Petrobras' cut in gasoline prices could erode ethanol's parity in Brazil

29.05.2017

Brazil's Petrobras is cutting wholesale gasoline prices by 5.4% with immediate effect, the company said late Thursday, which could erode ethanol's recently regained parity against gasoline at the pump.

The average gasoline price for the consumer over May 14-20 was Real 3.586/liter in the Southeast region, according to latest ANP data.

If the decrease is completely passed on at the pump, the retail price should fall by 2.4%, or Real 0.09/liter.

The company said the decrease follows a recent surge in gasoline imports by third parties and the movement of the real against the US dollar.

Since October, the company's pricing policy has been for monthly adjustments according to global market prices and the competitiveness of its product in Brazil.

This is the third cut in gasoline prices this year. The company decreased prices in January and February. It increased prices in April.

IMPACT ON ETHANOL

With the start of the 2017-18 sugarcane season in Center-South Brazil, ethanol prices have been falling. The latest data from ANP for the May 14-20 period showed the price of hydrous ethanol at pump in the Southeast averaged 69.33% of gasoline, the lowest since early October.

Hydrous fuel ethanol is used in Brazil as a stand-alone biofuel (E100) by flex-fuel vehicles. To be competitive, it has to be below 70% of the price of gasoline.

However, despite the recent price improvement, demand at the pump has been very slow, according to market sources.

"The consumer doesn't do the math of the 70% before fueling their tanks, the price difference has to be of at least Real 1/liter difference," an analyst said.

In the medium term the market expects the cut by Petrobras to force Brazilian ethanol producers to further decrease ex-mill prices, which could in turn attract consumers to switch back to the biofuel.

"It will actually be good for demand, it will force hydrous prices to fall further and improve the parity," a source said.

"There is only one alternative for ethanol, prices will have to fall," a broker said.

S&P Global Platts on Thursday assessed domestic hydrous ethanol at Real 1,730/cu m (Real 1.73/liter), ex-mill Ribeirao Preto.

Compared with a month ago, hydrous prices have declined Real 94/cu m, or 6%. Since the start of the season on April 1 prices are down 3%.

"If we compare the average of hydrous ex-mill prices this season versus last year we can see that prices are much higher. So there is still space for prices to fall further," according to analysts at Kingsman, the agricultural analysis unit at S&P Global Platts.

Platts assessments show that the average price of hydrous from the start of the crop April 1 to May 25 was Real 1,789/cu m, compared to Real 1,592/cu m in the same period last year.


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