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Ethanol tax cut fails to propel prices in Brazil

Sao Paulo — Ethanol prices in Brazil remained unchanged Monday, on the first trading day after government announced an anticipated cut in hydrous taxes.

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The federal government decided late Friday to accept claims by ethanol producers, which argued recently applied tax increases were above the amount allowed by the law.

Related Snapshot video: Brazil's ethanol may be bolstered by emissions goals, but many changes expected in the interim

One week earlier, the government had raised so-called PIS/Cofins taxes by Real 410/cu m for gasoline and by Real 207/cu m for hydrous, in addition to other increases for diesel and anhydrous ethanol, aiming to boost federal revenues.

On Friday, PIS/Cofins charged on hydrous ethanol at distributors was decreased roughly by Real 85/cu m, according to an executive order signed by President Michel Temer.

S&P Global Platts assessed domestic hydrous prices at Real 1,720/cu m ex-mill Ribeirao Preto on Monday, down from 1,725/cu m on Friday. Anhydrous prices were assessed at Real 1,610/cu m, flat from Friday.



Hydrous ethanol is used in Brazil as a standalone biofuel (E100) in flex-fuel vehicles, and to be more competitive it has to be below 70% of the price of gasoline. Anhydrous ethanol is blended with gasoline at a 27% ratio.

Buyers and sellers are still evaluating if the lower hydrous tax would be converted into higher prices paid to the mills or into lower prices charged to the drivers, in which case hydrous demand could increase, according to market sources.

"We will have to wait and see how the market will adjust," said one broker. "We have to see where the price ratio between hydrous and gasoline will go."

He estimated hydrous prices are currently 67%-68% the gasoline prices in Sao Paulo state, the largest consumer in the country, possibly moving to 65% if a major part of the tax cut is reflected at pumps.

On the other hand, many ethanol mills in Brazil's Center-South, the largest sugarcane producer region in the world, raised their offer prices on Monday, trying to absorb at least part of the gap created after the tax cut. Fuel distributors said there was no margin to pass higher costs to consumers, leading to a thin volume traded on the spot market.

Center-South is at the peak of the 2017-18 sugarcane harvest. Large volumes of ethanol produced recently have gone into storage, as mills wait for better prices and more clarity in the pricing and taxation landscape.

"We produce 140,000 cu m of ethanol/year, and we have storage available for 110,000 cu m," one mill trader told Platts. That means we can sell really slowly."

On the demand side, fuel distributors foresee some price adjustments and a possible ex-mill price hike, after the tax cut. However, there seems to be no reason to make large ethanol purchases.

"There is no need to hurry," said an market analyst at a large fuel distributor. "We may see higher prices in the short term, but after that they should become stable, capped by the large supply during the harvest."

--Gustavo Bonato, gustavo.bonato@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com