Brazilian ethanol exports have been on a tear throughout 2022, but whether that drives through into next year depends on the incoming administration's extension of tax cuts that spurred exports at the expense of domestic demand.
Exports of ethanol received a boost when President Jair Bolsonaro sharply cut taxes on fuels, especially gasoline, in mid-June in a gambit to control spiraling inflation and enhance his reelection odds. Those cuts made ethanol less competitive domestically as a flex fuel than gasoline, forcing mills to look overseas for sales.
The government-sponsored bill reduced taxes to a 17pc cap on the VAT-like ICMS state tax on fuels. Gasoline previously had been levied more heavily than ethanol, so cutting the taxes decreased ethanol's price advantage.
Bolsonaro also zeroed out the PIS/Cofins and Cide federal taxes levied on motor fuels, further driving up gasoline consumption at ethanol's expense.
Major ethanol firms such as Sao Martinho, Raizen, Tereos Brasil and Adecoagro boosted exports to offset lower domestic sales as motorists turned to gasoline over biofuel.
But the slate of controversial tax cuts expires on 31 December, threatening a surge in domestic gasoline prices which would make ethanol more competitive at the pump and cut into exports.
Ethanol mill Sao Martinho's chief financial officer Felipe Vicchiato said it is difficult to forecast whether exports next year will be as strong as they are now, highlighting uncertainties about how the tax holiday will be handled by president-elect Luiz Inacio Lula da Silva, who assumes office on 1 January.
"If a chunk of the taxes return, maybe we won't have so many exports," he said.
A poll of sources consulted by Argus expects exports to reach 2bn l (34,500 b/d) in 2023 if Lula maintains the gasoline tax holiday next year, which would sustain Brazil's current ethanol supply and demand dynamics. So far in 2022, Brazilian producers delivered 2.17bn l of ethanol to the international market, according to the ministry of economy.
Ethanol exports in 2022
A challenging 2022-23 sugarcane crop season has highlighted the strength of Brazil's ethanol sector in the face of unfavorable economics and constant changes to the tax code, putting extra pressure on domestic producers to find new avenues for sales.
Mills in center-south Brazil — the country's main producing region — delayed the start of the harvest because of the prior season's adverse weather.
Despite the setbacks, the biofuel industry enjoyed months of steady financial recovery, as ethanol prices reached record-highs — a welcome relief from the depths of the Covid-19 pandemic thatled to profound cutbacks in fuel consumption.
But profit margins narrowed significantly since Bolsonaro sharply slashed the taxes on fuels, putting extra pressure on domestic producers to find new markets overseas.
Sao Martinho's Vicchiato said in November that the firm expects its exports to surpass 250mn l by the end of the 2022-23 harvest, which ends next March, or 28pc of the company's total ethanol output for the cycle.
If analyst estimates for 2023 are correct, anhydrous ethanol will account for the lion's share of export growth next year, with most cargoes landing in California — a long-haul main destination for the Brazilian specification — or the Netherlands, a port of entry for most imports into the EU.
Industrial-grade non-fuel hydrous ethanol — which is used by manufacturers like pharmaceutical and cosmetics companies and is sold mostly to South Korea — is expected to hold firm in light of steady demand.
But market participants are also wary that the biofuel industry might adopt a different strategy if domestic demand gains momentum. "No one has aclear outlookfor 2023 yet," one source said.
