Analysis: Market doubts Brazil can sacrifice sugar for ethanol

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  • Posted on April 12, 2011


    By Inae Riveras

    SAO PAULO (Reuters) – Local cane mills, world sugar markets and analysts were unmoved by the Brazilian government’s threats to boost ethanol output by any means, saying ideas of a sugar export tax or credit limits would be hard to implement or ineffectual.

    Brazilian ministers last week began floating early proposals for an industrial policy shift aimed at stimulating local ethanol supplies to bring down local fuel prices. Such measures, if successful, would likely redirect cane away from sugar production in a country that controls half of global trade in the sweetener.

    But local cane mills doubt the effectiveness of such measures and question the political will to go to such an extreme in a country that relies on sugar shipments for billions of dollars in annual export revenue.

    Sugar futures were also stable to falling in response, even though the world is coming off a two-year deficit in the sweetener and rising food costs are worrying governments around the globe.

    Analysts say a tax would simply provoke a rise in international prices given Brazil’s importance in the market, especially at a time of tight global stocks.

    “If they impose a tax on exports, then sugar prices will rise,” said Leonardo Bichara, an analyst at the International Sugar Organization, adding that such a move would mean even fewer incentives for producers to increase ethanol output.

    TRADE SURPLUS DWINDLING

    But Julio Maria Borges, director at Job Economia consultants, said it was still too early to have a clear image of how the government might reshape sugar and ethanol policy.

    Talk of overhauling Brazil’s ethanol market is not new. Almost yearly, when ethanol prices surge in between cane harvests, the government threatens to regulate the industry.

    In recent years, the government has dealt with supply concerns by reducing the mandatory ethanol blend in gasoline to the legal minimum of 20 percent. But repeated threats to tax sugar exports have never materialized, and many analysts question the likelihood of such a move at a time when Brazil’s trade surplus is dwindling.

    Usually, government pressures and the arrival of ethanol from the newly started season have been sufficient to ease fuel prices and avert more drastic measures.

    This year, however, deeper changes could occur after the price of hydrous ethanol — the kind used in flex-fuel cars — hit a five-year high, prompting drivers to switch to gasoline.

    Fears of a fuel shortage have recently forced Brazil to import ethanol and gasoline to keep up with demand from the growing auto fleet while the government struggles to keep fuel prices from stoking inflation beyond its already troubling rate.

    The industry itself also has been seeking some sort of government intervention so companies could take steps to meet strong demand by resuming major investments in expansion. These investments have been frozen since the 2008 credit crisis.

    TOUGH TO IMPLEMENT

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    By Inae Riveras

    Analysts are skeptical about how the government could implement some of the measures such as forcing mills to prioritize ethanol production at the expense of sugar.

    “All these measures that are being mulled scare investors, although I don’t see how some of them could be implemented,” said Eduardo Pereira de Carvalho, director at Expressao, which advises companies on acquisitions in sugar and ethanol.

    Most Brazilian mills can calibrate the amount of cane used for each product throughout the season, giving them the ability to shift production according to price swings. Experts say this is a major factor for Brazil’s competitiveness on the global sugar market, but this flexibility is limited.

    “Nobody has a lot of idle capacity that could now be used,” said Carvalho. The most flexible mills can switch only about 10 percent of their capacity between the two products, he added.

    In the long run, however, if ethanol somehow remains more attractive than sugar, industrial capacity to produce the fuel could be expanded — not necessarily at the cost of sugar.

    Brazil’s Energy Minister Edison Lobao said on Friday that state-run oil and gas company Petrobras would expand its presence in the ethanol sector and become a de facto “regulator of the market.”

    A more-regulated ethanol supply, possibly through Petrobras building stocks and concentrating sales in between cane harvests, could mean less price volatility, which is currently a major problem for the sector.

    The new rules are expected to be announced over the coming weeks, Agriculture Minister Wagner Rossi said on Thursday.

    One of the most likely ones is the change in ethanol status to a “strategic fuel” instead of an agricultural commodity, meaning the National Petroleum Agency (ANP) will keep tabs on the sector from production through distribution.

    About 70 percent of ethanol sales are currently made on a spot basis, with nearly no hedging. Under ANP oversight, the fuel would likely be traded more like gasoline, where suppliers sign long-term deals with distributors.

    “If ANP rules for gas and diesel such as programed distributor purchases are extended to ethanol, this can be positive… It will be a change for the better,” said Plinio Nastari, head of Datagro, a sugar and ethanol consultancy.

    But even this measure raises questions about the extent ANP would be able to determine what each mill will produce.

    Other proposals cited by the local media provide unclear or sometimes confusing signs: a cut in the ethanol blend in gasoline, new credit lines for the renewal of cane fields and the removal of a tax on imported gasoline.

    In all cases, a major problem for mills will likely remain unchanged: Petrobras keeps gasoline prices independent of world oil price fluctuations, which effectively sets a ceiling for ethanol pump prices above which the biofuel can not compete.

    “The appetite for new mills is very low because ethanol has to compete with controlled gasoline prices,” said Marcos Jank, president of Brazil’s cane industry association Unica.

    SUGAR TAX

    Reuters/AC