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Feature: Brazilian ethanol import barriers increase structural deficit in NNE region

Sao Paulo — Anhydrous ethanol stocks in Brazil's NNE region was recorded by the Ministry of Agriculture and Livestock, or MAPA, at 147 million liters as of December 31, a drop of 8.9% year on year and the lowest for the period since S&P Global Platts started to track it in 2009 as imports declined due to change in quota rules.

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The Brazilian North-northeast region is well known by its historical structural deficit of anhydrous ethanol, the one used in Brazil as a mandatory 27% blend in the Gasoline A. The region imports cargoes from US, the usual supplier, to cover its short production mainly in the first quarter of the year, when producers from Center-South Brazil are mostly out of the market due to the inter-crop season in the CS.

That market dynamic started to change in September 2019, when the Brazilian Foreign Trade Chamber (Camex) published a new set of rules for ethanol import quotas. The new rules increased import quota by 150 million liters, moving from 600 million liters per year to 750 million, however, restricted the access to the import license just for ethanol producers, which are allowed to request a maximum quota of 2,500 liters per producer.

Instead of 750 million liters/year divided equally into 187.5 million liters/quarter, volumes are now restricted to 200 million tariff-free liters during the North-Northeast crushing season (September to February). The remaining 550 million liters can enter tariff free between March and August.

"These new restrictions have hindered our import operations and the usual amount of ethanol we import per month. We are having to aggressively negotiate with mills with granted import quotas in the effort to combine quotas to fulfill a full cargo of ethanol," said a Sao Paulo based trader.

The production and price reaction

A more restricted market encouraged regional producers to increase their anhydrous production to 775 million liters, a surge of 22% year on year in the period between August, 2019 to December, 2019, showed the latest data from MAPA. Despite that increased production it was not enough to meet the increased anhydrous demand in the region as gasoline prices remained more attractive than hydrous and imports are still needed.

In 2019 the Brazilian ethanol imports into the NNE region totaled 1.01 billion liters, a plunge of 25% from 2018. S&P Global Platts Analytics estimates that Brazil will import a total of 1.35 billion liters in 2020 with 300 million liters being imported in Q1 2020. If these estimates prove correct, Brazilian ethanol imports will decline by 8.8% year on year with a decline of 24% to Q1 2020 from Q1 2019.

"The new quota rules and trade restrictions for Brazil's Northeast have not affected how much ethanol I am sending to Brazil. The only change has been that I am selling one cargo to multiple Brazilian buyers, but my volumes have not changed year over year," stated a Houston based ethanol trader.

That short stocks and imports of anhydrous ethanol are already reflecting in a regional price spike. Platts assessed anhydrous ethanol DAP Suape on January 17 at Real 2,515/cu m a surge of 15.4% on the year. According to Platts calculations on January 17, despite that price spike the import arbitrage for companies without access to import quotas remained closed in Real 87/cu m, while producers who are managing to import their quotas had an open arbitrage of Real 334/cu m.

"Anhydrous ethanol price needs to increase in Real 100/cu m in Suape to trigger more imports," said the international trader from an usual import company.

In addition to the current closed import arbitrage, the trader said that lack of tank capacity is also limiting further imports right now.

As the Brazilian gasoline has a mandatory blend of 27% of anhydrous ethanol any shortage of anhydrous could trigger a regional fuel supply issue, which would not be positive for the ethanol industry.