Sugarcane mills in Brazil's Center-South region are adding water to currently-cheap anhydrous ethanol to capture the higher prices for hydrous, sources said.
The anhydrous premium over hydrous was assessed Tuesday at 4.32%, after having fallen to as low as 2.85% in the second week of January, which is the lowest level for January since S&P Global Platts started assessing CS domestic market in April 2014.
Anhydrous is usually traded with a higher premium, usually from 6% to more than 10% during the crop season, hydrous ethanol has a water content of approximately 5%.
The average premium during December and January, the first two months of the intercrop period in 2017-18, is the lowest at least since 2014-15, according to Platts data. The premium calculation considers ex-mill prices in Ribeirao Preto, free of taxes.
"With the spread at 5%-6%, it is already very difficult to hold on to the anhydrous stocks. I believe mills will begin hydrating anhydrous ethanol intensively now," said a trade source at a major sugarcane group. "At least we are going to do it more than in recent years."
Adding demineralized water into anhydrous ethanol is legal and is often done inside the mills premises, depending on the market conditions. Given that the decision to do so is completely private, there are no official statistics related to this practice.
One market source at a large ethanol producer said the amount of anhydrous that could be converted into hydrous between January and March in the CS ranged between 200,000-300,000 cu m, out of approximately 10.7 million cu m of anhydrous produced this season in the region.
"The numbers show it's advantageous to 'wet' the anhydrous. Plus, hydrous demand and liquidity in the market is currently much higher," said the second source. "I heard many companies are doing it, and we are also considering doing it."
Anhydrous ethanol is used in Brazil at a 27% blend ratio into gasoline, while hydrous is used directly in flex fuel cars.
In 2011, the National Petroleum Agency (ANP) created a regulation which made mandatory that mills and fuel distributors close deals early in the season to have contracts that equal to 90% of the volume needed of anhydrous ethanol, in order to guarantee anhydrous supply in the domestic market during the entire year.
According to ANP rule No. 67, ethanol producers also must carry 25% of the total anhydrous volume traded in the previous fiscal year as stocks until January 31. After that date, they must hold stocks amounting to 8% until March 31, when the new crop officially begins.
In other words, after January 31, mills are obliged to have less anhydrous in stocks, freeing larger amounts to potentially be converted into more valuable hydrous.
