Change is likely coming to the Brazilian ethanol market in 2020, driven by the new RenovaBio program and diversification in ethanol production's geography and feedstock.
A majority of industry participants expect domestic consumption of biofuels to keep breaking records in 2020 as hydrous ethanol is likely to retain its economic advantage over fossil fuel gasoline. Brazilian producers will need to keep proving their ability to produce more ethanol, even with low investments in planted areas.
According to estimates from S&P Global Platts Analytics, Brazilian hydrous ethanol consumption in 2019 will reach 23.2 billion liters, a jump of 15% from 2018. For 2020, estimates by Platts Analytics signal a drop of 3% year on year in hydrous ethanol consumption, to 22.5 billion liters. That decrease is explained by the combination of a lower ethanol production mix and a cheaper gasoline price in the second half of the year, which could encourage consumers to switch to fossil fuel gasoline.
For 2020, estimates by Platts Analytics point toward hydrous ethanol production reaching 22.3 billion liters in Center-South Brazil, where 20.7 billion liters will come from sugar cane and 1.5 billion liters will come from corn feedstock.
WHAT CAN MOVE PRICES IN 2020?
Ethanol prices will continue to follow international energy prices, sugar prices and domestic demand for hydrous ethanol.
Brazilian hydrous ethanol consumption has a high correlation with gasoline prices. Therefore, any change in the international energy price basket can directly change the fuel consumption pattern.
Hydrous ethanol is used in Brazil as a standalone biofuel (E100) by flex-fuel vehicles, and to outcompete gasoline in Brazil, E100 has to be below 70% of gasoline's price because of E100's lower energy content.
The second important component will be the Brazilian real-US dollar exchange rate. As most of the Brazilian gasoline ANP spec is imported from the EU and US, any dramatic change in the exchange rate can mean much higher or lower prices at the pump. According to the latest Focus report released by the Brazilian Central Bank, the exchange rate is forecast to remain in a trading range of 4.00/$1 to Real 4.10/$1 for 2020.
Hydrous ethanol in raw sugar equivalent is expected to keep being valued above NY11 sugar futures prices during the first quarter of 2020, when CS goes into its inter-crop season. The BM&F hydrous ethanol futures contract and the NY11 sugar futures contract, however, are not pointing in that direction anymore for the third quarter of 2020, when the CS reaches the peak of the harvest season.
Although it could initially suggest Brazilian producers could shift more cane toward sugar production, sources were confident that after many investments in distillery capacity and steady domestic consumption observed in the last two years, the large producing groups will stick with their strategy of maximizing ethanol production and waiting for higher returns in the spot market.
Platts Analytics estimates that 64.5% of the total cane crushed might be used for ethanol production, slightly lower than the 65.5% expected for the current crop. That expectation could change because of further price declines in international energy markets or higher sugar prices because of a potential supply deficit in 2020 and any possible periods of drought in the Brazil's Center-South.
NORTHEAST AND CENTER-WEST REGIONS
The Brazilian ethanol import quota is expected to remain in place in 2020 and keep protecting regional producers from a cheaper US ethanol market. While the barriers might keep capping imported volumes during the regional crop season from September to March, there will still be a need to import anhydrous ethanol from US and transfer some volume from Center-South Brazil to attend to the NE demand.
Ethanol imports in 2020 are expected to increase 2.43% year on year to 1.35 billion liters, Platts Analytics estimates. That is primarily considering an increase in the gasoline consumption, that in Brazil has a 27% mandatory blend of anhydrous ethanol and the lower domestic availability.
While the Northeast region has a structural ethanol deficit, in Center-West Brazil, the state of Mato Grosso is becoming a net supplier for its neighbor states.
Hydrous ethanol production in Mato Grosso combining cane and corn feedstock is expected to reach 1.44 billion liters in the 2019-20 crop (April to March), meaning a surge of 27% from the prior crop cycle, data from Sindalcool MT showed. That production spike has been driving the fast expansion of corn ethanol production in the region, which accounted for roughly 55% of the hydrous production in the current crop cycle.
Hydrous consumption in the state from January to October 2019 also jumped 18.57% from the year-ago period and reached 811 million liters, the latest ANP data showed. Market participants estimates that MT consumption has already reached its celling and a new increase could be triggered if the regional GDP had an unforeseen spike.
RENOVABIO CARBON CREDIT PROGRAM
The carbon credit program RenovaBio program will be major factor for ethanol demand and supply in 2020 as producers are expected to participate in large numbers to take advantage of the generation of CBIOs and the additional revenue generated for participation in the program.
The volume of CBIOs that biofuel producers will issue is linked to the quantity of CO2 reduction their renewable fuel can produce when compared with the fossil fuel alternative.
The mandate for 2020 is 28.7 million credits and should be attained if more than 50% of the 190 producers are certified next year for the RenovaBio program according to S&P Global Platts Analytics.
Sources in general were not considering any additional remuneration from Renovabio, which officially started December 24, as there are still doubts about the pricing tools.
"We expect to be able to sell CBIOS just in the second half of 2020, and therefore we are not counting on it to decide our sugar mix," an ethanol trader from a Sao Paulo-based mill said.
