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Brazilian ethanol biofuel: deficit unlikely

Contrary to expectations, the Brazilian ethanol market is unlikely to face a deficit in 2010/11 (as was the case in 2009/10) due to producer stockpiling.

High prices in Brazil, driven by producer ethanol stockpiling has been blamed by Czarnikow Group, a London-based agricultural commodity business, for preventing demand from recovering and as a result, the Brazilian ethanol biofuel market could find itself with larger than expected ethanol stocks at a time when the biofuel supply was forecast to be in short supply.

Regarding these events Henry Toller, Analyst at Czarnikow, says: “Recent producer stockpiling, assisted by government backed stock financing should lead to sufficient supply throughout the off-crop period. Additionally, Brazil has been blessed with good weather this season, which has enabled the industry to advance the harvest. Furthermore, high domestic ethanol prices have slowed the growth in demand and this could see the market well supplied in the latter part of the year.”

Given the slow pace of demand seen so far, and the increasing cost of hydrous ethanol at the pump, demand from the ever-expanding flex-fuel fleet (cars designed to run on more than one type of fuel) has yet to have its potential realised.

If this scenario persists through the coming months, CS fuel ethanol demand could struggle to reach the 22.5 billion litres forecasted by Czarnikow Group, which although is 11% higher than 2009/10, is less than had been expected.

A recent history of Brazilian ethanol biofuel industry:

  • An acute shortage of ethanol in the off-crop period led to a sharp drop in demand, as prices reached a peak of R$1.20/litre ex-mill in São Paulo state, which pushed pump prices above the 70% indifference level with gasohol. This was followed by a crash in prices to R$0.75/litre at the start of April;
  • Consumption of the biofuel has since recovered in the wake of the price crash but has struggled to reach the peak levels seen last year. In the first quarter of 2010/11, total domestic hydrous sales by CS mills were 2.5% lower than in the corresponding period of the previous crop year; and
  • The unexpectedly low consumption figures have raised serious questions over whether Brazilian fuel ethanol demand will increase as expected, despite the continuing expansion of the flex-fuel fleet.

When considering the future of the Brazilian ethanol biofuel market it is interesting to note that the outcome of the Enviromental Protection Agency’s decision to increase the ethanol blending limit in petrol above 10% may determine whether the US continues to play a large role in global trade. If there is a positive outcome, the US could potentially withdraw from the export market and Brazil could start to regain some of its traditional markets.

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