February 6, 2015

Brazilian Gasoline will contain 27% Ethanol starting February 15th

The Brazilian government announced earlier this week that the percentage of ethanol blended into the nation's gasoline supply will be set at 27% starting on February 15th. The Union of Sugarcane Industries (Unica) had requested a 27.5% blend, but they agreed with the slightly lower blend. The previous blend percentage, which had been in place for several years, was 25%.

Debates about increasing the blend percentage have been ongoing for several years as Unica indicated that the ethanol producers needed higher volumes and higher prices in order to stay in business. They complained that the government policy of artificially holding down the price of gasoline in order to control domestic inflation was causing economic distress in the industry.

In September of 2014, President Rousseff signed legislation authorizing a 27.5% blend of ethanol, but only if technical studies indicated there would be no harm caused by the increased blend.

Tests conducted by independent organizations indicated that Brazilian-made vehicles would not suffer any negative impact from the increased blend. Over 90% of the new cars in Brazil have flex-fuel engines enabling the use of gasoline or 100% ethanol (E100) as well as any combination of the two fuels. The tests are still being conducted on imported automobiles, so in order to placate owners of imported cars, Unica agreed to the slightly lower blend percentage.

The Brazilian automobile manufacturers association had argued against any blend higher than 25% because a significant portion of the automobile fleet in Brazil were older vehicles that were not equipped for the higher blend.

The Brazilian sugarcane sector has endured economic hardship in recent years due to adverse weather and low prices for both sugar and ethanol. Dozens of sugar mills in Brazil have closed their doors or entered into bankruptcy proceedings in recent years. The increased blend will help to increase the margins on anhydrous ethanol, which is blended into gasoline. Traditionally, anhydrous ethanol had lower margins than hydrous ethanol which is sold as E100.

The Brazilian government also has increased the price of gasoline recently which should help to improve ethanol prices as well. The combination of these two factors will help the sugarcane sector, but it remains to be seen if it is enough to stem the tide of red ink in the sector.