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Brazil expected to withdraw ethanol import quota

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Brazil expected to withdraw ethanol import quota

Highlights

Brazil to apply 20% tax in the ethanol imports from US

Import arbitrage closed since April, even for tax-free market

Santos — In a year hit by an economic recession, which triggered a cap in global fuel consumption, Brazil is moving toward domestic market protection, withdrawing its ethanol import quota market expiring Aug. 31.

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The import quota market regulates the threshold of ethanol imported free of a 20% tax entering the country.

Market participants say the absence of official announcement on the expiry day was a sign the federal government was not willing to renew it.

"There is no [Chamber of Foreign Trade] resolution scheduled for today and quotas will not exist after today," said a member of UNICA, the sugar and ethanol association, from Center-South Brazil. The source added that a new resolution could be published later following new political talks.

In August 2017, a strong lobby from North-Northeast region, where the majority of the imports enter the country, pushed the Brazilian government to limit the import volume free of tax. In that year, the Brazilian NNE imported 1.68 billion liters from September 2016 to August 2017, the record historical volume for the period.

During the first 24 months of free import quotas, from Aug. 31, 2017, to Aug. 31, 2019, the quarterly quota of 150 million liters was split between quotas A and B. Companies placed in quota A had access to 50% of the total quota, but could also place orders to access the additional volume available in quota B. Quota A companies could request 7,500 million liters, while companies listed in quota B could request 3,750 million liters.

The regulation which was in place from Aug. 31,2019 to Aug. 31, 2020 had its final remarks published just on Oct 14, 2019, when the Chamber of Foreign Trade (Camex) restricted the quota market just to ethanol producers and limited to a seasonal volume. Camex limited the total imports, within the quota market conditions, from Aug. 31, 2019 to Feb. 29, 2020 at 200,000 million liters, capping imports during the NNE crop season.

That delay to release an official announcement for the next 12 months cycle is a sign that the import tariff story might not end on Aug. 31,2020.

From Aug. 31, 2019, to July 30, 2020, just 500 million liters of ethanol were imported through the NNE ports, half of the 1.07 billion liters imported in the prior 12 months.

Definitely, the coronavirus pandemic, which capped the fuel demand in the country and the strong depreciation of the Brazilian Real against the US dollar, were relevant aspects to plunge the imports need in the region, which historically has a structural deficit of ethanol.

According to S&P Global Platts calculations the import arbitrage is closed even within the quota market since April 17, 2020, when Platts assessed anhydrous DAP Suape at Real 1,995/cu m and the landing cost of anhydrous from US was calculated at Real 2,000/cu m.

"The only alternative to balance prices and social benefits is ensuring that importers, distributors or producers have access to the same market conditions," said Abicom researcher Milena Mansur. ABICOM is the Brazilian Association of Fuel Importers.