Brazil to cut biodiesel blend mandate to 10pc: Update

Adds confirmation of blending cut in second paragraph, Ubrabio comment in 12th paragraph.

Brazil temporarily reduced the mandatory biodiesel blend in diesel to 10pc from 13pc because of concerns about the inflation impact and discontent among truck drivers.

Brazil's mine and energy ministry confirmed the reduction today following protracted talks with biodiesel producers.

The move comes after biofuel prices soared 60pc in a now-suspended auction that started earlier this week, two sources who participated in meetings with the government told Argus. The mandate reduction is valid during May and June.

ANP suspended the tender on 6 April at the start of a new bidding round for small-scale producers. Average prices in the first hours of the 79th biodiesel auction reached R7.50/l ($5.08/USG), up by 60pc from the final price of the previous auction, R4.70/l. The price of 10ppm sulphur content (S10) diesel at Brazil's largest refinery Replan is currently R2.79/l.

Biodiesel prices are rising because of successive feedstock price increases and depreciation of the Brazilian real to the dollar since the last auction on 5 February. Soybean oil prices in Sao Paulo jumped to R7,500/t cif on 26 March, up by 26pc from 5 February. Prices were boosted by a 5.8pc depreciation of the Brazilian real to the US dollar over that period as well as beef tallow prices that soared by 30pc to R7,000/t cif.

Producers and distributors recently surveyed by Argus had expected prices to rise by 17pc at this week's auction, meant to supply biodiesel to the market for May and June.

ANP said it "cautiously suspended" the auction "as requested by the mines and energy ministry." The mines and energy ministry did not respond to a request for comment.

The energy ministry convened at least three emergency meetings with plant representatives to analyze the current supply and pricing scenario. The ministry proposed a reduction in the blending mandate for May and June amid recent political tensions over rising diesel prices and its consequences for inflation, transport costs and rising discontent among truck drivers.

A source who attended the meetings told Argus that the producers were under intense pressure to accept a reduction in the blending mandate after technicians from the chief of staff and the energy ministry argued that the price increases would be unsustainable.

The government saw the reduction as critical, in part because its March suspension of the PIS/Cofins federal tax on diesel will soon expire. The federal tax should be restored on 1 May, prompting government concerns about the combined effects on retail diesel prices from the tax restoration and rising biodiesel prices.

Reducing the diesel mixture to 10pc comes less than a month after mines and minister Bento Albuquerque committed to adding 13pc of biodiesel to fossil fuel in an event that brought together the presidents of the associations of vegetable oil industries Abiove, biofuel producers Aprobio and biodiesel producers Ubrabio.

Ubrabio said the reduction will cause a R17bn loss to producers and a 300mn l drop in biodiesel output.

Sources from the fuel retail segment told Argus that the reduction of the biodiesel content seemed to be the best solution to reduce the price in the short run.

Brazil's biodiesel supply is negotiated in bimonthly tenders organized by ANP, a model which should come to an end in 2022 as Brazil migrates toward a free market model. Diesel consumption reached 974,400b/d in May-June 2019, which means that reducing the biodiesel content by three percentage points would have shifted 29,230b/d from biodiesel to diesel at the time.

By Alexandre Melo and Amance Boutin