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Feature: Consumption collapse triggers new market dynamic in Brazilian ethanol market

New York — The two largest fuel distributors in Brazil declared have force majeure to lower their monthly ethanol purchases amid a scenario of hampered fuel demand.

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The Raízen joint-venture, owned by Shell and Cosan, told its ethanol suppliers Monday it could not sell scheduled volumes because of plummeted fuel demand caused by the coronavirus pandemic.

BR Distribuidora also Monday said its initially scheduled volumes would need to be revised down, following lower fuel demand. However, BR emphasized it hopes to eventually take all contracted volumes as soon demand returns to normal.

The two companies accounted for nearly 40% of Brazilian demand for total gasoline C, the domestic specification blended with 27% anhydrous ethanol, and hydrous ethanol sales in January, according to Sindiom, the national distribution association that represents the largest Brazilian fuel distribution companies.


The force majeure was triggered by the collapse of Brazilian fuel demand in March and the expected continuation in April due to social isolation measures imposed to combat the coronavirus outbreak.

In Sao Paulo, the largest fuel consumer, the quarantine was imposed by the governor, João Doria, from March 24 to April 7 for the 644 cities of the state.

According to the largest fuel distribution companies, in the week of March 23, the Brazilian otto cycle demand was lowered at 60% of total expected domestic demand week on week. Alesat, the Brazil's fourth largest distribution company said Monday that the otto cycle demand was down 4% from the week-ago day. Brazilian otto cycle represents total gasoline C and hydrous-E100 ethanol sales.

There was a consensus among the market participants that otto cycle demand might be capped at 65% in April if the social isolation measures be extended until the end of the month.

"Even considering a scenario of non-isolations in May the economic recessions and population concerns about staying out of home might keep impacting the fuel demand," said a researcher from a Sindicom member.

Considering the Brazilian otto cycle demand in March and April 2019 at 9.88 billion liters, the drop in gasoline C and hydrous consumption at 65% means that 6.42 billion liters might not be consumed in the current fiscal year. If this estimates proves to be right, 2020 consumption can be reduced in more than 10% from 2019.


Center-South Brazil is about to start to harvest its sugarcane 2020-21 crop on Wednesday and the market scenario could not be worse. The turmoil in the oil prices could by itself be a strong cap for hydrous ethanol prices; however, the coronavirus has added a global consumption crisis never before seen in modern history.

Ethanol has been also weighted down by falling gasoline prices at refineries in Brazil. Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or 100% hydrous ethanol (E100). Consumers generally fill their tanks with E100 only when its price is 70% or less than that of gasoline, due to hydrous ethanol's lower energy content.

The hydrous ethanol price in the key Center-South fell to more than a two-year low Friday. S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 1,700/cu m on March 27, the lowest level since July 20, 2017, when Platts assessed hydrous ethanol at Real 1,660/cu m. Since then, the assessment has kept stable.

If Brazil's ICMS, PIS and Cofins taxes were deducted, the ex-mill price equivalent would drop to Real 1,365/cu m, or Real 54.90/cu m less than the production cost estimated by sources.

Market participants are estimating a strong shift in the Brazilian production patter from ethanol to sugar production for the 2020-21 crop year, when the sugar mix might be test its high industrial limits. In the current 2019-20 crop year, which ends Tuesday, the sugar mix is expected to close at 34%, while for the 2020-21 crop some consultancies are already forecasting a sugar mix at near 49%.

On Tuesday, hydrous ethanol converted into raw sugar equivalent was assessed by Platts at 8.51 cents/lb. The ICE NY11 sugar future contract settled at 10.42 cents/lb, proving that raw sugar exports was paying 1.921 cents/lb, or $42.11/mt more than hydrous ethanol in the domestic market.