Cheap Petrobras Gas Hurts Ethanol Investments: Corporate Brazil

Petroleo Brasileiro SA, the state-run oil company, is boosting money-losing gasoline imports at its fastest pace ever, holding down prices for alternative fuels and hindering investments in ethanol.

Petrobras, as the oil producer is known, will import as much as 25.5 billion liters (6.74 billion gallons) by 2020, or about half of the nation’s gasoline, estimates Adriano Pires, head of the Brazilian Center for Infrastructure. That’s an almost sevenfold rise from the 3.68 billion liters, or 12 percent, the company imported last year, when its refining unit lost $17.5 billion buying the fuel and reselling it below cost.

President Dilma Rousseff’s policy to fight inflation by capping gasoline costs at the pump is also limiting prices for sugar-based ethanol, discouraging millers from investing in new output and exacerbating the problem. Investments in new ethanol production fell to $256 million last year from a peak of $6.4 billion in 2008, according to data compiled by Bloomberg New Energy Finance.

“The ethanol sector is paralyzed, and the car fleet is expanding every year,” Jose Roberto Della Coletta, director of Della Coletta Bioenergia SA, which owns a sugar and ethanol mill in Sao Paulo state, said in a telephone interview. “Mills will provide what fuel they can, but the rest will have to come from gasoline that will need to be imported.”

Gas Discount

Petrobras declined to comment on gasoline imports and the effect on ethanol prices. The company sells gasoline at a 15 percent discount to international prices, Bank of America Corp. and Itau Unibanco Holding SA said in reports last month. Consumers typically expect ethanol prices at the pump to be at least 30 percent less than gasoline because it delivers less energy, Rabobank International said in a February note.

The average price for ethanol at the pump for the week ending March 30 was 2.058 reais ($1.02) a liter, compared with 2.878 reais for gasoline, according to fuel regulator Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis.

Petrobras has slumped 9.2 percent this year, compared with a 10 percent decline for the benchmark Bovespa index, amid delays in developing some of Brazil’s largest-ever oil discoveries. The shares slid 1.6 percent to 17.72 reais at the close in Sao Paulo.

The stock traded yesterday at 7.2 times its estimated 2013 earnings, making it the eighth cheapest among the Americas’ 250 biggest oil and gas producers.

Hydrous ethanol, the version of the fuel that runs Brazil’s fleet of flex-fuel cars, has sold below production costs almost half of the time in the past six years, Arnaldo Correa, executive director of Sao Paulo-based research company Archer Consulting, said in a March 23 report.

Shuttered Mills

The economics are prompting some cane companies to close facilities. About 14 mills were shuttered in the 2012-13 harvest season, after 16 closures in the prior season, said Elizabeth Farina, president of sugar-cane trade group Unica.

“It’s a vicious cycle,” Felipe Rocha, an analyst at Omar Camargo Investimentos, said in a telephone interview. “The sugar-cane industry says they won’t invest in new capacity until they’re more confident” ethanol will play a large part in the country’s energy supply.

Without new capacity, the country won’t achieve its goal of tripling ethanol production through 2021, Maurilio Biagi Filho, chief executive officer of ethanol producer Grupo Maubisa, said in a telephone interview from Ribeirao Preto, Brazil.

‘Paper’ Target

“This idea to triple production just exists on paper,” said Biagi, whose company is the world’s second-biggest individual sugar-cane grower. “Why would it increase? There haven’t been any big policy changes. The sector isn’t making money from ethanol.”

Brazil is the second-biggest ethanol producer after the U.S. and the largest sugar maker. In Brazil, ethanol is made from sugar cane.

Sao Martinho SA, owner of the world’s largest cane-processing plant, has declined 0.5 percent this year, and Cosan SA Industria & Comercio, which jointly controls the world’s biggest cane processor with Royal Dutch Shell Plc, increased 7.1 percent.

If the government raises gasoline prices in line with international benchmarks next year, growers would build new plants, Unica’s Farina said. The government last allowed Petrobras to boost gasoline prices at refineries in January by 6.6 percent.

100 Mills

“We already built 65 mills in four years,” Farina said. “I don’t see why we wouldn’t be able to build 100 mills” through 2021.

Even if the government does revise its ethanol policies, pressure on Petrobras to import more fuel will remain, said Coletta, the director of ethanol maker Della Coletta Bioenergia.

“When the government wakes up and tells us we have to start producing again, we won’t be able to because it takes time to put together a workforce and get idle mills back online,” he said. “That’s the risk: By the time they decide they need us again it will be too late.”