Ethanol Mills Get Tax Breaks as Brazil Seeks Output Lift

Brazil, the biggest ethanol exporter, will give tax deductions and extend low-cost credit to mills in a bid to lift output and reduce fossil-fuel imports.

The government will grant 970 million reais ($480 million) in credits to offset a 0.12 real per liter tax on ethanol and offer 4 billion reais in loans for crop renewal this year, Finance Minister Guido Mantega told reporters in Brasilia today. There will also be a 2 billion-real line of credit for ethanol stockpiling and tax credits for the chemical industry, he said. Shares of energy and petrochemical companies rallied.

The plan comes as ethanol mills start processing a record sugar-cane crop amid declining international prices for the sweetener and rising gasoline imports by state-run Petroleo Brasileiro SA. The administration of President Dilma Rousseff has reduced electricity rates and payroll and food taxes to tame inflation while the central bank raised the benchmark interest rate for the first time in almost two years last week.

“The ethanol sector is here to stay and, from time to time, we need to revisit it to see what we can do to help our producers,” Rousseff told reporters at a separate event. “Sometimes the price provides returns, other times it doesn’t.”

Cosan Gains

The objective of the measures that take effect May 1 is to boost investments, increase production and partially replace demand for gasoline, Mantega said. They can also help ease inflation, he said.

Cosan SA Industria & Comercio, which jointly controls the world’s biggest cane processor with Royal Dutch Shell Plc, rose as much as 5.3 percent to 47 reais as Mantega spoke. The stock traded at 45.95 reais, up 2.9 percent, at 4:21 p.m. in Sao Paulo.

“Mills started harvesting a record crop, and the incentive will help in profitability,” Henrique Koch, an analyst at Banco do Brasil SA, said in a telephone interview from Sao Paulo. “This incentive also helps to reduce ethanol prices at the pump, easing inflationary concerns.”

The government incentives could prompt some investors to plant more cane but won’t attract new companies into an industry that’s still struggling with cost increases that haven’t been offset by higher prices, said Alexandre Grendene Bartelle, chairman of shoemaker Grendene SA, who has stakes in two ethanol refineries.

“Maybe some companies will expand plantations or mills, but we won’t see companies making big investments in new projects,” Bartelle said by telephone from Porto Alegre.

Fuel Losses

Sugar has dropped 18 percent in the past 12 months in New York as supplies from top producer Brazil may exceed demand.

Ethanol output in Brazil, where the fuel is made from sugarcane, will rise to about 28 billion liters from 23 billion last year, Mines and Energy Minister Edison Lobao said today.9.

Petrobras increased imports of fuel and other refined oil products to 505,000 barrels a day in the fourth quarter, from 394,000 barrels a year earlier, and has sold the fuel at a discount to international prices.

Shares in the state-run oil company, which also produces ethanol, climbed 2.7 percent to 19.28 reais in Sao Paulo, heading for the highest closing price since March 14.

Brazil will raise the mandatory amount of ethanol mixed into the gasoline blend sold at pumps to 25 percent next month from 20 percent now. Most Brazilian cars can run on pure ethanol or a mix with gasoline. The U.S., where ethanol is made from corn and used as an alternative gasoline additive, is the world’s largest producer and consumer of the biofuel.

Chemical Boost

Rousseff’s government will also grant credits to reduce the so-called PIS and Cofins taxes on raw materials used in the chemical industry to 1 percent from 5.6 percent now.

Brazil’s chemical industry, the world’s sixth-largest by revenue, faces heightened competition because of cheaper shale-gas feedstock in the U.S., Mantega said. The credit takes effect immediately and will be gradually reduced from 2016 to 2018, he said.

Braskem SA, Latin America’s largest petrochemicals producer, rose the most on Brazil’s benchmark index, surging 7.4 percent to a seven-month high of 16.05 reais. Petrobras is Braskem’s second largest shareholder.

“The benefit is clear,” Henrique Kleine, head analyst at Magliano SA, said by phone from Sao Paulo. “In the long run, it will result in lower production costs and better margins.”

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