Impact of Falling Crude Oil Prices on the Biofuel Sector

CEIC Brazil Data Talk - June 3, 2015 The negative oil shock from mid-2014 to early-2015 has proven to be a major game changer in the energy markets, with the WTI and Brent blend spot prices falling below the USD50/barrel barrier in January 2015. While oil prices subsequently hovered around the USD60/barrel mark in mid-February and April 2015, prices remain far below the USD100/barrel mark observed prior to mid-2014. As a net importer of petroleum, Brazil is expected to benefit overall from falling oil prices. For the semi-state-owned national oil company Petrobras, the decline in oil prices has come as a welcome reprieve, having registered a net income of BRL 5.3 billion in Q1;2015. Petrobras had been obliged to import fuel for domestic sale at highly subsidized prices to help control inflation, resulting in a net debt of BRL 332.45 billion as at Q1;2015. However, the lower oil price changes not just the landscape of Brazil’s petroleum industry but also the dynamics of other related industries. The biofuel sector, for one, is likely to experience mixed reactions to the declining oil prices. At a macro level, falling oil prices do not bode well for biofuel producers. Brazil’s biofuel sector, which is predominantly concentrated on sugarcane-based ethanol, has been hit by competitive pressures from cheaper oil, placing downward pressure on biofuel prices. Combined with the global glut in sugar, sugarcane producers are finding themselves wedged between low prices for sugar and oil. Sugar prices have fallen by around 10% to 20% in the international market in recent years, with persistently low prices expected given the rise in sugar inventories. This has significant implications for the industry. As a major producer of sugarcane globally, Brazil saw annual production of 653,443 tons during the year ended August 2014 with sugar production of 37,709 tons during the year ended December 2014. While sugarcane operators previously adjusted to these market pressures by allocating between sugar and ethanol production, the dual decline in sugar and oil prices has forced around 83 plants to cease operations during the past six years. This has contributed to indebtedness, compounded by adverse weather conditions plaguing the sugar mills. Notwithstanding these adverse trends, the long term outlook for Brazil’s biofuel sector may not be as bleak as it seems. Production continued to grow in 2014 despite these adverse trends. Ethanol production grew by 18.2% to 27.54 billion litres in 2014. Additionally, given that domestic fuel prices are regulated, the global decline in fuel prices may not necessarily translate into lower gasoline prices at the pump. Gasoline prices rose to BRL3.31/litre in April 2015 from BRL3.03/litre during January 2015 and BRL2.99/litre during April 2014. Indeed, despite appearing as a de facto substitute of gasoline, Brazilian laws mandate a minimum blend (approximately 25%) of ethanol with gasoline. While almost all vehicles in Brazil are modified to use this gasoline-alcohol blend, 87.7% of Brazil’s automobile fleet is composed of flex-fuel vehicles with the ability to run on any proportion of gasoline-ethanol blend and, indeed, run solely on ethanol fuel. Brazil’s biofuel sector has been further aided by favourable government policies. In January 2015 the government increased the taxes on fuel, PIS-Cofins and Cide, both to support prices and to enhance government revenue. The increased taxation is estimated to translate into a price increase of BRL 0.22/litre for gasoline and BRL 0.15/ litre for diesel. More recently, the government’s decision to increase the proportion of ethanol blend to 27.5% from 25% will help promote the usage of ethanol, hence supporting ethanol prices amid falling oil prices. Ironically, this move will largely benefit the oil producer, Petrobras, which may see a decline in its associated import bill. Brazil’s biofuel players may have to weather a rather rough patch as twin declines in sugar and fuel prices place tough short-term pressures on the sector. As with most agriculture-based sectors, biofuel continues to be at the mercy of inclement weather conditions. However, as pioneers in the sector, Brazil’s biofuel industry is expected to continue growing in the long-run as supportive government policies help to mitigate the worst effects of lower fuel prices. By Bruno Vasconcelos - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
3rd June 2015 Impact of Falling Crude Oil Prices on the Biofuel Sector

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