Rio de Janeiro — Brazil has reduced the volume of biodiesel blended with diesel sold at the pump to 10% from 13% for the May-June period amid raw-materials shortages that have caused prices for the biofuel to skyrocket at recent supply auctions, the Mines and Energy Ministry said.
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The latest reduction, announced April 9, represented a setback in Brazil's attempts to expand biofuels consumption as a way to meet its targets to reduce greenhouse-gas emissions under the Paris agreements as well as cut Brazil's dependence on imported barrels of diesel and gasoline. Brazil has historically imported about 25% of its diesel demand and about 15% of gasoline consumption.
"The government is working to strengthen and consolidate the Brazilian biofuels market, albeit in an environment that allows for competition, in search of guaranteeing the national supply and consumers' desires for price, quality and supply of the product," the Mines and Energy Ministry said.
The latest price troubles started April 7, when Brazil's National Petroleum Agency, or ANP, suspended the 79th biodiesel supply auction. The auction was suspended after biodiesel prices soared to more than double the price of a liter of diesel during a new phase of the sale dedicated to small, family size producers. Industry officials cited raw materials prices for the jump.
Brazil most recently raised the volume of biodiesel blended with diesel sold at the pump to 13% on March 1. The increase was part of a broader plan that is expected to boost the biodiesel mandate to 15% by March 2023 under the country's RenovaBio program.
Biodiesel producers, however, have faced challenges to meeting Brazil's biodiesel demand since the coronavirus pandemic arrived in Latin America's largest economy in March 2020. Producers initially reined in production amid expectations that domestic diesel demand would fall because of social-distancing measures implemented to contain the outbreak.
But Brazil's downturn in diesel consumption was short-lived, with record-setting oil seed and sugarcane harvests stoking demand for diesel in the second half of 2020. Diesel is Brazil's No. 1 refined product in terms of consumption, powering tractors in fields as well as trucks and trains that transport the harvest to port.
Caught by surprise
The surge in demand caught biodiesel producers by surprise. In addition, demand for soybeans surged as demand from key export destination China pushed prices for the commodity to record levels. That caused biodiesel prices to spike, forcing some biodiesel producers to import soybeans and oil from overseas to use in biodiesel production.
According to the ministry, 71% of Brazil's biodiesel is made from soy, with the rest coming from animal fats and other oils such as recycled cooking oil.
The higher raw materials prices crept into biodiesel-supply auctions and forced the ministry and Brazil's National Petroleum Agency, or ANP, to temporarily reduce the biodiesel mandate on three occasions in 2020. That included a reduction to 11% from 12% in the November-December period.
Biodiesel outlook cloudy
The ongoing blend volatility leaves the outlook for biodiesel production growth uncertain. Trade groups representing biodiesel producers and agricultural groups expected the rising biodiesel mandate to boost output in 2021. Despite the pandemic, Brazil increased biodiesel production 9.0% to 6.43 billion liters in 2020, compared with 5.90 billion liters in 2019.
Each 1% increase in the biodiesel-diesel blend sold at the pump represents about 600 million liters/year of additional production, according to the Brazilian Biodiesel and Biokerosene Union, or Ubrabio, and Brazilian Vegetable Oil Industry Association, or Abiove. Both trade groups represent biodiesel producers in Brazil.
The groups had expected 2020 biodiesel production to break 7 billion liters.
Abiove, Ubrabio and several other trade groups issued a joint complaint about the reduction, saying that it puts the blame for rising diesel prices at the feet of Brazil's biodiesel industry. Biodiesel blending, which represents about 14% of the price of a liter of diesel, is also subject to variations in international commodities markets and foreign exchange rates just as oil prices are, the group said.
The trade groups called on the government to reverse the measure.