The arbitrage between the US and Brazil has opened as Brazil's ongoing push to direct more of its sugarcane crush toward sugar production has driven up regional ethanol prices.
"People see the 1 million b/d of [US] production and they need that outlet," said a source when asked about the opportunity exporting to Brazil presents.
The open arbitrage comes at just the right time as the US market searches for demand. Production has hovered near 1 million b/d in recent weeks, threatening to create oversupply if sellers cannot find a home for all the product.
The additional product in the US market has pressured prices.
S&P Global Platts assessed the front-month Chicago ethanol swap, the price basis of most exports, at $1.4250/gal Monday. The product fell to a seven-month low of $1.3650/gal on August 2 as concerns about oversupply mounted in the US.
Freight rates from the US Gulf Coast, the typical origin for ethanol exports, to Brazil have also fallen recently.
"I'm hearing freight from the US to Brazil is 10 to 12 cents" per gallon, said another source.
A typical rate is closer to 19 cents/gal, sources say.
But the opportunity to capture higher prices in Brazil has perked up the stumbling US market.
STRONGER BRAZILIAN PRICES
Platts assessed anhydrous ex-mill Ribeirao Preto in Center-South Brazil at Real 1,750/cu m Monday, about $2.09/gal. The product's price is up 27% year on year.
Local sources have reported that anhydrous ethanol in the Northeast state of Pernambuco was priced at Real 2,020/cu m on August 8, or just over $2.40/gal.
The Center-South's price is not quite high enough to open the region to imports, but the strong values farther north have encouraged import flows to reopen.
The arbitrage is helped by a Brazilian real that has strengthened against the US dollar over the past several months. The dollar was worth Real 3.1749 Monday, a far cry from January 4's value of Real 4.0389.
Brazil's currency has strengthened on hopes of economic restructuring after the impeachment process of deposed Brazilian President Dilma Rousseff. A global sugar shortage has driven up sugar prices in Brazil. The flat price of Brazilian sugar has risen more than 33% from April 1, when the 2016/2017 crop began in the Center-South.
Platts assessed both Brazilian Center-South and North-Northeast spot sugar prices at 20.30 cents/lb Monday, up 5.11 cents/lb from 15.19 cents/lb on April 1.
Since the beginning of the crop season, 44.21% of the sugarcane crush has been used for sugar production, up 4.04% from the previous year, according to UNICA data.
With sugar so much more expensive, Brazilian sugarcane producers have directed more of the crush to sugar and away from ethanol, driving up ethanol prices.
The North-Northeast sugarcane crop is expected to start between the end of August and the beginning of September, which could bring relief for anhydrous prices in the region.
However, with the international sugar prices in a contango structure, producers are expected to increase the sugar mix.
INCREASING VOLUMES INTO NORTH-NORTHEAST
The North and Northeast are net importers of anhydrous ethanol from the US as regional production is not enough to meet demand.
Brazil's total ethanol imports in July hit a 2016 monthly record of almost 55 million liters, up 46% month on month and up from just 1.3 million liters a year earlier, SECEX data showed.
Almost 100% of the volume entered the country via the Itaqui port in the northeastern state of Maranhao, with the small balance entering via ports and airports in the Center-South.
Maranhao offers exemption of ICMS tax on the imported ethanol. With this tax advantage, many companies are nationalizing the product in Maranhao and shipping under Brazil's cabotage, or domestic shipping requirement, to meet demand from neighboring states.
The state government of Pernambuco also waived Brazil's ICMS tax through the end of September, further encouraging imports are expected to continue to the Northeast. The ICMS tax rate waived in Pernambuco is 23% over the CIF price.
In Brazil, anhydrous ethanol is blended into gasoline at a 27% rate. Platts considers anhydrous ethanol production in the North-Northeast region in 2016 at 1.26 billion liters while consumption is expected at 3.1 billion liters.
The missing volume of 1.84 billion liters could be met by either transfers from the Center-South region or imports.
From January to July, imports totaled 356 million liters, down 24% year on year. The North-Northeast accounted for 93% of total volume imported with the Center-South taking the balance.
The total volume due to arrive has yet to be confirmed, but some local players expect at least four vessels of minimum 20 million liters each.
LOGISTICAL ISSUES
Despite the open arbitrage to import anhydrous fuel from the US to North and Northeast Brazil, a logistical bottleneck has been deterring some business.
Wider profit margins that have been paid by diesel imports have encouraged trading companies and distributors to use most available tanks to store the fossil fuel.
"When a shipment of diesel arrives at the port the total volume was already sold in advance of the discharge," an ethanol broker said. "While for ethanol the importer needs to negotiate the price and find buyers right when the cargo reaches the port area."
According to market sources, distributors are giving preference to buying imported diesel rather than buying it directly from the state owned oil company Petrobras.
"Distributors are paying on average Real 8 cents less per liter in the imported diesel instead of buying it from Petrobras," added the broker.
