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NNE Brazil anhydrous ethanol trades at discount to CS region resupply cost

Highlights

NNE anhydrous at Real 155/cu m discount to CS option

NNE anhydrous inventories up 20.4% on year

Imports expected to arrive from October

  • Author
  • Nicolle Monteiro de Castro
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Agriculture Oil Shipping

Brazilian anhydrous ethanol spot price in the North-Northeast registered a second consecutive weekly drop on Sept. 3 to trade at an equivalent discount of Real 155/cu m ($29.9/cu m) to the resupply cost of anhydrous sourced in the Center-South.

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After 13 weeks of trading at an equivalent price to supply cost from Goias state plus freight, since Aug. 6, the NNE region started to trade at a discount to the CS option.

S&P Global Platts anhydrous ethanol DAP Suape, the regional benchmark price, was assessed at Real 4,245/cu m on Sept. 3, down Real 60/cu m, from the record high of Real 4,305/cu m assessed on Aug. 20.

The Brazilian NNE region has a historical structural deficit of biofuels. Due to the national blending mandate of 27% anhydrous in the gasoline and 12% of biodiesel in the diesel, the region is dependent on transfers from CS or imports. These imports can be considered just for ethanol as Brazil is not allowed to import biodiesel or soybean oil for fuel purpose.

In the scenario of regional deficit and widely closed import arbitrage to bring anhydrous from US since April 2020, the NNE ethanol supply was mostly fulfilled by transfers from Goias state, the most competitive option from early-April until end-July.

Producers from NNE usually start harvesting their regional crop in September and end in March. However due to the economic incentives, a few producers from Paraiba state started to crush earlier in 2021.

Producers from Paraiba state started to offer anhydrous in late July and could still capture the equivalent price of transfers from Goias state delivered in the region. However, as the anhydrous availability increased in Paraiba, the price started to trade at a discount to the ethanol flow coming from CS.

Part of the price drop can be explained by the increased anhydrous ethanol stocks in the NNE, which was at 88.4 million liters on Aug. 15, up 20.4% on the year and nearly 27% higher than the last five years average, the latest data released by the Ministry of Agriculture and Livestock, or MAPA, showed.

Like the CS, regional NNE producers were maximizing anhydrous production to guarantee enough domestic supply to comply with the 27% blend, and lowering the hydrous share in the total ethanol production. Hydrous ethanol inventories in the NNE on Aug. 15 were at 50 million liters, down 22.3% on the year, but up 14% from the last five years average.

The second reason behind the price cut right in the beginning of the NNE crop was the expected volume to be imported from US in the last quarter of the year.

S&P Global Platts analytics estimates that nearly 500 million liters will be imported through the NNE ports between October and March 2022, up from 192 million liters imported in the same period of the prior year.

According to Platts calculations, import arbitrage window was closed at Real 330/cu m on Sept. 3. However, considering the expected US ethanol price drop in the forward curve, producers were concerned that the supply could increase with more product coming from US.

Anhydrous supply was still tight in the NNE. However, any increased volume available in the spot market sourced from Alagoas or Pernambuco states, combined with imports, could trigger a wave of lower prices in the region.