A renewed emphasis on ethanol for Brazil?

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As sugar prices fall Brazil’s cane industry will need to re-invigorate its domestic ethanol market

Brazil is a dominant force in the global bio-ethanol. However, in recent years cane has been diverted from ethanol production towards sugar and ethanol output has fallen. This has led to a reversal of the spectacular demand growth experienced in 2007-2009, as demand has had to be rationed on a large scale. Today, with ethanol prices falling, demand should start to return. However, it appears as though consumption patterns have shifted as demand has remained weak despite hydrous ethanol (E100 i.e. unblended) becoming competitive again.

  • The harvest in Centre South Brazil has rebounded in 2012/13, with the volume of cane crushed expected to reach 525mn metric tonnes (mt), an increase of 6% year-on-year, whilst total ethanol production has risen by 4.5% to 21.4bn litres.

“Brazil has the capacity to produce much more ethanol than it is doing today and the consumer base is in place to use much more ethanol. However, prices need to be at the right levels to get this to work”

Henry Toller, ethanol analyst

However, cumulative ethanol production remains short of record levels, and is currently 18% lower than the volume produced in 2010/11.

  • Around 60% of the Brazilian car fleet can operate on either hydrous ethanol or Gasohol (ethanol gasoline blend). In spite of this, discretionary demand for hydrous ethanol has been hugely disappointing, falling by 9% this season, despite competitive pricing.
  • Taking a longer term view we can see that current hydrous demand is around 40% lower than the record volumes seen during 2009.
  • After three years of high sugar prices, the global sugar outlook is becoming more depressed, yet discretionary hydrous ethanol demand from Brazil’s consumers has yet to emerge.

Low fuel prices and gasoline imports are a cost for Brazil’s energy businesses

  • So far this year Petrobras has reported losses of BRL 17.3 bn in its refining business, of which around 12% are from gasoline.

“The focus on sugar production has seen growth in ethanol production and use stall as the sector has switched emphasis. With lower sugar prices and an increase in production around the world today, the sector is right to be looking again at domestic hydrous demand and encouraging consumers to recognise the benefits of Brazil’s well established renewable fuel.”

Toby Cohen, Czarnikow director

A refocus on untapped ethanol demand as the Sugar market de-risks?

  • During the 12/13 season we project a global surplus of 7.1mn mt, which follows on from a stock build of 7.7mn mt in the 2011/12 season.
  • With the global sugar market de-risking, with stock levels rising, the weight of this additional sugar could prove difficult for the sugar market to accommodate. Lower prices could increase the allocation of cane from sugar to ethanol production,  primarily via the domestic hydrous market, where there is huge, untapped demand.
  • Still, hydrous prices, already at their lowest level since 2011, may need to fall further to stimulate demand, making it harder for producers to cover their costs.

Exports on the rise

  • Slow development of cellulosic biofuels effectively created a market for 490mln gallons of cane based ethanol in 2012. This market could increase to 800mln gallons in 2013.
  • This increased demand, together with an anticipated increase in Brazil’s fuel blend to 25%, means there could be significant pressure on Brazil’s anhydrous ethanol supplies going forward.
  • Overall, the Brazilian cane sector is likely to reaffirm its focus on ethanol in the 2013/14 season, though is set to do so in a difficult domestic environment.

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