Gasoline melts and pushes ethanol down the hill
August was a disappointing month for the mills. Not exactly because of sugar since NY behaved pretty well and ended up appreciating 35 points – a monthly appreciation of almost 8 dollars per ton – against July’s last working day. Ethanol let everyone down, though. I will explain that next.
Besides sugar, gas natural, which increased more than 15% (which indirectly causes the strengthening of the white premium, which blew up), corn with 12%, and most soft commodities and grains, had positive results in August.
The collapse of the gas market, which dropped 20% during the month, totally messed up the internal ethanol market, flushing down the drain all the planning the mills had done all through 2022, which had everything – according to this scribe who has spoken about the subject so many times – to be the year of ethanol.
Ministre of Economy Paulo Guedes’ lack of a macro view and the President’s insane search for reelection at all costs make up the backdrop of the disconcerting and unfavorable business environment. It must be the so-called “more Brazil and less Brasília” promised by the current president and we don’t understand it well.
Ethanol has melted more than R$500 per cubic meter in just a month. The cash flow of the mills will feel the blow, even counting on the expected compensation from the federal government related to the August installment, which will come via tax credit. That is, if the company has a lot of accumulated credit in the fiscal books, it will imply a meaningful reduction in the margin of the milluntil it turns into money again (cash flow). That also affects new investments due to the lack of expected resources because of a budget which was hoping for a strong market for ethanol.
The fuel imbroglio arises in the potential foreign investor the concern over the risks investing in the industry in Brazil. The rules of the game, the fiscal incentives, product pricing can all go down the drain depending on the cognitive dysfunction of the Executive. Imagine an industry that has set up in the country counting on a reduction in the tax rate that has now vanished.
A factor that has been pressuring ethanol right now is that the price reduction of gas at the refinery goes almost instantly to the gas station encouraging the gas station owner to sell his product aggressively, while hydrous turns into a second-line product. As the margin of the gas station owner is greater with gas, he holds the hydrous price down at the pump and makes gas more available. And hydrous sales plummet. The nominal price heard on Friday was R$2.4000 per liter at the refinery, equivalent to 14.40 cents per pound, a 400-point discount against equivalent sugar in NY.
The advantage of ethanol as a clean and renewable fuel can disappear with the total exemption of taxes, opening up room for gas and putting the survival or expansion of the sector at stake. How many jobs are created with the fuel import compared to ethanol production in Brazil? We can argue that markets adjust themselves and that those who have no competence don’t succeed. However, just for a moment imagine the fuel sector without ethanol. What would Brazil do to meet a consumption estimated at 55 billion liters of fuel (Otto Cycle) even counting on the expansion of corn ethanol?
The sugar futures market in NY closed out Friday at 18.14 cents per pound, a 33-point drop, or a little more than 7 dollars per ton, against last week. The next months along the curve closed with smaller highs. That can be a sign that more sale hedges on the part of the mills are coming up to protect the additional volume of sugar they are producing to replace ethanol, whose compensation is smaller.
Meanwhile, B3 is trading ethanol for the first quarter of 2023 below 15 cents per pound. As we said here last week, something will change in this scenario.
The next Advanced Course on Options in Agricultural Commodities (in person) will take place on October 25 (Tuesday) and October 26 (Wednesday) from 9:00 am to 5:00 pm at the Hotel Wall Street next to Trianon Subway Station in São Paulo. For further information, contact priscilla@archerconsulting.com.br
You all have a great weekend.
To read the previous episodes of World Sugar Market – Weekly Comment, click here
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
