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Outlook 2019: Brazilian ethanol market


Sao Paulo — If we highlighted a strong market consensus for 2019, it would be that more than ever, Brazilian ethanol production and consumption patterns will be driven by oil and gasoline prices.

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In 2018, the Brazilian ethanol industry tried to maximize the sugarcane mix toward biofuel production, mainly converting it into hydrous ethanol. The ethanol mix in the 2018-19 crop is expected by analysts to close at near 65%, the highest ethanol mix in almost 10 years.

The latest data from the Sugar Industry Association showed that hydrous ethanol production from April 1 to December 16, 2018, was at 20.7 billion litters, a surge of 44% from the same period of 2017, while total ethanol was recorded at 29.77 billion litters, up 18.93% year on year.

During the 2018-19 crop, Brazilian ethanol producers were encouraged to increase the biofuel production due to high oil and gasoline prices, which have set a new price floor for the biofuel.

Brazilian hydrous ethanol consumption has a high correlation with the fuel price policy implemented by the federal government as it is used in Brazil as a standalone biofuel (E100) by flex-fuel vehicles. To be more competitive than gasoline in Brazil, E100 has to be below 70% of the price of gasoline due to its lower energy content.

The hydrous ethanol price at the pump in the Southeast region averaged Real 2.818/liter from January to December 15, 2018, up 8.9% from the same period of 2017, while direct competitor gasoline C surged 19% in the region during the same period, according to data from the National Petroleum Agency (ANP).

That high correlation was new for Brazil, since Brazilian ethanol producers have been operating under a policy established by state-led oil company Petrobras in July 2017 for both diesel and gasoline under which prices would be adjusted according to foreign-exchange rates and international price quotes for crude and oil products.


With a combined picture of lower global sugar production and the geopolitical uncertainties pressuring oil and gasoline prices down, the Brazilian industry is expected to slightly increase the volume of sugarcane it devotes to sugar production.

The forward price curve of the NYMEX sugar No.11 futures contract has been closely watched by Brazilian producers, which have been comparing it with the estimates for oil and gasoline prices in 2019 to build up their commercial strategy for the years ahead.

Fundamentals are pointing to a bearish oil market in 2019 amid record US oil production and because OPEC is unlikely to considerably cut output. Saudi Arabia furthered the bearish tone when it released a budget plan targeting $177 billion in revenues for 2019, which market participants said is unrealistic. In addition, Saudi Arabia committed earlier this month to produce more than 10.2 million b/d, which would increase global supply.

While Petrobras has been reflecting lower international gasoline prices in its ex-refinery prices, consumers are still not seeing it at the pump. In the last quarter of 2018, gasoline ex-refinery prices plunged 30.47%, while Southeast-region drivers saw a decrease of just 6.7% at the pump.

The decisions of fuel distributors in 2019 as they try to increase profit margins could also influence hydrous ethanol's price parity with gasoline, sources say.

In addition, Brazilian producers are expected to increase their risk exposure by lowering the volume of sugar settled under term contracts for the 2019-20 crop, to allow them buying flexibility so they can make last-minute decisions about how much of the production mix goes to ethanol.


The favorable price parity of hydrous ethanol over gasoline has been a new market condition in the Brazilian North and Northeast regions. A big change was seen in consumption patterns by drivers in the North and Northeast regions, which respectively recorded an increase of 111.15% and 79.22% in hydrous ethanol consumption in the period from January to October 2018, the latest ANP data showed.


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For 2019, even with gasoline prices getting cheaper at the pumps, hydrous demand is expected to remain higher than past averages, as regional drivers are expected to keep favoring the biofuel due to the nominal price difference expected to remain over Real 1.00/liter.

One focal point in NNE Brazil expected to be watched by the international and domestic market is the expiration of the current 20% import tariff on volumes higher than 150 million liters per quarter. The tariff was implemented in September 2017 for two years, which means it is due to expire in September next year.

With President-elect Jair Bolsonaro's chief economic adviser, Paulo Guedes, being a University of Chicago-trained free-market economist, sources anticipate the market should not expect any increase in trade barriers. In fact, the industry may have to work on maintaining the current tariffs in an effort to protect its domestic market from an oversupplied US ethanol market eager to increase its exports.

--Nicolle Monteiro de Castro,

--Edited by Derek Sands,