Government intervention disrupts the ethanol and sugar market

The sugar-energy sector is experiencing a rare combination of favorable winds blowing towards Brazil, both for sugar and ethanol production. With just the right amount of rain and heat, the country’s 2023/24 sugarcane crop should grow 7% in productivity and reach 600 million tons, the second best in history.

Global indicators add to the positive picture of domestic crops. In China, the main importer of sugar, production is expected to be the lowest in seven years, creating a supply deficit of 6.5 million tons, the second largest on record.

In Europe, heat waves and restrictions on some chemical pesticides dropped the productivity of beet plantations by 8%, the main raw material for making the sweetener. Finally, India increasingly directs sucrose to produce ethanol and add to gasoline. The mixture will increase from 10% to 20% by 2025, a decarbonization solution that Asians are copying from Brazil along with flex-fuel car technology.

This whole scenario weighed on the announcement by the Minister of Mines and Energy, Alexandre Silveira, this Friday (28th), that he will propose to the National Energy Policy Council an increase in the mixture of ethanol and gasoline, from 27.5% to 30%. It is an encouragement for the sector, but the fact is that sugar production remains highly competitive and should remain the preference of mill owners in the current cycle.

As in Brazil sugar and ethanol come mostly from sugarcane, the mills need to choose what will be the participation of each one in the production mix, within the industrial possibilities. For most of them, the decision has already been made: “max sugar”, or as much sugar as possible. The predicted percentage is 47.5% of the mix, the highest since 2011.

Resuming the parity of ethanol with gasoline is uncertain

In addition to the great moment for sugar – futures contracts in New York reached a six-year maximum in early April –, the instability of the ethanol market weighs heavily on the choice of plants, given the recent history of government interventions in the fuel sector.

Even with the return of federal taxes, suspended for almost a year, and with the recent increase in gasoline taxation, the resumption of ethanol parity at a competitive level – up to 70% of the price of gasoline – is not guaranteed.

“The fuel market as a whole is socially and politically very sensitive. So, if the government needs an increase in popularity, it will change fuel prices and this will harm ethanol, as it did last year”, points out Filipi Cardoso, market intelligence specialist at StoneX.

In 2022, the government of former President Jair Bolsonaro (PL) took a series of measures to try to reduce the price of gasoline, such as suspending the collection of PIS/Cofins and Cide and reducing the maximum ICMS rate. As a result, the competitiveness of ethanol turned to dust and the fuel’s share in the Otto cycle (fleet of passenger and light cargo vehicles), which was already 48.2% in 2019, fell to 23%.

Interventionist, PT talks about rebuilding Petrobras

With Lula, the interventionist spirit is renewed. Finance Minister Fernando Haddad said the president “ordered” changes in Petrobras’ pricing policy. It means that the company will no longer follow the Import Parity Price (PPI) policy, in force since 2016, which follows the price of a barrel of oil and the dollar.

The renewal of the oil company’s Board of Directors, defined this Thursday (27), was considered by the president of the PT, deputy Gleisi Hoffmann, an opportunity to sign “people committed to the reconstruction of the company and its role for the country”. In other words, a company more responsive to the moods and directives of the ruler of the day.

On the other hand, charging a unified ICMS for gasoline, at R$ 1.22 per liter, in theory, would represent a favorable externality for ethanol. But it’s not a sure thing.

“With the full return of federal taxes, plus this change in ICMS, gasoline at the pump would be around R$ 6 a liter. I find it very difficult for the current government to maintain this. If it holds, it would be great for ethanol. But since the beginning of the year there has been interference in Petrobras’ pricing policy. When it looks like ethanol is going to take off, interference comes from outside and ends up getting in the way”, evaluates Ana Zancaner, analysis manager at brokerage Czarnikow.

Ethanol, therefore, continues as a weak point in the equation because of the comings and goings of the state. The focus of the mills, points out Leonardo Alencar, head of agro at XP, has always been the domestic market, due to the potential of market share yet to be conquered beyond the Southeast region. However, the worsening of the scenario last year, after attempts to interfere with Petrobras and tax changes, caused the plants to open export channels.

Global ethanol market is still taking shape

What was supposed to be just a relief ended up revealing new possibilities. The São Martinho plant, for example, one of the benchmarkings sectors, calculated to close the 2022/23 cycle by exporting 28% of ethanol production, taking advantage of the simultaneous supply deficit in Europe at low prices in the Brazilian domestic market.

“As you start to create these export channels, and develop the commercial part with clients in the international market, this tends to become an arbitrage capability. Brazil could be one of the great exporters in the world”, points out Alencar.

“For an economy like the Japanese one to decide to increase the mixture of ethanol in gasoline, it is necessary to have extremely reliable strategic partners, or several partners to choose the best condition. It would be the case for Brazil, India, Thailand and other countries to export, to create this global ethanol market and make imports predictable and stable, replacing fossil fuel. I think it is a maturation process that is underway in the sector”, underlines the XP analyst.

In relation to other decarbonizing energy solutions, such as electric cars, what ethanol would not lack is competitiveness. “In this energy transition process, the electrification of the hybrid with ethanol, which we have in Brazil, is much better than the electric car in Europe, where the energy matrix is ​​not so clean”, highlights Alencar.

Corn becomes a joker to enable ethanol exports

If before the ethanol market suffered the see-saw effect of the sugarcane harvest and off-season, the production of fuel from corn increasingly stabilizes supply throughout the year. Corn became the “joker” raw material that, unlike sugarcane, can be stored. StoneX estimates that corn ethanol production in the country should grow by almost 30% in the 2023/24 cycle.

“It’s a significant growth, especially in the Midwest, where ethanol consumption is very accelerated and where there is also a greater supply of corn. Now we have two markets, sugar and ethanol, with the possibility of continuing to grow. It is the growth of corn ethanol that brings the possibility for Brazil to participate in this global ethanol market”, points out Filipi Cardoso.

The private sector has been betting on corn ethanol, but is already putting one foot behind it, for fear that the government, in its regulatory and interventionist impetus, will end up limiting the expansion of the segment.

“Uncertainties hurt more than bad news. And this amount of interference generates insecurity. There are already many companies holding investment. The plants that have corn ethanol projects are worried, because in this case you don’t have sugar, only DDG (ration) as a second line of revenue. They started to operate new projects in a very challenging scenario due to the uncertainties of ethanol. So we may end up limiting the investment capacity in a growing sector, and very positive for the country, due to political insecurities”, evaluates Leonardo Alencar.

China retreated from the use of ethanol

The global ethanol market should have already advanced significantly, were it not for China’s withdrawal from plans announced in 2017, of a mandatory 10% blend in gasoline starting in 2020. The Chinese retreated after a drop in the country’s corn stocks and capacity limited production of ethanol itself. This makes Ana Zancaner, from brokerage Czarnikow, cautiously view the possibilities of a new commodity.

“Long term, there may be opportunities. But I wonder if countries will want to add another dependency on a strategic sector like fuel. Many are already dependent on oil and gasoline, why would they want to establish another dependency?”, he asks, citing the Chinese example.

Having made the reservations, the analyst understands that if there were a free price policy for Petrobras, the two sugarcane by-products would be facing some of their best years. However, other structural challenges remain.

More than 80% of the sweetener is exported through the port of Santos, which also concentrates 40% of corn shipments and 25% of soy. As the sugar terminals also operate with grains, the bottleneck is accentuated. In the evaluation of the Czarnikow brokerage, sugar exports are limited, by logistics, to 2.6 million tons per month.

“It doesn’t matter if Brazil produces more than 36 million tons, and that sugar cannot be exported. It’s a logistical problem that could get worse next year. We need to add capacity to the bottlenecks, not only to load ships, but also to receive sugar at the terminals”, warns Ana Zancaner.