Sao Paulo state's ICMS tax hike and Petrobras gasoline price increase sends Brazil's hydrous and anhydrous ethanol to record-high prices.
The Center-South hydrous ethanol price jumped Real 90/cu m, or almost 4% on the week, Jan. 19 to Real 2,600/cu m, S&P Global Platts data showed, a new historic record price.The 13.3% Brazilian Tax on Commerce and some Services, or ICMS tax, on hydrous ethanol was implemented on Jan. 15 in Sao Paulo state. The ICMS tax on hydrous ethanol increased to 13.3% from 12% in Sao Paulo state. CS mills passed the bulk of the increase in the ICMS tax to end-users.
Petrobras instituted an average gasoline price increase of 7.93% at refineries Jan. 19.
"The Petrobras gasoline price increase combined with the ICMS tax increase during a low liquidity intercrop period sent ethanol prices to irrational levels in a short time frame," a Sao Paulo-based trader said. "The recent spike in hydrous and anhydrous prices is slightly exaggerated because of low liquidity in the spot market due to previously committed volumes of ethanol agreed upon long-term contracts."
Hydrous and anhydrous ethanol ex-mill Ribeirao Preto prices have rallied around 63% from their respective low prices recorded on April 27, 2020. This substantial rally in prices reflects the recovery in ethanol demand, which has attained prepandemic levels during the first few weeks in January.
Platts assessed domestic anhydrous ethanol at Real 2,595/cu m ex-mill Ribeirao Preto, up Real 50/cu m on the week, S&P Global Platts data showed, a new historic record price. The domestic anhydrous ethanol premium over hydrous is 16.07% net of the ICMS tax.
Although anhydrous ethanol does not fall under the purview of the ICMS tax, the price of anhydrous is greatly affected by Petrobras ex-refinery gasoline changes.
The Petrobras average gasoline price increase of 7.93% at refineries Jan. 19 will make gasoline less competitive compared to hydrous ethanol at the pump.
Market participants use Petrobras ex-refinery gasoline price increases as a discounting mechanism for ethanol prices because the gasoline price increase ultimately felt by consumers at the pump will put pressure on hydrous ethanol prices in the near term.
Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or E100. Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, because of hydrous' lower energy content. Any changes in the ex-refinery price of gasoline can alter this delicate price balance.
Petrobras utilizes a fuel-pricing policy, which includes international energy and foreign exchange components, to ensure Brazilian domestic prices are in line with international markets.
ICE March Brent crude futures have increased around 10% from the last announced Petrobras ex-refinery gasoline price increase on Dec. 28, 2020, to the settlement price on Jan. 19. NYMEX RBOB March futures have increased more than 12% from Dec. 28, 2020, to the settlement price on Jan. 19.
If ICE Brent and NYMEX RBOB futures continue to rise, the Petrobras average gasoline price at refineries will likely increase in tandem, thus increasing competitiveness for ethanol at the pumps.
