Brazil cuts diesel prices, truck strike ending: Update

Adds tax impact on diesel importers.

Brazilian president Michel Temer agreed to a 60-day diesel price cut in the latest concession to striking truckers that have blocked highways and snarled food and fuel distribution nationwide since 21 May.

Abcam, the largest independent truck drivers' organization, is claiming victory and urging truckers to return to work. Several roadway protests are still underway.

The price reduction of R0.46/l ($0.12/l) to R1.64/l is a fresh sign that Brasilia is backing away, at least temporarily, from a policy of market-based fuel pricing that was implemented by state-controlled Petrobras in 2016 in the wake of a debilitating corruption scandal.

The new price cut equates to an elimination of federal fuel taxes PIS/ Cofins, a key demand of the truckers. After the first 60-day freeze, diesel prices will be reviewed monthly, Temer said. The government's proposal, which also includes an increase in minimum freight costs and a toll road exemption, is expected to cost around R10bn through the end of the year.

Sensitive to the perception of foreign investors, Temer said last night that the price freeze will not hurt Petrobras. But the oil company had already broken with the policy on 23 May when it said would cut diesel prices by 10pc, to 2.1016/l, for 15 days, in an extraordinary action aimed at ending the strike. The truckers did not budge, prompting the government to announce on 24 May that it was eliminating federal fuel tax Cide and would subsidize the discount for 30 days. The costly proposal was the result of marathon negotiations between the federal government and most truck drivers' groups, but the deal did little to ease the work action. On 25 May, Temer authorized the military to clear highways in an effort to normalize food and fuel supply. The step had limited impact over the weekend.

Fuel supply should begin to normalize this week. But a threat by refinery workers to carry out a 72-hour strike starting on 30 May is creating further uncertainty. Echoing the demands of the truckers, the refinery workers oppose Petrobras' market pricing policy, which they blame for a flood of fuel imports that have contributed to sagging refinery throughput. The workers are also leading calls to replace Petrobras chief executive Pedro Parente.

Petrobras said it is evaluating the government's new price cut.

Utilization rates at Petrobras' 13 domestic refineries averaged around 76pc in first quarter 2018, down from 82pc in the same period of 2017. The company's diesel production in that period averaged 622,656 b/d, down by 9.2pc year on year. Diesel sales in Brazil averaged 914,382 b/d in the first three months of 2018, a 1.8pc increase. The gap was filled by imports, which increased by almost 30pc year-on-year to around 258,795 b/d in the first quarter.

The import trend raises industry questions about how the government's diesel subsidy will work in practice.

Today, finance minister Eduardo Guardia announced that the diesel subsidy of around R0.30/l would be extended to diesel importers, and that an import tax would be levied when international diesel prices fall below the reference price in Brazil. Guardia said the import tax is fundamental to the success of the subsidy plan.