Driving Discussions: Impacts of Covid-19 on Brazilian ethanol market

Author Argus

Like many commodities markets around the world, the Brazilian ethanol market has seen a significant impact from Covid-19.

Join Vanessa Viola, Senior Vice President for Latin America, and Amance Boutin, Latin America Biofuels editor, as they discuss the pandemic implications to ethanol supply and demand, how producers are handling this crisis and the outlook. 

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Vanessa Viola: Hello and welcome to Driving Discussions, a series of weekly podcasts brought to you by Argus about the major facts impacting the global energy and commodities markets. My name is Vanessa Viola, Senior Vice-President for Latin America. In today’s episode I talk to Amance Boutin, Latin America Biofuels Editor with Argus, about the impacts of coronavirus in the Brazilian ethanol market.  Welcome Amance.

Amance Boutin: Thank you for having me, Vanessa.

Vanessa: Amance, how did the Covid-19 pandemic impact Brazil’s ethanol market?

Amance: Like across all energy markets, Brazil’s ethanol sector was taken aback by its effects. Brazilian producers also had to deal with a dual shock which rippled through both supply and demand and sent prices, volumes and expectations into a downward spiral starting mid-March. I would dare to say that those premises were even worse for Brazil’s ethanol sector.

Vanessa: How so?

Amance: Brazil’s ethanol production uses sugarcane as primary feedstock, whose crop season started on 1 April. That meant that the Covid-19 demand crisis hit right when the supply of feedstock peaked.

Now, you can’t store sugarcane in a silo like you would with soy or corn, or in an on-shore terminal or a tanker like you would for oil. Once you cut ripe sugarcane, it starts losing its sugar content within 24 hours. If you left it in the field and save it for later, it will affect quality content too. This means that mill growers and owners have to process it right away, which tends to exacerbate the offer shock.

You also have to remember that the Brazilian ethanol market is a free market. There is no overarching structure like Opep to discuss and mandate production cuts to attenuate the oversupply situation and balance the market. 

Vanessa: And how did this translate in terms of prices?

Amance: All these factors sent prices for hydrous ethanol (or E100) in Ribeirao Preto, Brazil’s largest producer hub, down 40pc between 3 March and 2 April to R1,550/m³ or 101.5¢/USG. Prices have rebounded between R1,700-1,760/m³ since the beginning of May as demand destruction stabilized around 50-60pc versus pre-crisis levels.

Vanessa: What did the sector do to remedy this crisis?

Amance: Brazil’s sugar and energy sector pleaded the government for a series of measure to protect E100 ethanol demand against gasoline. Virtually all Brazilian cars can run on E100 and E27 gasoline, and Brazilian can drivers basically arbitrate between the two fuels. They tend to choose ethanol over gasoline when the price for E100 is 70pc or less the price of E27 gasoline.

Producers proposed two measures to safeguard this 70pc price gap. One was to raise the Cide federal tax on gasoline by R100/m³ and temporarily suspend a R131/m³ tax on hydrous ethanol. They also attempted to establish a 15pc import tariff on gasoline at the beginning, with a congressman closed to the ethanol sector even suggesting Brazil banned imports of ethanol, diesel and gasoline for three months.

Finally, they asked for credits that use ethanol as a collateral to keep companies afloat and help them invest in storage space.

Vanessa: Did the government attend these demands?

Amance: The credit lines did get a lot of traction, but the remainder of the proposals faced a lot of opposition from other players such as Petrobras, fuel retailers and traders, gas stations and the government itself.

They are still under discussion but the consensus is that all demands but credit lines have a chance to succeed as they would either cause losses for other market participants in the fuel sector or undermine tax revenue for the government.

Vanessa: You mentioned that E100 ethanol and gasoline compete at the pump. How did the crisis impact gasoline?

Amance: As you would imagine gasoline demand was also heavily impacted by the transport restriction measures. The number of players in the downstream segment is much smaller than ethanol, but the exposure to international price variation is probably greater. There is basically Petrobras, which owns most of Brazil’s refining capacity, fuel retailers and traders who imports gasoline and private refineries, but their volumes are marginal compared with the other two. 

Demand destruction for gasoline was close to the levels we have seen for ethanol – about 50-60pc.

The steep drop in demand meant that Petrobras had to slash refinery runs, which dropped from 74pc on average in March to a low of 54pc around mid-April. Utilization rate is now back above 70pc, but Petrobras remains in a dire situation to maximize output as demand for refined products vary greatly. Gasoline is one of the products which faces oversupply.

Vanessa: Did Petrobras manage to reduce gasoline production to match demand?

Amance: To some extent, yes. But it also fought to retain domestic market share by keeping prices very low. Brazil faces a conundrum as gasoline demand remains very weak while demand for LPG is growing as Brazilians are cooking more at home due to the Covid-19 restrictions. Brazil’s LPG production comes mostly from oil refining and any reduction in gasoline production tends to reduce LPG output as well.

This has made life increasingly difficult for ethanol producers, but also for direct competitors such as fuel importers and independent refineries, which struggle to compete with Petrobras ex-refinery prices.

Vanessa: How is the outlook for gasoline imports?

Amance: It’s very uncertain to say the least. Importers are coping with negative margins as gasoline purchased abroad remains consistently more expensive than domestic product.
There’s also an aggravating factor, which is the upcoming changes in gasoline specification which will come into force in August.

Vanessa: What are these changes and how will they impact the market?

Amance: The most important changes are a minimum density requirement of 715g/l at 20ºC and a minimum RON number of 92 for E27 gasoline. It’s basically an upgrade which puts the Brazilian grade – which is currently a low density, low octane gasoline – closer to US and European specifications. Distributors will have a 60 days period where they will be able to sell their outstanding inventories of old specification gasoline starting 3 August.

It’s not clear yet what the impact will be in terms of pricing. We did a survey with importers in Brazil and refiners in the US and we heard a quality differential of 2 to 5cpg compared to the current price. 

Brazilian importers are trying to maximize the use of the old specification before and during this transition period, but they also don’t want to carry stocks after October when the transition period ends. And the current scenario makes it very difficult to predict demand and consumption patterns.

Finally, they don’t know how Petrobras will react to the specification change. The company backed the change during the public consultation period held by Brazil regulator ANP. They argued that they already attended to the new specification in terms of density and that the change would not impact their prices, but market participants Argus spoke to think the octane upgrade will force it to raise its prices. 

Vanessa: Thank you, Amance.

If you want to learn more about the impacts of the coronavirus pandemic in the global commodities markets, access our dedicated microsite at www.argusmedia.com/coronavirus.
We will be back soon with another episode of “Driving Discussions”. Bye!

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