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Anhydrous ethanol premium over hydrous in Center-South Brazil at record high

Highlights

Center-South anhydrous spot premium at average 14.3%

Increased gasoline demand in 2020 supported premium

Long-term contracts to settle at nearly 13% premium in 2021

New York — The spot premium of anhydrous ethanol over hydrous in Brazil's Center-South for the 2020-21 crop, which ended March 31, averaged 14.3%, up 3% from the prior crop and at the highest premium since S&P Global Platts started to track it for the 2014-15 crop.

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The Center-South crop started on April 1, 2020.

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

The highest premium was recorded at 26.8% during the three first days of the 2020-21 crop, while the lowest at 4.2% was on March 10.

With the spot hydrous price historically showing a higher volatility than anhydrous, the first price impacts of lackluster fuel demand due to the start of the coronavirus pandemic in Brazil and the collapse in international oil prices were reflected in hydrous, or E100 prices.

Platts assessed hydrous ethanol ex-mill Ribeirao Preto in the first half of March 2020 at an average Real 2,440/cu m and Real 1,875/cu m in the second half of the month, a drop of 23% in the period. The anhydrous ethanol assessment ex-mill Ribeirao Preto lowered by 14.3% in the same period.

Most of the higher anhydrous ethanol premium support in 2020 could be explained by fuel consumers' behavior, which pointed to a preference to fill their tanks with gasoline, which in Brazil has a mandatory blend of 27% of anhydrous ethanol, rather than with the E100.

Hydrous ethanol consumption in Brazil in 2020 totaled 19.26 billion liters, a drop of 14.6% on year, while gasoline demand totaled 35.8 billion liters, down 6.1% on year, meaning that anhydrous had the same year-on-year decline.

While part of the higher premium could be explained by the consumers pattern, the reduced anhydrous production in the 2020-21crop and plunged imported volume from US have also contributed to the bullishness.

S&P Global Platts Analytics estimates that the total Center-South total ethanol production from the 2020-21 crop will reach 30.4 billion liters, down 8.4% from 33.2 in the prior crop cycle.

CS ethanol production lower for second straight year

Anhydrous ethanol imports were also capped in Brazil due to the steep depreciation of the real against the US dollar and the return since Dec. 14, 2020, of the 20% import tariff charged for any ethanol imports coming from non-Mercosul members.

Brazilian total anhydrous imports from March 2020 to February 2021 were 532 million liters, a plunge of 62% from the 1.4 billion liters imported in the same period of the prior Center-South crop cycle, increasing the domestic demand.

Platts Analytics estimates that Brazilian total otto cycle fuel demand in 2021 will increase 6% from 2020, despite the better consumption scenario the volume is estimated to be still 4% under 2019, in the pre-pandemic environment.

In the scenario of increased fuel demand in 2021 and ethanol production in the Center-South falling for the second consecutive year, to 29 billion liters, according to Platts Analytics, market participants are estimating tight anhydrous availability in the country. That expected tightness is already reflected in the first market discussions for long-term contracts of anhydrous ethanol for the crop 2021-22.

In Brazil, fuel distributors and ethanol producers who traded anhydrous ethanol in the prior crop cycle,need to set long-term contracts of anhydrous equivalent to 90% of the total volume negotiated in the prior year, as a measure to guarantee the country's supply security.

In the last few years, however, the average anhydrous premium settled in the contracts was at 10.5%-11% over hydrous in the spot market, according to sources, while the first talks for the 2021-22 crop are pointing to a premium over 13%.

A large ethanol producing group declared that the first talks were suggesting a premium between 14% and 15%, while one of the largest fuel distributors said that its is aiming at a ceiling target of 13% premium.