BRASILIA, – Brazil wants to increase regulation of the domestic ethanol market to ensure output, a senior government official said on Wednesday, signaling a move that could have major implications for global sugar supplies.
President Dilma Rousseff has instructed Brazil’s National Oil Agency, or ANP, to draft regulations that will treat ethanol as a “strategic fuel” and no longer as an agricultural commodity, Haroldo Lima, the agency’s director, told Reuters.
“There is a decision that the issue is going to be studied to see if it’s viable in the short term,” Lima said. “We regulate all aspects of the oil and gas market, but with ethanol all we regulate is the quality of the product.”
Shares of the world’s largest sugar and ethanol maker,Brazil’s Cosan (CSAN3.SA), posted their biggest intraday drop in two months on Wednesday after local newspaper Valor Economico first reported that the government wants to broaden regulatory oversight on the cane industry.
Brazil controls more than half of the world’s sugar trade and is a pioneer in biofuels such as ethanol, which it makes from sugarcane. Ethanol shares about an equal amount of the local fuels market with gasoline. World sugar prices are 25 percent off 30-year highs set in February and Brazilian cane mills have been pushing production of the sweetener close to capacity and at the expense of
“Mills’ plan for the new crop is to maximize sugar production with about 46.2 percent of the cane harvested going to it and the rest to ethanol production,” said Plinio Nastari, a sugar and ethanol analyst.
Ethanol prices have reached their highest in five years on the local market, due to limited growth in production of the fuel over the last year. This has prompted owners of flex-fuel cars to switch to gasoline at the pump. But the surge in gasoline demand has turned the local fuels market on its head. State-run oil company Petrobras was forced earlier this year to import gasoline to keep local markets from running dry. A 24 percent jump in vehicle sales in February underscores the continued surge in fuel demand from motorists.
For years, Brazilian officials have threatened to tax sugar exports as a way of ensuring greater output of ethanol in between cane harvests. Citing unnamed government sources, Valor said Rousseff would consider a tax on sugar exports if all else failed, but only as a “last resort”.
“There is actually an export tax already in Brazil for sugar but the levy is zero, so there’s no effect,” Nastari said. “But such a measure would not be good. It would bring uncertainty and hurt mills that are still trying to recover from the financial crisis.”
The government is worried about inflation in the fuels sector. The switch to gasoline by some motorists due to surging ethanol prices has in turn pushed up the cost of gas. With the beginning of the cane-crushing season, hydrous ethanol prices have started falling at the mill. Prices are expected to start dropping at filling stations soon. Rousseff also ordered studies on how “substantially” to
reduce the mix of ethanol in gasoline, Valor added.
All gasoline sold in Brazil has a blend of 25 percent anhydrous ethanol. By law, the blend can fluctuate between 20 percent and 25 percent. To move the blend outside that range would require a change in the law. Brazil also makes and sells 100 percent hydrate ethanol at filling stations for the flex-fuel car fleet. Brazil has imported more than 150 million liters of U.S. ethanol this year as producers struggle to supply the local market during cane interharvest, the director of a large ethanol group estimated last month.