In Brazil, starting this February 1st, the mandatory percentage of ethanol added to gasoline will be reduced from the current 25% to 20%. This new rule is expected to be in effect for three months. The measure comes after a sharp rise in the price of ethanol and problems with supply in some states.
Over the last five months the price of ethanol has jumped over 20% with the result that at the beginning of January it was economical to fill up with ethanol in only six states: Bahia, Goiás, Mato Grosso, Pernambuco, Paraná and Tocantins.
Which means that in the rest of the country ethanol was more than 70% the cost of gasoline, which makes it uneconomical since ethanol gives a driver around 30% less mileage than gasoline.
The reduction announced by the government will mean an additional 100 million liters per month on the market – the equivalent of around 7.5% of total consumption. Brazil consumes 1.3 billion liters of ethanol a month.
According to representatives of the ethanol/sugar sector and minister Reinhold Stephanes of Agriculture, the supply problem was caused by excessive rainfall during the harvest period at the end of last year, which delayed the cutting of sugarcane.
The harvest is behind by some 60 tons of sugarcane that should have been delivered to the mills. To put that in perspective: total sugarcane production in Brazil in 2009 was 540 million tons. In other words, slightly more than 10% of the crop was not harvested due to rain.
According to UNICA, the trade union of sugarcane mill owners, another factor was that in spite of the bigger harvest this year – compared to 505 million tons in 2008 – total production of ethanol and sugar was actually lower because too much rain reduces the amount of sugar in the plant, which means less ethanol or sugar for the same amount of sugarcane.
In other words: too much rain lowers saccharification – the biological process by which plants transform complex carbohydrates into simple sugars.
In Brazil, in normal times, 55% of the sugarcane crop is transformed into ethanol and 45% into sugar. At the moment sugar prices on international markets are the highest in 30 years.
Stephanes says he does not think a significant shift to sugar has occurred. Some people, however, think is the reason for the supply problem. He points out that many of the newer mills cannot even make sugar – they are 100% ethanol.
Finally, Stephanes points out that the measure reducing ethanol content in gasoline will be in effect for 90 days because in March the next harvest begins and a bumper harvest is expected and the problem will be resolved. He insisted that the ethanol supply problem is seasonal and not structural.
Brazilian Minister of Mines and Energy, Edson Lobão, says that the decision to reduce the percentage of ethanol in gasoline in Brazil will not cause an increase in the price of gasoline.
On the contrary, says Lobão, what will happen is that with more ethanol on the market, the price of ethanol will fall and as a result the price of gasoline will also drop. “The tendency is for the prices of all fuels to come down,” declared the minister.
Lobão went on to explain that the reason for the reduction is to ensure that the supply of ethanol is uninterrupted. The government’s priority in this case is to guarantee that there will be sufficient ethanol on the market, said Lobão.
However, explained the minister, the 90-day period could be shorter or longer depending on how the situation evolves. Lobão added that besides ensuring supply the government was aiming at a reduction in fuel prices as a result of the measure.
According to Lobão, the reduction in the percentage of ethanol in gasoline should free up some 100 million liters of ethanol per month and that is expected to bring the supply/demand equation into balance.
Lobo pointed out that there are two other facts that have to be factored into the equation at the moment: sugar prices on the international market have spiked and that makes sugar financially more attractive than ethanol for mill owners.
And the lousy weather – way too much rain – has reduced saccharification in the sugarcane, which lowers ethanol production rates, explained the minister.