Brazilian Ethanol Looks for Balance between Oil, Sugar Markets

by Nicolle Monteiro and Castro Beatriz Pupo (S&P Global) Brazilian ethanol prices, production and consumption patterns are more than ever driven by oil and gasoline prices. -- Ethanol's share of the 2018-19 sugar cane crop is expected by analysts to near 65%,its highest level in almost 10 years.

In 2018, Brazil tried to maximize production of the biofuel from cane, mainly converting it into hydrous ethanol.

But what has driven this swing to ethanol from use of the cane for making sugar?

The big turning point for Brazilian producers was in July 2017, when state-led oil company Petrobras initiated a new pricing policy for both diesel and gasoline. The revised pricing model established that gasoline and diesel prices would be adjusted based on foreign-exchange rates and international prices for crude and refined petroleum products.

But a combination of lower global sugar production and geopolitical uncertainties pressuring oil and gasoline prices is unfavorable for ethanol demand and production going forward.

As a result, Brazil is expected to slightly increase the amount of cane it devotes to sugar production.

Equally important is that Brazil's flex fuel car fleet is continuing to grow, with sales up 12.5% in 2018. However, hydrous ethanol is expected to lose some of its recently attained share of total fuel consumption, slipping to 24% in 2019 from 26% forecast for 2018. In comparison, hydrous ethanol's share of total Otto cycle demand was 17% in 2017.