Sao Paulo — Brazilian sugar mills are considering cutting back the amount of sugarcane they convert into ethanol as storage capacity has become increasingly limited and its profitability over sugar has dramatically plunged, market sources have reported to S&P Global Platts.
Platts assessed hydrous ethanol in raw sugar equivalent at 11.96 cents/lb on Wednesday, while NY11 sugar futures settled Tuesday at front-month October at 11.39 cents/lb, lowering the spread to 0.57 cent/lb, or $12.57/mt.
The Brazilian domestic market has been flooded by hydrous ethanol since September 2017 when sugarcane producers started to see a price advantage over sugar production. The biofuel started to pay off producers better than sugar in August 2017 when the NY11 sugar futures market dropped from 14.88 cents/lb in August 1 to 12.94 cents/lb in 15 days.
The peak of the largest profit margin was reached in March 13, when Platts assessed hydrous ethanol converted to raw sugar equivalent at 17.85 cents/lb and NY11 sugar futures settled at 12.62 cents/lb. By that time ethanol producers were receiving 5.23 cents/lb, or $115.30/mt, more to produce hydrous ethanol than sugar.
These wide profit margins have started to narrow after the start of the 2018-19 Brazilian Center-South crop in April 1, when domestic ethanol prices dramatically moved down with the oversupply. In the first official month of the CS crop Brazilian producers delivered to the local market 2.1 billion liters of hydrous ethanol, or 91.75% more than the same period of the previous crop 2017-18.
Local prices have quickly answered to it and plunged 16.74% in a month, from Real 2,150/cu m on April 2 to Real 1,790/cu m on May 2.
While the cumulative hydrous ethanol production was recorded at 6.2 billion liters in the first three months and 15 days of the crop 2018-19, or 80.91% more than the same period of the previous crop, the demand has not increased in the same pace. According to the latest report from the National Petroleum Agency, hydrous ethanol consumption in the first five months of 2018 moved up 38% year on year, a considerable surge, but not enough to consume the additional production.
Producers have been lowering the ethanol price on a daily bases aiming to find a buying interest, but it has not been encouraging larger purchases from distributors.
On Wednesday, Platts assessed hydrous ethanol ex-mill at Real 1,830/cu m, the lowest price in near two months. Producers have been reporting that in addition to the usual cash pressure seen in the beginning of the month due to payroll commitments the storage capacity has started to be limited.
