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Anhydrous ethanol spot premium in Center-South Brazil trading at discount over term contracts

Highlights

Anhydrous ethanol premium at 13% over hydrous in the spot market

Distributors favoring to anticipate volume from term contracts

The anhydrous ethanol spot premium over hydrous in Brazil's Center-South traded at 13%, S&P Global Platts' assessment showed July 6, down from the 14% average anhydrous premium in term contracts for the Center-South 2021-22 crop.

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Platts considered hydrous and anhydrous free of taxes to calculate the spot premium.

From the beginning of the CS crop 2021-22 on April 1 to July 5, the average anhydrous ethanol spot premium over hydrous was at 15%, considered the top level of the average term contracts by market participants.

On a year basis Brazilian ethanol producers who traded anhydrous in the prior year and fuel distributors need to settle term agreements of a volume equivalent to 90% of the total volume of anhydrous sold in the prior year, to guarantee that there will be enough anhydrous in the market to commit with the 27% mandatory blend in Brazilian gasoline.

Guaranteeing product availability

In the prior years the average anhydrous ethanol premium over hydrous in the term contracts was settled at 10.5% and 11%, therefore the 14% premium in the term contracts in 2021 was already pointing toward distributors being willing to pay more to guarantee product availability.

For 2021, the volume committed under term contracts was equivalent to 90% of the volume sold in 2020, a year when Brazilian gasoline consumption was at 35 billion liters, or down 6% from 2019, therefore any higher gasoline demand in 2021 over 2020 would not be included in those figures.

S&P Global Platts analytics estimates that the Brazilian otto cycle fuel demand will increase 3.4% on year, while total ethanol production might be capped at roughly 3.5 billion liters from the crop cycle 2020-21, explaining the appetite from distributors to pay higher premiums in the term contracts settled by mid-April 2021.

Market insights

Market participants considered the drop in the anhydrous ethanol premium over hydrous in the spot market as reflecting the lack of liquidity for anhydrous.

"We have been totally out of the spot market and anticipating our term contracts to supply any additional demand," one of the largest Brazilian fuel distributors said.

On the other hand, a second major fuel buyer in Brazil was carrying out an opposite strategy and favoring buying any additional volume needed on the spot market.

"As we are seeing a tight market in the last quarter of 2021 and first quarter of 2022, we understand that it is better to buy spot now and guarantee our contracts for the future demand," the ethanol trader from another major fuel distributor said.

From the producers' perspective, despite Brazilian anhydrous ethanol inventories by mid-June at 1.45 billion liters, down 20.6% on year, there is a concern of a wide carry strategy to hamper an upward price movement in the last quarter of the year, or even imported volumes entering the country and putting a cap on the spot price.

Platts assessed anhydrous ethanol ex-mill Ribeirao Preto at Real 3,445/cu m July 6, right under the most competitive offers heard in the same region at Real 3,500/cu m.