Small to medium-sized mills in Brazil's Center-South region were aggressively offering ethanol on June 18 at price levels below Real 2,000/cu m ex-mill Ribeirao Preto, but raised the prices after Petrobras announced an increase in the ex-refinery price of gasoline.
S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 2,030/cu m on June 19, a rebound from the sub-Real 2,000/cu m prices reported in the morning, but still down 1.5% on the week.
The small to medium-sized mills were willing to sell at lower prices as they needed cash to cover short-term expenses, including employee payrolls. After the Petrobras announcement on late June 18, mills increased their offer prices in the Center-South to reflect the revised gasoline price.
Market participants use Petrobras ex-refinery gasoline price increases as a discounting mechanism for ethanol prices because the gasoline price increase will ultimately put upward pressure on hydrous ethanol prices in the near term. Consumer demand tilts toward relatively cheaper hydrous ethanol at the pump when gasoline prices increase.
In the week that ended June 13, the hydrous ethanol price ratio to gasoline was 64.36%, below the 70% threshold that encourages consumers to fill their tanks with hydrous ethanol, or E100, according to data released June 8 by the National Petroleum and Biofuel Agency.
Petrobras instituted an average gasoline price increase of 5% at refineries June 19. This sixth price hike since May 7 lifted the cumulative increase to 65% since then and reflected a recovery in international energy markets and real's weakness against the dollar.
"Petrobras will almost attain price parity to the price of imported gasoline with today's 5% increase in ex-refinery gasoline prices," said a Sao Paulo-based trader. "The 9% depreciation in the Brazilian real to US dollar exchange rate since June 9 was the primary reason Petrobras increased ex-refinery gasoline prices."
NYMEX RBOB August futures have increased more than 4%, ICE Brent Crude August futures have increased more than 3%, and the Brazilian real has depreciated almost 9% since the last Petrobras increase in the ex-refinery gasoline price on June 9.
Petrobras utilizes a fuel pricing policy, which include international energy and foreign exchange components to ensure Brazilian domestic prices are in line with international markets.
Market participants were expecting small to medium sized mills to continue strategically selling ethanol at elevated prices upon Petrobras announcing gasoline price increases in the near term if international energy markets continue to rally or if the Brazilian real continues to weaken versus the US dollar.
Capacity constraints, cash flow needs
"Tanking capacity constraints for ethanol and short-term cash needs will be a challenge for small to medium sized mills in the near-term," said a Sao Paulo-based trader. "Although the larger mills have adequate storage capacity and sufficient cash reserves, smaller and medium sized mills will need to continue to sell ethanol to meet short-term cash flow requirements, thus putting downward pressure on ethanol prices in the Center-South during late June through August."
Smaller to medium sized mills, or mills which crush less than 7 million tons of sugarcane per crop season, account for about 40%-50% of the ethanol produced and sold in the Center-South, according to market sources.
According to several market sources, three of the largest producers in the Center South have leased almost the entire storage capacity in the Center-South for the remainder of the 2020-2021 harvest.
These 35 critical storage facilities located in the Center-South will enable these three large producers to strategically carryover around 60% of the ethanol they have produced during the current harvest to cover ongoing demand through the end of the intercrop season in the Center-South.
"If the monthly ethanol demand in the Center-South remains at levels experienced in May, close to 1.5 billion liters, the peak of ethanol storage will occur in October with an estimated 10 billion liters of carryout for the intercrop season," said a Rio de Janeiro-based broker. "Therefore, I do not think storage will be a problem during this harvest for the larger ethanol producers, but rather the increasingly strong need for cash, especially from the less capitalized market players, which are the medium to smaller sized mills."
Cumulative 2020-21 crop year ethanol production to June 1 totaled 6.20 billion liters or 0.3% less than a year earlier. The 2020-21 crop year runs from April 2020 to March 2021.
Ethanol sales by Center-South mills in 2020-21 to June 1 totaled 3.97 billion liters or 28.3% less year on year, with 3.75 billion liters going to the domestic market and 218 million liters for export, reported UNICA. The fall in demand was caused by the impact of the coronavirus pandemic on the Brazilian economy.
The forward price curve in ethanol is starting to find resistance and market participants were expecting the Center-South ethanol market might test its usual August low prices.
