High inventories pressure Brazil biodiesel prices

Logistical differentials for Brazilian biodiesel contracts to supply fuel distributors in May and June fell from March and April values, reflecting higher inventories and a bumper crop of soybeans for crushing, which could increase vegetable oil production.

The formula for the logistics differential of plants includes the quote of the soybean oil futures contract in Chicago, its differential for export cargoes in the port of Paranagua and the Brazilian real-US dollar exchange rate. It is the portion in the pricing linked to producers' margin.

Negotiations for May and June started with plants seeking higher values to recover part of the losses incurred by unscheduled stops, the result of retailers' delays in collecting biodiesel. But the supply glut has not abated, leading to a drop in prices.

With higher inventories in the market, fuel distributors stuck close to acquisition goals established by oil regulator ANP for the May-June period.

Sales are expected to gain traction over the next two months, as blended diesel demand traditionally gets a seasonal boost from agricultural-sector consumption linked to grain and sugarcane crops.

The distribution sector expects an extension of the current supply-demand imbalance, exacerbated by significant volumes of imported diesel at ports and lower-than-expected demand. The situation has generated concern among many participants, who see this trend as a potential sign of non-compliance with the biodiesel blending mandate.

ANP data show that the compliance rate with the Brazilian B14 diesel specification dropped to 83.4pc in April from 95.2pc in March, reaching the lowest level since the 2016 start of monitoring. Non-compliance with the minimum biodiesel content accounted for 67pc of the infractions recorded during the period compared to a historical average rate of 47pc.

The recent end to a special tax regime for fuel importing companies offered by northern Amapa state's secretary of finance should end a significant source of diesel price distortions and help rebalance supply in the country.

Variations

The steepest decline in differentials took place in northeastern Bahia state, where premiums for the period ranged from R600-830/m³ (44.35-61.35¢/USG), down from R730-1,020/m³ in the March-April period, according to a recent Argus survey.

In the northern microregion of Goias-Tocantins states, the premium range also dropped by around R142/m³ to R300-535/m³ from R440-680/m³.

By Alexandre Melo