Brazil’s Lower Ethanol Blend Won’t Cut Gas Prices

Brazil’s plans to cut the amount of ethanol that must be blended into gasoline may do little to lower the price of fuel at the pump, an analyst said.

The country will cut its ethanol blending rate to 20 percent by Oct. 1, from 25 percent now. The measure is aimed at ensuring there’s an adequate supply of the renewable fuel, which has increased 27 percent in price since June, Minister of Mines and Energy Edison Lobao said in a statement.

The plan won’t cut ethanol consumption enough to significantly drive down prices because bad weather is reducing sugar-cane production and the industry’s investment in new mills and plantations may not meet demand, said Salim Morsy, an analyst for Bloomberg New Energy Finance in New York.

“The effect this will have on final gasoline prices will be marginal,” Morsy said in a telephone interview yesterday.

Cutting the blend-rate will reduce demand for anhydrous ethanol, which is mixed with gasoline, by about 1.4 billion liters (422 million gallons) to 1.6 billion liters a year, he said. That’s about 6.4 percent of total ethanol consumption in Brazil.

Rising demand for fuel from Brazilian drivers boosted prices for anhydrous ethanol to 1.43 reais (90 cents) a liter on Aug. 26, up 27 percent from its June 3 low this year.

Record High Price

The current price is lower than the record high of 2.46 reais a liter reached on April 15, during the rainy season when mills shut down and ethanol supplies dwindled. That pushed up the price of gasoline at the pump to 2.91 reais a liter, 13 percent higher than six months earlier, according to information compiled by Bloomberg.

“Prices haven’t settled,” Morsy said. “And there are few indications that they’ll subside in the coming months, even with this blend reduction, given current fuel demand levels and poor sugar-cane harvest outlooks.”

Brazil is expected to process 589 million tons of cane this harvest, 5.6 percent less than last season because of poor weather, government agency Companhia Nacional de Abastecimento said yesterday in an e-mailed statement.

“We have to guarantee supply this year and next year because we verified the harvest next year won’t be much better than this one,” Lobao said in the statement. “We have to take action immediately.”

Brazil also plans to introduce new financing measures to help mills store ethanol and re-plant cane plantations, according to the statement.

Inadequate Investment

Under-investment in production capacity is the main reason for climbing ethanol prices, said Arnaldo Correa, an analyst at Archer Consulting in Sao Paulo.

The cane industry has been growing at an annual rate of 2 percent for the last three years, and ethanol demand has been growing by 9 percent, Correa said. “Companies aren’t building enough to cope with increased demand. It’s simple mathematics.”

Companies including Bunge Ltd., ETH Bioenergia SA, Petroleo Brasileiro SA and Cosan Ltd. are expanding their ethanol production capacity, and it may take as long as four years for some of those projects to come online, Morsy said.

source: bloomberg