The volume of mandatory anhydrous stocks that ethanol producers in Brazilmust carry as of March 31 will be reduced in the next season to 4% of tradedvolumes, down from 8%, the National Petroleum Agency said on Thursday.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The modification in the stocks rules applies starting with the 2018-2019(April to March) sugarcane crop, the ANP clarified later via email onThursday.
In another key change, Brazil's ethanol importers are now also requiredto follow the same rules as domestic producers regarding stocks, according tothe text of resolution 719/2018 published in the country's official gazetteThursday.
In 2011, the ANP created a regulation that made it mandatory for millsand fuel distributors to close deals early in the season and have contractsequal to an anhydrous volume representing 90% of their sales of gasoline inthe previous year, in order to guarantee anhydrous supply in the domesticmarket during the entire year.
The original rule, ANP 67/2011, aimed to ensure there would be enoughanhydrous ethanol available during the intercrop season in Center-SouthBrazil, following a serious supply disruption that forced the country to turnto imports, mostly from the US. The intercrop period in CS Brazil runs fromDecember until March 31.
Ethanol producers and now importers must carry 25% of the total anhydrousvolume traded in the previous year as stocks until January 31. And then, afterthat date, they will have to hold the above-mentioned stocks of 4%.
Importers have traditionally run very lean operations, meaningpotentially limited ability to hold the required stocks. Importers may need toeither lower their volumes or hire tank capacity in port areas, which iscommonly not available. Brazilian tank capacity is limited and is more oftenused to store gasoline or diesel, which have a wider import margin overethanol.
One trade source said smaller importers would be most likely to faceissues.
"It will not impact in our import business as we do have a large tankcapacity," a trader from the country's largest ethanol importer said. "Thestock obligation for importers will strongly affect the small ones,as they don't count on tank capacity and just come to the market once thearbitrage is open."
In another change, the volumes that distributors need to have in stock byMarch 31 will now correspond to 10 days of sales instead of 15 days. However,ANP says it can change this back to 15 days every January, depending on marketconditions.
Other alterations published in the resolution include giving more timefor distributors and producers to negotiate long-term contracts.
MARKET REACTION AND IMPACT
The initial reaction by market participants focused on the fact that thereduced level of stocks that producers need to carry by March 31 could putdownward pressure on market prices, as mills needing to generate cash to closetheir fiscal year-end might liquidate more product than in previous years. "With a lower stocks obligation, folks will clean out more product inMarch," said a trader. There is a potential for more pressure on prices inApril, if there are delays to the start of crushing in April, he added.
"Although the crop usually starts in early March/early April, it beginswith lower productivity and more focused on hydrous," said another source.
Another potential impact noted by market participants concerned theobligation for importers to carry stocks. "This should limit the participationof trading houses," a source said.
This would be due to the additional costs of storage, which might hamperthe economics of bringing in imports, depending on how wide or small thearbitrage window is.
"It's very early to evaluate the impact of this change in rules, but wecan say it puts producers and importers in a more equal position," saidMarcelo Guerra, director of Sindacucar, the sugarcane industry association ofPernambuco state.
"Why only producers had the obligation to carry stocks?" he added.
Another trade source said that there was a lot of chatter in the marketearlier in the morning, when it was not clear if the changes in mandatorystocks would have to be implemented immediately, for the remaining weeks ofthe 2017-18 season.
"But when it became clear it would be valid only for 2018-19, people gotcalmer. We will now read and evaluate the changes with time," said the source.
--Beatriz Pupo, firstname.lastname@example.org
--Gustavo Bonato, email@example.com
--Nicolle Monteiro de Castro, firstname.lastname@example.org
--Edited by Lisa Miller, email@example.com