California demand for Brazilian ethanol to fall

: Biofuels
20/06/03

Lower gasoline consumption and logistical hurdles are likely to cut California's demand for Brazilian sugarcane ethanol from three cargoes per month to just two, as market participants start to negotiate fob Brazil shipments amid improved arbitrage economics.

California's ethanol market could face oversupply issues if Brazilian deliveries exceed two 40,000m³ (335,460 bl) cargoes of ethanol per month between August and December 2020, according to an Argus survey of traders in Brazil and the US. Last year, traders considered three cargoes per month a sweet spot for Brazilian exports to California.

Demand caps for Brazilian ethanol include lower on-road fuels consumption because of Covid-19 pandemic-related travel restrictions and shelter-in-place orders. While gasoline production in California showed slight signs of recovery in May — averaging 725,400 b/d after reaching 21-year lows in April — stockpiles fell further, compounding decreases recorded in previous weeks. The tightness in the gasoline market points to a precarious balance Brazilian exporters must strike to take advantage of an open arbitrage for sugarcane based ethanol without overwhelming domestic blending operations.

Logistical hurdles at California's main hubs for renewable fuels — Carson and Selby — may also deter large inflows of waterborne ethanol as both land terminals are primarily used to store inbound ethanol originating in the midcontinent.

Despite the California headwinds, traders are still moving quickly to take advantage of the open arbitrage for Brazilian ethanol. Market participants have already closed on at least two tankers set to take ethanol from Brazil to California in the coming months, including Pacific Blue, which sailed off Santos to California on 1 June, and an undisclosed vessel. Current spot market prices for a medium range (MR) tanker with a 40,000m³ capacity on the Brazil to US west coast route cost approximatively 15.6¢/USG.

Last year, Raizen North America's share of Brazilian ethanol imports to California reached 35pc, with a total of 1.6mn bl. This was followed by Copersucar's subsidiary Eco-Energy with close to 1mn bl, TCPU (777,000 bl), Shell (750,000 bl) and Vitol (505,000 bl), according to Energy Information Administration (EIA) company-level data.

The average cargo size for California-bound shipments of ethanol from Brazil captured by Argus averaged 28.000m³ (175,900bl) in 2019.

Carbon intensity advantage

Brazilian ethanol carries a premium to domestic corn ethanol in the California market, compounded by the D5/D6 RIN spread and sugarcane ethanol's low carbon intensity (CI) score. The typical CI score for sugarcane-based ethanol from Brazil is much lower than that for US corn-based ethanol, with Brazilian ethanol ranging from about 40 to 47 CI points. Ethanol with a lower CI score comes at a premium, and the fuel generates tax credits under California and US federal law. Under the California Low Carbon Fuel Standard (LCFS), the premium per carbon intensity point was 1.73¢/USG on 2 June, with LCFS credits closing at $212/t.

The shipments would also generate D5 RINs under the federal Renewable Fuel Standard (RFS). The D5/D6 RIN premium generated by sugarcane-based ethanol versus corn-based ethanol stood at 8.5¢/RIN on 2 June.

Negotiations of export shipments of anhydrous fuel ethanol from Brazil picked up in May as ample supplies in Brazil's center-south region and the devaluation of the Brazilian real against the dollar helped reopen the arbitrage for fob Santos cargoes to California.

Fob Santos anhydrous prices fell 27pc between 3 March and 2 June to 140.2¢/USG. This came amid a growing product overhang as the start of the sugarcane crushing season on 1 April lifted ethanol output in Brazil's main producer region. The US dollar was up 17pc against the real between 2 June and 28 May to settle at R5.24 per US dollar.

By Amance Boutin and Jacqueline Reigle

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Bangchak tests runs at Thai SAF plant before 3Q launch

25/05/08

Bangchak tests runs at Thai SAF plant before 3Q launch

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25/05/07

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