Brazilian hydrous ex-mill prices surged Friday after the government raised taxes on gasoline and ethanol.
Hydrous prices rose early in the day with trades reported taking place between Real 1,700-1,720/cu m, compared with Real 1,660/cu m on Thursday.
"I think there is space for prices to rise even further," a broker said.
Overall activity was considered quiet, with most participants out of the market.
"Some larger mills sold early in the morning at higher prices and then stepped out of the spot market," a broker said.
"The market is still absorbing the news and prices, there are a lot of doubts on how the distributors will apply the new taxes," a source said. "For the mill is clear, they are adding the PIS/Cofins increase to the ex-mill price."
The decision to increase the PIS/Cofins on gasoline and ethanol was announced late Thursday, as the government tries to meet budget targets. The government expects to collect around Real 10 billion with the tax increase. The announcement was in an official note issued Friday by the finance minister.
The surprise came from the decision to charge part of the amount of the PIS/Cofins of ethanol on distributors as well, not leaving the burden to producers alone.
The PIS/Cofins tax applied to gasoline increased to Real 792.5/cu m from Real Real 381.6/cu m.
Ethanol producers will now be charged Real 130.9/cu m of PIS/Cofins from Real 120/cu m previously.
Distribuitors will also have a PIS/Cofins tax of Real 196.4/cu m, up from zero before.
"The announcement was better than expected for us [ethanol producers], as part of the tax burden is now on the distributors as well," a producer said.
A distributor said they are also adding the new PIS/Cofins charge to their selling price to the gas stations.
"The price impact on our side is direct, we are already adjusting prices by adding the Real 130.9/cu m of PIS/Cofins," a distributor said.
"The price of gasoline should increase by Real 46/cu m at the pump while hydrous ethanol could rise by Real 25/cu m at the pump in the Southeast region and still maintain its current competitive relationship at 66.5-67% of the gasoline price," Kingsman analyst Alessandra Rosete said.
Kingsman is the agricultural analysis unit of S&P Global Platts.
However, with the increase in gasoline greater than ethanol by Real 200/cu m and considering the ex-mill price gain of around Real 120/cu m, the market expects hydrous to increase its competitive relationship against gasoline at the pump.
Despite a recent gain in competitiveness at the pump over the past months, consumption rates have remained very low this season.
Data from industry association UNICA showed that since the start of the 2017-18 harvest on April 1 until the end of June, the sales of ethanol (both hydrous and anhydrous) for the domestic market has reached 5.59 billion liters, down 13% from the previous season. Looking at hydrous sales alone, the decrease is of 17% with 3.25 billion liters sold from April to June.
Hydrous ethanol is used in Brazil as a standalone biofuel (E100) in flex-fuel vehicles and to be more competitive it has to be below 70% of the price of gasoline. Anhydrous ethanol is blended with gasoline at a 27% ratio.
