Sao Paulo — Brazilian hydrous ethanol prices in the key Center-South producing region surged 10.53% during the first 15 days of February.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 2,100/cu m on February 15, an increase of Real 200 m from February 1. It was also the highest assessment since November 1, when it was assessed at Real 2,145/cu m.

The primary driver for the steep increase in Center-South hydrous ethanol prices is how the gasoline and ethanol price relationship favored the latter in January. The majority of fuel retailers kept their margins at the pump as high as possible for gasoline and did not pass along savings from a decrease in the average price for distributors.

Hydrous ethanol price parity to gasoline in the largest fuel consumer region of Southeast Brazil was at 63.26% in the week ended February 17, according to the National Petroleum Agency, or ANP. Considering the threshold price at 70% it means that hydrous ethanol kept its economic advantage over the fossil fuel. In the same period of the prior year price parity was at 70.56%.

An excess of hydrous ethanol stocks carried over from 2018 to satisfy any supply shortfalls during the Center-South intercrop period from January through March. The excess ethanol caused the price at the pump to decrease 8.1% in January at the same time gasoline at the pump increased 1.5%. Price-sensitive consumers chose hydrous ethanol over gasoline and demand outstripped supply.

Hydrous ethanol sales in January totaled 1.83 billion liters, the highest value recorded for the first month of the year and up 32.45% compared with January 2018, according to the most recent report from industry association UNICA. Distributors have been aggressive buyers since then to compensate for the demand in January in an effort to replenish stocks for the second half of February, when fuel demand is expected to surge in the prior days of the Brazilian Carnival holiday.

The recent peak in the hydrous ethanol price could be reflected in a lower sugar mix for the Center-South crop in 2019-20, which officially starts April 1. The hydrous ethanol price converted in raw sugar equivalent was assessed by Platts at 14.34 cents/lb on February 15, or 1.41 cents ($31.09/mt) higher than Platts CS Brazilian raw sugar flat price. According to market participants, sugar would need to pay 1 cent/lb more than hydrous ethanol during a period of at least one month to encourage Brazilian producers to shift more cane toward sugar production.

-- Phillip Herring, phillip.herring@spglobal.com

-- Nicolle Monteiro de Castro, nicolle.castro@spglobal.com

-- Edited by Jason Lindquist, newsdesk@spglobal.com