Brazilian demand for U.S. ethanol expected to increase

By Kris Bevill | April 06, 2011

U.S. ethanol exports to Brazil are expected to increase during the month of April in order to fill supply gaps brought on by economic difficulties experienced within the country. Small shipments of U.S. ethanol have been received by ports in the northeast portion of Brazil over the past few months, but activity is expected to ramp up in the coming weeks as demand increases in the industrial regions near Sao Paulo and Rio de Janiero, prior to the area’s sugarcane harvest.

Raphael Hudson, Hart Energy’s director of research and consulting for Latin America, said high sugar prices have had some impact on Brazil’s ethanol industry, but have not played a significant role because the ability for mills to switch from sugar to ethanol production or vice versa is somewhat limited. He attributes the country’s ethanol supply shortage mostly to economic factors. “Their financial sector hasn’t been as hard hit as the American banks, but there’s been a pullback in financing, so there has been less in the way of new sugar and ethanol mills coming online,” he said. “Also the sugarcane acreage has been expanding at a lower rate.” Hudson said ethanol demand has also been increasing as more flex-fuel vehicles (FFVs) are added to Brazil’s growing fleet. Flex-fuel motorcycles were also recently introduced into Brazil’s market.

UNICA, Brazil’s sugarcane industry association, predicts that about 45 percent of the 2011-’12 sugarcane harvest will be used to produce sugar, representing a slight increase over last season. Approximately 25.52 billion liters (about 6.7 billion gallons) of ethanol is expected to be produced in Brazil this season, less than 1 percent more than last season. UNICA stated that ethanol exports from Brazil are anticipated to drop by nearly 20 percent this season compared to the previous period. Fewer exports will improve the tight supply situation, but not by much. UNICA’s technical director, Antonio de Padua Rodrigues, said reducing exports will increase domestic supply by about 500 million liters, which is lower than the expected demand growth due to accelerated sales of FFVs.

The U.S. is expected to supply most of Brazil’s demand for imported ethanol. The most recent shipment of U.S. ethanol to Brazil was received at the port of Maceio in the northeast region of the country on March 11, and consisted of approximately 10 million liters (about 2.6 million gallons) of ethanol. Shipments delivered in December and January were about a million gallons larger. Hudson said some predictions are that shipments delivered to Sao Paulo in April could be as great as 200 million liters. “I imagine in a market the size of the U.S. it still isn’t a huge deal, but given you are coming closer to that blend wall, I guess every little bit helps,” he said.

Brazil appears to be doing what it can to encourage U.S. ethanol imports. Last year, the country also experienced tightening supply between February and April, but chose to temporarily reduce its blend mandate from E25 to E20 in order to alleviate supply/demand issues. That wasn’t done this year, presumably as an attempt to encourage free trade with the U.S. with the hope of receiving some reciprocity in the future. Brazil also recently modified its anhydrous ethanol specifications to more closely resemble the ASTM standard for ethanol. This modification is a temporary measure and will expire on April 30. “Basically, the idea was to make it easier for importers and distributors to bring this U.S. ethanol into compliance with Brazilian specs,” Hudson said.

Prices paid so far for U.S. ethanol have been fair, according to Hudson. The March 11 shipment to Maceio sold for 61 cents per liter, or about $2.30 per gallon. By comparison, the wholesale market in Brazil averaged at about $3.65 per gallon in March, which makes importing from the U.S. a “compelling arbitrage opportunity,” he said. “The window is not always open, but it’s looking pretty good right now. Even in Sao Paulo where the wholesale prices are lower, if you import U.S. ethanol into Sao Paulo right now it would be a pretty good deal.”