After a year of negotiations, the Brazilian biodiesel spot market may gain traction in the second half of 2023 in the hope that president-elect Luiz Inacio Lula da Silva will raise the mandatory blend in April.
Outgoing president Jair Bolsonaro through the first quarter of 2023 maintained the current mix at 10pc, the same level since November 2021. The decision was unexpected, as contract volumes and prices are usually renegotiated every two months.
A resolution from the national energy policy council CNPE foresaw a gradual hike in the biodiesel blend starting in 2019, reaching 15pc in 2023. But the Covid-19 pandemic left the supply and demand dynamic unbalanced for blended diesel, prompting the government to slash the mixture for the first time in September 2020.
Bolsonaro cut the biofuel mandate in 2022 to keep down the retail price of blended diesel amid record inflation, an election-year strategy aimed at easing tensions with independent truck drivers. Producers will pressure the next administration to increase the mandate as of March.
Prompt transactions began to gain strength in May, as distributors turned to the prompt market to meet their target, and almost doubled from April to 6.29bn liters. Deals in 2022 peaked at 25.89bn l in August, reflecting national retailers' appetite.
But Argentina's soy dollar policy shook liquidity in September, when biodiesel sales fell by 37pc to 16.23bn l. In Brazil, biodiesel pricing for two-month contracts and the spot market are based on a formula made up of soyoil prices in the Chicago Board of Trade (CBOT), product differential at the Paranagua port, and the US currency exchange rate.
Prompt demand remained weak in October-November, as the country's largest fuel distributors further increased their purchases under the contract model amid more attractive prices. Since then, regional retailers have been responsible for most of the period's liquidity as they buy new diesel cargoes and must blend them with biodiesel.
Brazil's soy intercrop season in November-February also boosts prices of vegetable oil and, consequently, biofuel amid lower bean availability. The average percentage of biodiesel contracted for November and December reached 142pc of the target for the period, indicating retailers' wariness of the spot market.
More of the same in 1Q
Distributors will continue to shy away from higher prompt prices in January-February, according to market participants. But confirmation will come in mid-January, when oil regulator ANP releases data for the period.
Producers are talking with Lula's transition team to increase the biodiesel blending mandate to at least 12pc in March. But this proposal is not unanimous among producers and distributors. Some of them believe that a more aggressive increase in the blend would trigger an increase in feedstock prices — mainly for degummed soybean oil — and impact retailers' logistics chain.
From the producer's point of view, the spot market may have more liquidity — especially in the second half of 2023 — because the contracting target defined by ANP will not be high, since the blend was kept at 10pc in 2002. Companies will be able to contract for the minimum and offer the remaining capacity on the spot market if they believe that conditions will be more advantageous.
If Lula's administration increases the blend to 14pc in the first half of the year, retailers are considering keeping contracts at high levels to ensure that there are no disruptions in the supply chain.
