September 2, 2011

Lack of Ethanol Forces Brazil to Import Gasoline

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The recent decision by the Brazilian government to reduce the amount of ethanol blended into gasoline from 25% to 20% means that Brazil will now be forced to import more gasoline to make up for the shortage of ethanol. During the six month period between October 2011 and April 2012, industry sources indicate that Brazil will import 1 billion liters of gasoline. The cost of the imported gasoline is estimated to be R$ 0.21 more per liter (US$ 0.50 per gallon) than domestically refined gasoline resulting in a loss of R$ 200 million for Petrobras.

According to the National Petroleum Agency (ANP), during all of 2010 Brazil imported 505 million liters of gasoline at a cost of UD$ 284 million. From January to July of this year, gasoline imports have already totaled 413 million liters at a cost of US$ 330 million.

The government reduced the ethanol blend due to declining ethanol production. It is estimated that the total ethanol production during the 2011/12 harvest season will be 15% lower than the previous year. Thus far this harvest season, the ethanol producers have been making more anhydrous ethanol used for blending and less hydrous ethanol sold as E100. As a result, ethanol prices have already increased significantly, but they still are below their peak of April 20, 2011 when a liter of ethanol was selling for R$ 2.72 or US$ 6.46 per gallon. As soon as the government announced the reduced blend, ethanol prices fell R$ 0.30 per liter (US$ 0.70 per gallon).

Brazilian ethanol distributors have already signed contracts to import 500 million liters of ethanol from the United States in order to supply the domestic market. They had been anticipating that the government would reduce the ethanol blend on November 1st, but the government decided to move it forward one month to October 1st. Some distributors feel the entire 500 million liters may not be needed, but it is too early to say for sure because the sugarcane harvest is not yet complete.