Brazil ethanol sector pleas for tax, credit help

Brazil's ethanol industry warned of collapse without immediate government help to overcome a sharp drop in gasoline demand just as a bumper sugar cane crop begins to be harvested.

Ethanol is now being sold at below its production cost, Brazil's influential sugar and ethanol industry association Unica and nine other agricultural and industry associations said in an open letter yesterday to President Jair Bolsonaro.

"We expect a cane crop of over 600mn tons and if it cannot be harvested, this will destroy the sector, hurting millions of families across Brazil," Unica president Evandro Gussi said.

Unica said an estimated 198 mills in the center-south region are already processing their 2020-21 crop, compared to 157 at the same time last year.

Unica urged measures to help the ethanol sector weather the crisis, starting with a temporary exemption of hydrous ethanol from the PIS/Cofins social tax of R0.1273/liter ($0.09/USG).

The government at the same time should increase the CIDE tax on gasoline, which would help hydrous ethanol to better compete at the pump, the group said. The CIDE tax is currently R0.10/l and the industry has suggested that the tax should be raised to as high as R0.50/l.

The industry groups are also urging the government to implement a credit program that would allow the use of ethanol or sugar as a loan guarantee.

The Bolsonaro government has signaled a willingness to respond to at least some of the industry's pleas.

Agriculture minister Tereza Cristina Correa said early this week that the government is considering a cut in the PIS/Cofins on ethanol.

Wholesale gasoline prices in Brazil have tumbled by 48pc from R1.93/l at the start of the year to R1.00/l, reflecting the global oil price crash.

Unica's Gussi called this "devastating" to mills, which are in the early weeks of the center-south cane harvest, when companies rely on domestic ethanol sales to generate cash flow to cover operating costs.

This sentiment was echoed by Unica's technical director, Antonio de Padua Rodrigues, who said that if nothing is done, the 2020-21 season will be lost.

Petrobras pushback

As expected, the ethanol industry is getting pushback from Brazilian state-controlled Petrobras, Brazil's largest fuel wholesaler.

"If you increase the CIDE tax on gasoline, this automatically makes gasoline less competitive compared with ethanol, just when we are seeing a scarcity of demand," Petrobras downstream director Anelise Lara said today.

"Ethanol is already very privileged, it has subsidies and lower [state fuel tax] ICMS. If you offer another subsidy for one derivative at the expense of another, it will disrupt the supply chain and we will certainly have a decline in gasoline demand. We will have to produce less gasoline and then LPG production will fall, and in this case we will we have an interruption of LPG supply, even with an increase in imports," Lara said.

Speaking this week on a webcast hosted by local think tank FGV Energia, Petrobras chief executive Roberto Castello Branco also criticized Unica's demands, saying this is not the time to "lobby the government over taxes."

Brazil's government has largely resisted recommendations for blanket lockdowns to check the spread of Covid-19.