BRASILIA: A few months ago, some ethanol traders in Brazil thought they had a slam-dunk idea—import cheap supplies from the U.S. at a time when domestic prices were surging and stockpiles were shrinking. It didn’t work.
Instead of pocketing easy profits, they ended up flooding the local market. In a surprising twist for a country that is a net exporter—it produces more ethanol than anyone except the U.S.—Brazil’s imports surged eightfold in the four months through February, compared with the same period a year earlier, according to the latest government data. Prices plunged more than 20 percent.
Caught in the squeeze were some big traders and distributors, including Raizen SA, a joint venture of Royal Dutch Shell Plc and Cosan SA; Copersucar SA, which controls U.S. biofuel marketer Eco-Energy LLC; and Biosev SA, a unit of trader Louis Dreyfus Co., according to data from state oil agency ANP. The glut was so bad that the industry called on the government to restore import taxes.
“Some buyers had to wash out import contracts to avoid further losses,” said Tarcilo Rodrigues, a director at ethanol trading Bioagencia, a broker based in Sao Paulo.
Prices remained high in December and through the first week of January, touching 2.079 reais, but then the market tumbled as new supplies arrived, according to data compiled by the University of Sao Paulo’s Cepea research arm. Ethanol slid to 1.591 reais last week, the lowest since May. The 18 percent decline in the first quarter was the steepest for that period since 2010, the data show.
Imports probably didn’t impact prices as much as the end of a tax exemption on domestic supplies, which led to a surge in sales before the new levy went into effect, Paulo Roberto de Souza, the CEO of Copersucar, said in an interview.
The prospect of a tax of 0.12 real per liter starting Jan. 1 “triggered most millers to sell until December a huge volume of ethanol for delivery through the first quarter,” de Souza said, adding that the price slump reduced the company’s expected margins on bio-fuel imports.
Spokesmen for Raizen and Biosev declined requests for comment on their ethanol trading or the market decline.
Slowing demand also cut the rally short. Most cars in Brazil can run on either gasoline or ethanol, and drivers typically fill their tanks with whichever fuel offers the best value at the pump. So, when Petrobras SA, the state-run oil company, cut gasoline prices, ethanol consumption slowed.