The EU's trade agreement with the Mercosur bloc is eroding the competitiveness of Pakistani ethanol exports to Europe by granting tariff concessions to Latin American producers, notably Brazil.
The 27-member bloc will apply an interim trade agreement (iTA) from 1 May to Mercosur members Argentina, Brazil, Paraguay and Uruguay. The deal reduces tariffs on selected products and improves market access, giving Mercosur ethanol a cost advantage over Pakistani supply.
Pakistan lost its tariff-free access to the EU last year, exposing its non-fuel ethanol exports to standard import duties and accelerating a decline in trade.
The EU-Mercosur agreement introduces a tariff-rate quota (TRQ) for ethanol, cutting or, in some cases, removing duties on fixed volumes from Mercosur countries. This particularly benefits Brazil, the EU's second-largest ethanol supplier.
Brussels will allow 450,000t of Brazilian ethanol for industrial use duty-free and sharply reduce tariffs on a further 200,000t for all uses, including fuel. In total, 650,000t will fall under the TRQ.
Previously, Mercosur ethanol faced standard import duties of €192/m³ for undenatured ethanol and €102/m³ for denatured ethanol. Pakistan, which had enjoyed duty-free access for non-fuel ethanol, became subject to these duties in mid-2025 after the EU revoked exemptions to restore what it called fair competition.
Pakistan was the EU's largest supplier of non-fuel ethanol in 2024, exporting 130,894m³, according to customs data accessed through Global Trade Tracker. Exports fell by about 45pc in 2025 following the removal of its preferential access.
The EU–Mercosur deal could accelerate this decline by reinforcing Brazil's cost advantage and displacing Pakistani supply in Europe.
Moreover, Pakistan does not export fuel-grade ethanol to the EU because its production facilities lack compliance with the EU's Renewable Energy Directive (RED) certification requirements. Fuel-grade ethanol still enjoys duty-free access under EU rules.
RED certification requires minimum greenhouse gas savings, compliance with land-use sustainability rules, third-party audits and full traceability. Several Pakistani distilleries have acquired, or are seeking, certification to attract European buyers of anhydrous ethanol, a market source said.
Brazilian supply weighs on prices
While Pakistani export cargoes for the current quarter have largely been booked, traders report limited discussions for third-quarter shipments as buyers wait for Brazilian price indications, which have been delayed by a late sugarcane harvest.
Brazil's sugarcane output in the centre-south region is forecast to reach 36.9mn m³ (363,900 b/d) in the 2026-27 season, the highest level in national supply company Conab's historical series. Brazil is also expected to produce a bumber corn crop in 2025-26, despite weather disruptions, reaching 139.6mn t, just below the previous season's record.
Corn-based ethanol accounted for nearly 84pc of Brazil's biofuels output in the first half of March, totalling 386.6mn litres, offsetting weaker sugarcane ethanol production during the off-season. Output was 6pc higher than a year earlier, according to Unica data.
Abundant feedstock supplies have weighed on Brazilian prices. Brazil's fob anhydrous ethanol was last assessed at $760.8/t on 29 April, below Pakistan's fob ethanol price of $790/t.
Brazil's highly mechanised agriculture and large-scale corporate farming deliver higher yields per hectare, lowering production costs. Pakistan's smaller-scale operations and less efficient farming practices raise costs, said Rana Waseem Akhtar, general manager at Pakistan's Noon Sugar Mills.
Shift to Asian Markets
Weak European demand has pushed Pakistani exporters towards alternative markets. A lack of new EU orders for September arrival has led traders to focus on South Korea and Japan.
One Pakistani producer said the company moved away from Europe in the second half of last year, shifting sales towards east Asia and the Middle East. Bulk shipments have declined, while containerised exports to eastern Asian buyers have increased.
South Korea has recently raised imports of Pakistani extra neutral alcohol (ENA), helping to limit downward price pressure. Korean buyers prefer containerised cargoes because of shorter delivery times, a Pakistani seller said. By contrast, US supply often requires bulk shipments that tie up capital for 60–90 days.
Another producer said it has developed new customers in Taiwan, recently shipping ethanol in ISO tanks.
Some traders remain cautiously optimistic about European demand, citing Pakistan's high ethanol quality. South American volumes require further purification to meet food-grade standards, adding time and cost, a Pakistan-based trader said.
