The Brazilian government has still not confirmed its expected reinstatement of the country's PIS and Cofins taxes on hydrous ethanol, to be charged at mills, as of January 1.
As a result, even though the country's Center-South is moving into the last few months of its current 2016/2017 crop year, mills there are not able to calculate the expected profitability of hydrous ethanol sales for the next crop year, starting April 1.
The Brazilian ethanol sector has started to discuss possible scenarios for January, as the Real 0.12/liter tax on hydrous ethanol is expected to be reimposed. Considering this new tax scenario, mills would decrease the profit margin on hydrous ethanol, as just a small part could be translated into the final price.
Center-South producers are counting on pressure from industry association UNICA to lead to an answer from the federal government soon.
"UNICA was trying to negotiate a partial reinstatement of PIS and Cofins on the hydrous ethanol at Real 0.7/liter and Real 0.5/liter on gasoline," said one of the largest Brazilian sugar and ethanol producers. A request to UNICA for further details about the negotiations has not been answered. But according to a copy of an October 6 presentation UNICA gave about the taxes, given to S&P Global Platts Tuesday by an agriculture ministry source, the group proposed three possibilities to keep hydrous ethanol competitive against gasoline. These are the following: Not reinstating the PIS and Cofins, which would not increase Brazil's inflation rate; increasing the CIDE tax on gasoline to Real 0.17/liter to balance the additional Real 0.12/liter of PIS and Cofins taxes on hydrous ethanol, which would increasing tax revenues and increase inflation; impose lower PIS and Cofins tax rates on ethanol and higher rates on gasoline, which would maintain tax revenues forecast for 2017, but which would add to inflation.
Representatives at the agriculture and treasury ministries for further details did not return requests for comment.
According to sources, a second meeting between government representatives, industry participants and UNICA was ongoing Tuesday about the reinstatement of the PIS and Cofins taxes.
The PIS and Cofins taxes were suspended in April 2013 by the government, then under President Dilma Rousseff, in an attempt to curb inflationary pressures and to support the then-financially struggling sugarcane sector.
There is no market consensus on whether or not the Real 120,00/cu m would be totally reinstated on hydrous ethanol.
"In our price calculation for 2017, we are applying 100% of PIS and Cofins on ethanol, but UNICA was trying to negotiate between 70% and 90%," the producer said.
Hydrous ethanol prices ex-mill have been trending lower since November 3, triggered by higher prices at the pump that reduced demand. Platts Monday assessed hydrous ethanol ex-mill Ribeirao Preto at Real 2,050/cu m, down Real 70/cu m, 3.30%, from November 3.
As a result of the lack of information about the new taxes that may be charged in less than 35 days, some mills have been encouraged to increase their sales prior to January 1.
"It is better to sell now at Real 2.10/liter than at Real 2.00/liter in January 1, if we need to pay the PIS and Cofins taxes again," said another big producer from Sao Paulo state.
