Biodiesel producers are seeking to renegotiate the composition of price formulas defined in methanol supply contracts to better reflect more competitive spot market prices for the input.
Formulas in contracts negotiated between biodiesel producers and major methanol suppliers usually include a proportion of the price set by the seller and a variable portion based on a spot market index, which is defined by mutual agreement.
The proportion of the pricing formula is usually around 80pc of the price given by the supplier, while the remaining 20pc is based on the spot index. An expansion of spot market volumes stored in the Paranagua port, in southern Parana state, at prices lower than those established in contracts has opened the way for participants to start negotiating a bigger portion of contract linked to spot market indicators, up to 40pc in some cases.
Some producers are considering increasing spot market purchases at the expense of contract volumes. Many negotiations with suppliers and supply strategy decisions are still in the early stages.
The move comes as discounts for spot market volumes delivered to Paranagua via contracts in the US Gulf drop significantly. The average Argus methanol indicator at the port was R2,200/metric tonne ($404.75/t) fob in 27 June-10 October, below the R2,800/t in the same period of the Argus indicator on a cif Brazil basis for the product originating on the US Gulf coast secured under contract.
New entrants in the market are the main drivers of a price dynamic that has emerged in recent months. Inputs originating in Russia, where it is possible to source the product at more competitive prices because of the large supply of natural gas, have come into focus in this new environment.
The first vessels laden with methanol from Russia started arriving at Paranagua in May. Around 2,360t of product from the country was unloaded during that month, according to data from the Brazilian trade ministry. Volumes from Russia totaled 31,269t in May-September, accounting for 4.2pc of the total volume of methanol that arrived at Brazilian ports during the period. Last year, there was no flow of Russian product to Brazil.
Trinidad and Tobago, Chile, the US, Venezuela and Argentina remain the main sources of methanol shipped to Brazil, accounting for more than 90pc of imports. These volumes come mainly from large suppliers operating under contract. A new flow from Oman to Brazil also began in May, although with less competitive prices and in smaller volumes compared with Russian product.
Ample supply
There is plenty of methanol in the market, according to participants, contributing to prices below last year's levels.
In addition to the diversification of origins for the input, biodiesel producers point to the delay in increasing the biodiesel blend mandate into fossil diesel and some distributors' non-compliance with mandatory blend as factors contributing to the ample supply of methanol.
The 1 August increase in the biofuel blend mandate in diesel to 15pc from 14pc was initially scheduled to take effect in March. When the delay was announced in late February, biodiesel producers had defined annual volumes of the input in contracts, preparing for demand that did not materialize.
Uncertainty regarding contracted volumes may occur again in 2026. Brazil's fuel of the future law sets for a further increase in the blend to 16pc in March. But the start date for the higher blending mandate may be postponed, the director of the mines and energy ministry's biofuels department Marlon Arraes said recently.
