Viewpoint: Brazil diesel importers unmotivated for 2021

Brazilian diesel importers will start 2021 unmotivated and deeply uncertain of the market conditions they will face in the coming months.

With the arbitrage window closed for the imported product and the beginning of the year historically marked by lower demand, participants are preparing for a period of extreme uncertainty in the domestic market. The current view is for continued difficulties for importers until state-controlled Petrobras completes the sale of around half of its 2.2mn b/d of domestic refining capacity — targeted for the end of 2021.

Petrobras plans to sell between $25bn-$35bn of non-core upstream, midstream and downstream assets through 2025, according to its most recent spending plan. The lion's share of that should come from the divestment of eight domestic refineries, part of a government-backed plan to open the refining market where the company holds 98pc of capacity.

For Brazil's fuel importers association Abicom, 2020 started with promising signals for the import market. Early in the year, oil prices were trending lower and Petrobras was repositioning itself in the market, creating an advantageous arbitrage scenario.

"But since March, what we've seen is a drop in demand [for fuels] due to Covid-19 and a positioning [by Petrobras] that is difficult to understand," Abicom president Sergio Araujo tells Argus.

Since mid-September, volumes of ex-port land terminal S10 diesel in Santos and Paranagua have been traded at premiums against Paulinia and Araucaria refineries prices, according to Argus price data. Market participants consider the arbitrage window open when the minimum discount for product stocked in Santos and Paranagua reaches R80/m³ and R35/m³ in relation to the respective basis.

New environment already under threat

Diesel imports into Brazilstarted to increase significantly in 2017 following Petrobras' adoption of market-based pricing, including daily changes. Trading firms, both large and emerging distributors, and brokers bet on a transformation of a local industry that for decades was dominated by a single participant. But activities have slowed since 2018 following Petrobras' more aggressive pricing strategy, raising concern about the promise for a free and transparent market.

With product prices more attractive from the refining units, ex-port land terminal diesel interest decreased throughout 2020, causing continuous losses for importers.

"The spot market at the Santos port has been practically at a standstill for six months," the representative of a distributor tells Argus. "It wasn't like that at the beginning of the year. It is necessary to change the posture [of Petrobras' pricing policy] in order to be competitive."

Some trading companies keen on mitigating losses discontinued prior indexed long-term contracts, which prevailed in the port of Santos.

In November, a major trading company was forced to suspend delivery of term contract volumes in order to stanch the bleeding, according to sources heard by Argus.

"This type of event is not common," a trading company source said. "Of course it has already happened, but this not normal in the market. In this case, we all understand that it was a choice between losing or losing a lot."

Abicom has said that Petrobras pricing below international parity represents an "abuse of market power" and continues to negatively impact the company's only competitors.

"Petrobras reiterates its commitment to the practice of competitive prices and in balance with international markets, which can be proven by the continuity of diesel and gasoline imports by several participants, distributors and trading companies," the company said recently.

By Gabrielle Moreira