Sugar prices that fell 39 percent in the past two years may need to drop more to discourage millers in Brazil from making the sweetener from raw material cane in favor of more ethanol, according to Jonathan Drake, chief operating officer of Singapore trader RCMA Commodities Asia Ltd.
Sugar probably needs to fall to 16 cents a pound to encourage the switch, Drake said in an interview at the Kingsman sugar conference in Dubai yesterday. The switch to make more ethanol would help reduce the surplus, estimated at 10 million metric tons in 2012-13, Drake said. Raw sugar closed on Feb. 1 at 18.89 cents a pound on ICE Futures U.S.
“You have to turn on hydrous demand,” he said, referring to the 100 percent pure biofuel that can be used to power flex fuel cars in Brazil. “And how do you do that? Either sugar goes so low that people make hydrous or petrol goes so high that people say, well I can use hydrous. It’s one of the two.”
The Brazilian government’s control over fuel prices in a bid to limit inflation has resulted in a drop in demand for ethanol, with the biofuel becoming uncompetitive at the pump against gasoline. Millers in Brazil directed 50.41 percent of all their sugar cane to make ethanol in 2012-13, down from 60.33 percent in 2009-10, data from industry group Unica shows.
“Isn’t it incredible that Brazil’s car fleet has grown by 50 percent in the last three years, the demand for petrol has gone crazy and yet for hydrous ethanol, which used to supply half of the country’s motor fuel, the demand has collapsed?” Drake said. “The question is what is the price in sugar terms that you can get consumers excited at in Brazil.”
The gasoline price increase announced by the government last week will alone not be enough to spur ethanol demand, Drake said. Another price increase for gasoline is unlikely this year, he said. Petroleo Brasileiro SA, Brazil’s state-controlled oil company, increased gasoline prices at refineries by 6.6 percent. The government also said it will raise the amount of anhydrous ethanol blended into gasoline to 25 percent in May from 20 percent now.
Flex fuel cars in Brazil can either run on the blend or on pure ethanol. The price of pure biofuel needs to be at maximum 70 percent of the blend level at the pump to be advantageous for consumers to fill up because ethanol burns faster. Prices at the pump may need to fall below the 70 percent parity for consumers to get out of the habit of using gasoline, Drake said.
“Consumers aren’t going to switch at the parity, you’ve got to make it a bit easier for them,” Drake said. “Historically, the industry has been a lot cheaper than 70 percent. In some years, it would average 62 percent for the whole year.”
A potential elimination or reduction of taxes currently imposed on ethanol may also help spur demand, Drake said.
“Remember, just because you make more hydrous, it doesn’t mean you use it. The key question that nobody knows today is if they change the taxes, do you know what the impact will be on the retail price.”