The atypical import of ethanol by fuel distributors into Brazil's Northeast when sugarcane season is already underway -- and, along with it, domestic ethanol production -- has producers frustrated and seeking solutions, the head of a key trade group said.
"It's lamentable, the practice of ethanol imports when the sugarcane season has begun in the region," Renato Cunha, the president of industry association Sindacucar Pernambuco, said Friday in an interview.
"These operations serve only the interests of the fuel distributors," Cunha said.
According to Cunha, ethanol imports are damaging to the mills' cash flow and he considers them a boycott of local production.
It is normal for ethanol to be imported into the region, but not at this time of the year. Market sources said more than 85 million liters of US ethanol would enter the region this month, with the same quantity or more expected in September.
The 2016-17 sugarcane harvesting season has just started in the North-Northeast and with it, consequently, the production of ethanol.
Imports can also be harmful to the states in the Center-South region, which are in the peak of sugarcane season, according to Cunha.
"The imports are the result of a convenient myopia of some participants amid the lack of a regional supply plan," Cunha said, adding that the imports were causing Goias, Minas Gerais and other states to lose market share in the Northeast.
Goias and Minas Gerais are in the Center-South region and supply ethanol to the Northeast, as they have production that is higher than local demand.
Producers blame the state government in Pernambuco, which on August 1 waived the 23% ICMS tax on imports until the end of September.
They say the government was responding to requests from fuel distributors to import ethanol without considering the problems imports may cause to ethanol producers.
Cunha pointed out that producers were surprised by the state government's move to waive the tax. "This measure discourages local production and compromises the security of the role of ethanol in the Brazilian market," Cunha said.
The tax waiver opened a window of opportunity at a time when Center-South ethanol prices have been high, due to rising international sugar prices, while US ethanol remains relatively cheap thanks to high ethanol output there.
The relation of production to consumption in Brazil is expected to be fairly balanced this year -- Cunha said ethanol production for the whole country is estimated at roughly 30 billion liters, with ethanol consumption expected at some 28 billion liters.
Cunha therefore believes that the imports will just lead to domestic ethanol being exported some months later.
Calling the import of ethanol by distributors an "extremely serious distortion" that has them "passing over the rights of producers to supply the domestic market," Cunha faulted the country's National Petroleum Agency for not having anticipated this situation when setting out is regulations for the national ethanol market.
The agency regulates the ethanol supply chain in Brazil and authorizes any fuel imports into the country. S&P Global Platts was unable to reach the agency for comment due to a local holiday.
Cunha also said that efforts were underway to impose measures against the imports at the federal level, adding that he believes that the Ministry of Mines and Energy and the federal government would favor producers, and that the agency has time to review its position.
A representative of the Ministry of Mines and Energy said via email that in 2015, ethanol exports amounted to 1.7 billion liters, compared with 500 million liters of ethanol imports. In January-June this year, Brazilian exports totaled 1.1 billion liters, while imports were 300 million liters in the same period.
The representative added that the Ministry of Mines and Energy monitors ethanol supply and believes that the balance between the domestic and export markets must be built based on dialogue with distributors and producers. Cunha said that fuel distributors play an important role and that they are open to improvements, but emphasized that imports at this time of year do not make any sense.
Noting that distributors are in a favorable position already, since they are the only ones allowed to sell fuel to stations, Cunha said they now "try to compete without the burden of investing in production."
One of the distributors bringing ethanol into the region, Raizen, declined to comment Monday.
NORTH-NORTHEAST ETHANOL MARKET
The North-Northeast is a net importer of anhydrous ethanol, as its local production represents roughly 40% of local consumption. In the first half of the year, anhydrous fuel consumption in the North-Northeast was 1.53 billion liters, up 5% from same period last year, data from the National Petroleum Agency showed.
Ethanol production this season is expected to reach roughly 2 billion liters, according to Sindacucar's forecasts for the 2016-17 sugarcane season released last week.
The Center-South is the main supplier for the North-Northeast region. In the first half of the year, the Center-South shipped roughly 900 million liters of anhydrous ethanol to the North-Northeast, up 55% on the year, ANP data showed.
In contrast, ethanol imports from the US in the first seven months declined 12% on year to 334 million liters.
Ethanol imports into the North-Northeast reached a record in 2011 at 450 million liters amid a drop in cane production in the Center-South that cut ethanol output. That was when fuel ethanol imports began in the country. The Center-South itself also imported ethanol that year, a record of nearly 712 million liters.
Ethanol production in the 2016-17 season is expected to fall 3% from the prior season to 1.95 billion liters. The drop can be attributed to higher sugar prices in both the domestic and export market this year, according to local producers.
The country has a mandate to blend 27% anhydrous into gasoline for sale at the pump.
