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Ethanol – benefits, risks and challenges

Since March 2008, ethanol consumption in Brazil has surpassed that of gasoline. For that reason, Brazil is the only country in the world where the “alternative” fuel is fossil and the “main” vehicle fuel is renewable. This is only possible because the 1975 oil crisis led Brazil to launch a bold petroleum substitution program. Brazil currently blends 25% of ethanol into all gasoline, flex-fuel vehicles represent over 90% of new car sales, 37% of the total light vehicle fleet is flex and ethanol is available in service stations throughout the country.

Recent studies offer impressive data about the cane industry’s impact on the country. Ethanol production alone creates 465,000 direct jobs, a number six times larger than the oil industry in Brazil. Ethanol is present in 1,042 cities, compared to only 176 oil-producing municipalities. This translates into more income distribution and internal development for these communities. University of São Paulo (USP) scholars estimated that a 15% nationwide gasoline substitution with ethanol creates 118,000 new jobs, generating R$ 236 million (US$ 140 million) in additional wages annually.

As for the environment, the use of sugarcane ethanol has generated a reduction of 600 million tons in CO2 emissions since 1975, an amount equivalent to the carbon sequestered with the planting of 2 billion trees according to a recent peer-reviewed study. In economic terms, specialists conclude that for every liter of ethanol, the country saves US$ 0,20 in carbon mitigation costs. Air Quality researchers at the University of São Paulo (USP) School of Medicine estimate that if every car in the Sao Paulo metropolitan region were fueled exclusively with gasoline, the city would face annually more than 400 additional deaths, 25,000 hospitalizations and an increase of R$140 million in healthcare expenses.

The 1990s sugarcane market liberalization is one of the reasons for the industry’s current positive performance. The elimination of price and production controls, previously carried out by the now defunct Institute of Sugar and Alcohol (IAA), led to significant improvements in productivity and real price reductions for both sugar and ethanol. Furthermore, petroleum is not only highly pollutant but as it become increasingly scarce in the world, its cost will only increase.

One consequence of deregulation is the significant increase in price volatility, both seasonally (harvest and between harvests) and cyclically (over the years). Unlike gasoline and diesel, where prices are artificially set in Brazil by the state-owned monopoly Petrobras, sugar, ethanol and cane prices vary according to the laws of supply and demand. Brazilian ethanol is similar to petroleum in the global market, because both are subject to market conditions. To exemplify, in the past two years Brazil underwent cycles of extremely depressed ethanol prices because of a strong increase in supply, the result of aggressive investments in expansion and new mills. Low prices reduced the cane industry’s profits. However, between 2005 and 2008, this price reduction and the expansion of the flex-fuel fleet led to a 185% increase in the use of hydrated ethanol. During the same period gasoline consumption increased by only 7%.

In March of this year, sugar and ethanol executives met with government officials on several occasions to discuss ways to stockpile the product, considering the beginning of a new record harvest and, at the time, a drop in prices due to the global economic crisis that affected producers. With the majority of the companies’ budgets constrained because of the crisis, the warehousing program did not reach the expected result. Seven months later, as the same harvest period draws to an end, excessive rainfall has damaged overall output and that led the Brazilian government to consider reducing the amount of ethanol blended into gasoline, from 25% to 20%. In other words, a radical change of scenario and policies within the same harvest took place.

The industry reacted well to market stimulus and demands, rapidly increasing production and its economic and operational efficiency to meet growing demand. With the exception of this year’s excessive rainfall until December, there is no reason to change ethanol blend levels at this time. The days of cars fueled only with ethanol and, therefore, more vulnerable to supply shortages are long gone. Nowadays, cars are “flexible” and ethanol competes directly with gasoline for the consumers at the pump. In other words, market adjustments happen naturally, at fueling station, where consumers can now decide in terms of relative prices and built-in values of each fuel, such as power, consumption, environmental impacts and effects on public health.

We are all aware that both consumers and producers would like to see less price fluctuation for ethanol. Yet ethanol is an agricultural commodity, highly influenced by weather, which must be produced during seven months and marketed during the entire year. Unlike the sugar market, the rigidity of ethanol trading rules make it difficult for the development of trade agents, as it generates little liquidity and is characterized by huge volatility in a primitive market that functions strictly based on daily spot prices. That’s the reason why the sector insists on the necessity of new physical and future trading tools that generate more liquidity and risk management, with the inclusion of new agents. It is also necessary to develop tax policies that consider positive social and environmental externalities that ethanol brings to society, keeping in mind that it also represents one of the great innovations developed by Brazilians.

Ethanol blend reduction in Brazil “makes sense”

According to the Brazilian Sugarcane Industry Association (UNICA), the Federal Government’s decision to reduce the anhydrous ethanol content of gasoline from 25% to 20% must be limited to the established 90-day period.

 “The Government’s reasons for the temporary reduction are understandable, but the move must be limited to the 90-day period only. Because of high prices, consumers that own flex-fuel vehicles are already shifting from hydrous ethanol back to gasoline, so there is no risk of pumps going dry,” said UNICA’s Technical Director, Antonio de Padua Rodrigues.

Hydrous ethanol is pure ethanol (E100) used in flex-fuel vehicles, which run on any mix of ethanol and gasoline. The blend reduction involves anhydrous ethanol, which is the type of ethanol that is mixed with gasoline. While hydrous ethanol contains about 5% water content, anhydrous ethanol is virtually water-free.

The decision to roll back the blend level was announced by the Brazilian Government on Monday (January 11) in Brasilia, following a meeting attended by UNICA executives. The measure takes effect on February 1st for a period of 90 days. Blend reductions are not new in Brazil – the last reduction occurred in March of 2006, when the percentage fell from 25% to 20%. The blend level was raised to 23% in November of that year, and fully reinstated at 25% in July of 2007.

 Padua noted that the Government should be praised for its open dialogue with the industry and for setting a timeframe for the measure, with reinstatement of the 25% blend happening as the sugarcane industry launches what will be the largest sugarcane harvest in Brazil’s history. “Dropping the blend requirement is unlikely to change the dynamics of the cane industry, which will continue to produce more ethanol and more sugar year after year. All that changed this year was the pace of that increase, because of unseasonable rains that affected the harvest,” concluded the UNICA executive.

Under Brazilian federal law, the anhydrous ethanol content of all gasoline sold in the country must be between 20% and 25%. The blend range is set by an interagency board (Conselho Interministerial de Açúcar e Álcool, or CIMA). The 5% reduction in the blend is expected to result in an additional 100 million liters (26.4 million gallons) of hydrous ethanol available per month, or around 7 percent of the current monthly demand.

 “UNICA has always advocated policies that give consumers options. Over the last few years, Brazilian consumers have opted to buy flex-fuel cars so they can chose at the pump which fuel they want to put in their car. Hydrous ethanol, not gasoline – be it with 20 or 25% anhydrous ethanol – has been the fuel of choice in Brazil because of its competitive prices and environmental benefits. We expect that trend to continue, hopefully not just in Brazil but around the world,” said UNICA’s Chief Representative for North America, Joel Velasco.

Ethanol - Latin America (Week Report)

Latin America – Brazil’s domestic ethanol prices continued to climb this week as the market tries to ration the limited amount of supply available through to the commencement of the 2010/11 harvest. Hydrous offers have risen R$50/cu m this week to R$1,450/cu m ex-mill Ribeirao Preto (with taxes). Some small volumes trading mid last week at about R$1,400/cu m but buyers withdrew from the market ahead of yesterday’s announcement of a reduction in the blend rate. Anhydrous offers were also limited, quoted at R$1,350/cu m, unchanged from last week. Indicative export hydrous offers have risen $50/cu m to $780/cu m FOB Santos but bids remain at $600/cu m. Buyers of EU grade anhydrous would realistically have to pay upwards of $760/cu m FOB Santos to attract any interest but offers have also pressed higher to $845/cu m. There are currently no bids for Anhydrous ANP while offers are notionally pegged at $820/cu m, up $50/cu m on last week.

ETHANOL - ETBE (Week Report)

ETHANOL – The European spot markets have had a strong start to the year, with firmer prices in both the T1 and T2 sectors. T2 for prompt delivery was booked at €558/cu m FOB Rdam early this week, and this value remains indicative, with activity fairly thin due to some continuing holiday absences across Europe. Buying appetite for T2 has increased - some traditional buyers of T1 for denatured markets (plus €102 duty) confirm that they are switiching from T1 to T2, with some selling T1 volumes and buying T2. Demand for physical T1 meanwhile seems to have tapered off again. Although T1 values have risen to around US$660-680 (though some are offering higher), there is some expecatation that these levels are not sustainable, and backwardation remains quite strong into Q2/Q3. A T1 trade booked at US$675 was reportedly for US material – which would be the first confirmed sale of US material into Europe this year.

Ethanol - Latin America (Week Report)

Latin America – Prices in Brazil reached fresh seasonal highs when markets re-opened after the holiday period. Further wet weather and mill closures have reduced ethanol availability, leading to further sharp increases in offers. Hydrous offers have risen R$80/cu m to R$1,400/cu m ex-mill Ribeirao Preto (with taxes) and a small volume traded yesterday at R$1,370/cu m. Anhydrous offers are pegged R$50/cu m lower than hydrous at R$1,350/cu m (same basis). Although conditions have been dry in recent days there is more rain forecast for the end of the week, potentially interrupting the efforts of those mills that decided to continue crushing through the inter-crop. The sharp uptick in domestic values has pushed most buyers to the sidelines and bids have been scarce. Export offers have responded in kind with notional hydrous ANP offers now quoted at $730/cu m FOB Santos, up $55/cu m since our 22 December report. Based on current domestic prices, notional offers for Anhydrous ANP are at $780/cu m FOB Santos and EU grade offers at $800/cu m but some quotes as high as $844/cu m have been heard. There seems little prospect of any substantial new business being done with notional bids for hydrous ANP at $600/cu m and EU Grade at $720/cu m.

Ethanol - Latin America (week report)

LATIN AMERICA – Although rain has eased in the last few days after a very wet start to December, domestic ethanol prices in Brazil have firmed further. Hydrous has traded at R$1,300/cu m ex-mill Ribeirao Preto and current offers are set at $1,320/cu m, up R$100/cu m on last week. In Paulinia, just over 200 km away, prices traded at R$1,350/cu m ex-mill. Anhydrous values are pegged at similar values. The steep increase in prices has prompted some distributors to postpone the purchase of January’s monthly requirements until after this week’s holiday in the hope that prices may ease. The gains in domestic market values have flowed through to export markets. Bids for hydrous rose $10/cu m to $600/cu m FOB Santos but offers were up $45/cu m to $675/cu m. Bids for Anhydrous ANP gained $10/cu m and are now quoted at $610/cu m while offers rose $30/cu m to $740/cu m. It was a similar story for EU Grade Anhydrous with prices now pegged in a $650-750/cu m range after a $10/cum rise in bids and a $30/cu m gain in offers. New crop offers for EU grade are seen at $550/cu m FOB Santos

Ethanol News - ETBE (Week Report)

ETHANOL – T1 prices reached record highs of US$690-710/cu m FOB Rdam in the past week, just above the previous all-time highs of US$690 reached at the beginning of September 2008 (see chart) - but the market is now beginning to ease from these levels. A trade was reportedly booked on Friday at US$705, and some sources assessed January prices at US$700-720 on Monday (even higher for prompt). But values have started to drop quite sharply, with Q1 now pegged around US$675-685 – down about US$25-35 on the week.

Ethanol News - Latin America (Week Report)


Latin America – Further rain in the lead-up to the Christmas holiday season has led to fresh gains in Brazil’s domestic market prices. Prices for both hydrous and anhydrous have risen to R$1,200/cu m ex-mill Ribeirao Preto (with taxes) – R$50/cu m higher than last week. Distributors are increasingly looking to secure volumes ahead of the upcoming holidays but further rain in CS Brazil’s cane growing areas has restricted availability and offers remain limited. Domestic price increases have kept values on export markets firm, despite some easing in the Brazilian Real. Bids for Hydrous ANP are unchanged at $590/cu m FOB Santos but offers have risen $15/cu m to $630/cu m. Notional prices for Anhydrous ANP are now assessed in a $600-710/cu m FOB Santos bid/offer range with offers rising $25/cu m. Prices for EU Grade Anhydrous are unchanged from last week, assessed in a $640-720/cu m FOB Santos bid/offer range.

Ethanol News

ETBE report:
ETHANOL – T1 prices have surged again this week while the T2 sector has also firmed, albeit more modestly. This has rendered T2 even more competitive with T1 for the denatured markets that require €102 import duties (e.g. the UK, Netherlands, Finland), with T2 average values of €547.5 versus a T1 plus €102 denatured import duty value of €564. T1 December offers have really thinned out, while buying interest has been growing. Values have increased almost daily over the week, with T1 booked at US$692/cu m FOB Rdam on Monday, while a bid was repoted at US$698 on Tuesday. Earlier week offers at US$699 seem to have disappeard. January levels were quoted at around US$680–US$710/cu m, bid/offer, with February at US$645–US$715/cu m. T2 is offered circa €550/cu m for December and Q1, dipping to around €530/cu m for Q2.

Ethanol News

Latin America – Further rainfall over the weekend has compounded an already tight stocks position in Brazil and contributed to a further upsurge in domestic prices. Offers of hydrous are scarce and those of anhydrous almost non-existent. Hydrous is offered at R$1,150/cu m ex-mill Ribeirao Preto with trades occurring at these levels. Anhydrous prices are assessed at similar levels but the market is extremely illiquid. Local traders expect domestic prices to continue to firm with the majority of mills expected to wind down operations by Christmas and recent rainfall is likely to have impacted negatively on ATR yields. Some of the newer mills are expected to continue crushing through the inter-harvest period and the need to service debt may require them to sell at discounted values to maintain cashflow. Those fuel distributors that are not constrained by a lack of storage may now look to lock in supplies for the upcoming holiday period and over the inter-harvest period. Export values have been boosted by the rise in domestic prices. Bids for hydrous remain at $575/cu m FOB Santos but offers have risen $15/cu m to $610/cu m. Notional bids for Anhydrous ANP have been increased by $5/cu m to $600/cu m FOB Santos but offers are assessed $25/cum higher at $700/cu m. Indicative bids for EU Grade Anhydrous have risen by $20/cu m to $640/cu m FOB Santos but offers have also risen by $10/cu m to $720/cu m.