lopes.

"Most of this volume [lost through Copape] would have to be replaced by imported products, as other domestic players are close to their maximum production capacity," Lopes said.

The ongoing fight against irregularities in the country's fuel industry has led to a tighter market and more robust margins, Ricardo Mussa, CEO of Brazilian sugarcane processor Raizen, said in the company's third-quarter earnings call Nov. 13.

"I have been at Raizen for eight years now, and looking at fuel informality, I have never seen all sides so aligned to fight: congress, government, states, producers, distributors," he said.

Letter suggests monitoring, taxes

To combat irregularities, the group suggested a revision of white pump authorizations -- pumps in branded gas stations that have unbranded fuel -- a more robust monitoring of naphtha imports and blenders, a single-phase tax for hydrous ethanol and legislation improvement to better penalize tax irregularities.

Besides illegal activity in the industry, Brazil has a grey legislative area around taxes and fuel regulations that facilitates evasion, one market source said.

For example, a single-phased state tax was implemented in May 2024 for LPG, diesel and biodiesel, followed by gasoline and anhydrous ethanol, which helped to combat tax evasion, market participants said. Now, officials and market participants are also pushing for a single-phased tax for hydrous ethanol.

The groups also expressed support for a proposed government bill that establishes the creation of a regulatory body to monitor real-time fuel stocks and transportation, and vouched for more funding to the Brazilian National Agency of Petroleum, Natural Gas and Biofuels, or ANP, the local industry regulator.

Critics of the agency say it does not have enough funding or staff to conduct proper surveillance of the fuels industry.

"There are gas stations that have never been inspected, and there are gas stations that are inspected once a year," a market participant said, echoing some of that criticism.

The Brazilian market has been maturing in recent years with the entry of and increased participation of new players, Lopes said.

Brazilian fuel retail sales totaled 130 million cu m in 2023, according to data from the ANP, up 5% from 124 million cu m sold in 2022.

Illegal activity costs industry

A September 2024 report by local investment bank Bradesco BBI estimated that the country's biggest fuel distributers, Vibra, Ipiranga and Raízen, lose about 10%-13% of consolidated earnings due to irregular practices in the market.

The Brazilian fuel industry loses an estimated Real 26 billion per year due to illegal activity -- Real 14 billion from tax evasion and Real 15.6 billion from operational activities, including quality and pump fraud -- according to a 2021 report by Brazilian university Fundação Getulio Vargas.

Asked by Commodity Insights how it fights fuel market irregularities, ANP's public relations office reiterated the agency's intent of preventing and combatting those issues. Among the options the agency has are fines, license suspensions and also revocations, with all participants having "ample right to defend themselves," ANP said. But the agency underlined that it does not have jurisdiction or tools for criminal enforcement.

"Companies that operate legally face difficulties competing with those that reduce costs through illegal practices," Sergio Massillon, institutional director of Brazil's National Federation of Fuel, Natural Gas, and Biofuel Distributors, or BRASILCOM, told Commodity Insights.

BRASILCOM was also a consignee on the letter.

Rumors of the involvement of criminal organizations in the fuels market have recently picked up among industry participants, government officials and the media.

However, Emerson Kapaz, president of Brazil's Legal Fuel Institute, one of the letter's consignees, told Commodity Insights there is currently no evidence to prove of such involvement.

"The only existing evidence is an investigation by prosecutors in the state of São Paulo," Kapaz said. "It is very hard to find a link to criminal organizations."