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Brazilian Southeast hydrous ethanol price parity with gasoline hits highest since April 2016

Highlights

SE hydrous ethanol price parity at 76.59%

Brazilian otto cycle demand up 7.3% on year

The hydrous ethanol price for consumers from Brazil's Southeast hit an average of Real 4.646/l on the week ended Oct. 2 while the gasoline cost averaged Real 6.066/l, resulting in a price parity of 76.59% of the E100 grade over the fossil fuel option -- the highest since April 4, 2016, when it settled at 76.99% -- showed data published Oct. 4 by the National Agency of Petroleum, Gas and Biofuel, ANP.

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Due to the lower energy content, hydrous ethanol offers an economic advantage over gasoline up to the 70% threshold, suggesting that since May 10 when the parity was at 70.16%, drivers from SE region were not economically oriented to favor the biofuel over the fossil fuel to fill their tanks.

The Southeast is the main Brazilian consuming region of hydrous ethanol, therefore any reduced price advantage of fuel with E100 in these states will trigger a stronger effect in the biofuel sales drop.

From the Brazilian total hydrous ethanol sales in 2020, 70.05% was to supply the Southeast region, while in 2021 this share is at nearly 69% from January to August.

The Southeast region is formed by Sao Paulo, Minas Gerais, Espirito Santo and Rio de Janeiro and has the country's highest population density. One of the components explaining the high biofuel consumption in this region is the ICMS tax charged over hydrous ethanol, at 13.3% in Sao Paulo and 14% Minas Gerais -- the two lowest state taxes in the country.

In addition to the low tax impact, Sao Paulo is the largest ethanol producing state, lowering the logistical costs to supply internal demand.

Main price triggers

Ethanol producers from Center-South region have been favoring the anhydrous ethanol production since September 2020 willing to guarantee the volume needed to commit with the 27% anhydrous mandatory blend in gasoline and lowering hydrous ethanol production.

That strategy was established since a higher volume of cane crushed started to be diverted toward sugar production in the prior CS crop 2020-21 and a severe dry weather hampered the current 2021-22 crop. According to estimates from S&P Global Platts Analytics, the total volume of cane crush will drop to 522 million mt in the current season, down 13% on the year.

Latest production data released by the Industry Association UNICA showed hydrous ethanol production from April 1 to Sept. 16 was at 12.7 billion liters, down 15.45% on the year, while anhydrous increased 26.42% on the year to 8.05 billion liters.

While the production has been decreasing, Brazilian fuel consumption is reinstating.

Brazilian total otto cycle demand from January to August increased 7.3% on the year, however, the number is still 5.9% lower than the same period in 2019 before the pandemic.

Otto cycle is the combination of hydrous, in gasoline equivalence, gasoline and anhydrous sales.

In that scenario, the Platts hydrous ethanol assessment ex-mill Ribeirao Preto has been breaking weekly historical highs since August. It settled on Oct. 4 at Real 3,990/cu m, unchanged since Sept. 28.

Market participants said just a drop in the anhydrous mandatory blend could cap the steady upward price curve expected to be in place until at least until May 2022, when the new CS crop might start.