FEATURE: European, Brazilian ethanol industry participants evaluate impact of EU/MERCOSUR trade deal

The European Union and the Mercosur bloc have agreed on the terms for the long-awaited free trade deal, European Commission President Ursula von der Leyen announced in Montevideo on Dec. 6.

"In light of the progress achieved since 2023, the Partnership Agreement between MERCOSUR and the European Union is now ready for legal review and translation. Both blocs are determined to carry out such activities in the next months, with a view to the future signing of the agreement," the Signatory State Parties of MERCOSUR and the European Commission said in a joint statement Dec. 6.

The Mercosur bloc's founding members -- Argentina, Brazil, Paraguay and Uruguay -- can implement the deal when each of the nation's national legislature approves.

The process in the EU is more complex; after a translation and legal review, the agreement may be split up for approval. The main trade deal could move forward if a majority of lawmakers and a qualified majority (i.e. 15 countries representing at least 65% of the EU population) of EU governments approve it.

France has shown opposition to the deal, expressing fears that it would allow a significant increase in South American agricultural imports such as beef, which could undercut local producers. Additionally, the Polish agriculture ministry earlier this month cautioned the deal may negatively impact Polish poultry and beef, sugar and ethanol producers the most.

To block the deal, at least four countries representing over 35% of the population need to vote against it. France plans to rally support from Austria and the Netherlands, which together with Poland make up 30% of the EU population.

Germany, Spain and nine other EU countries, which represent 40% of the EU population are pushing for the deal to be finalized this year.

In 2019, the agreement envisioned a total ethanol import quota of 650,000 mt, with 450,000 mt allowed duty-free for chemical use. A 200,000-mt quota for all other uses, notably fuel, would be subject to a one-third MFN duty. It remains unclear whether these quotas and tariffs will be adjusted under the new agreement.

Brazil is expected to secure the largest share, with smaller portions allocated to Argentina and Paraguay. The country is also seen as having significant potential to become a major supplier of biofuels that do not contribute to deforestation, positioning its producers to benefit from the EU-Mercosur trade quotas.

European opinion divided on scale and impact of deal

Initial reaction to the agreement was mixed from the European ethanol industry, as market participants and industry groups weigh up the scope of the deal with specifics still to be determined.

"I'm not expecting significant impacts in the short term," a Europe-based ethanol trader said. "Key products will, most likely, have quotas and the agreement includes a phase-out period during which tariffs are gradually reduced, which can extend up to 15 years. Overall, it is a long implementation timeline."

A second trader said that an ethanol quota would be met almost entirely by Brazilian exports and that whatever the duty-free quota was set to be for ethanol trade would at least amount to "a few boats" worth per year, which "will make the European price more fragile."

Platts, part of S&P Global Commodity Insights, assessed T2 ethanol FOB Rotterdam at Eur665/cu m Dec. 6, with prices stabilizing through 2024 after a comparatively volatile previous two years. Import duty for T1 ethanol to Europe is Eur102/cu m for denatured product and Eur192/cu m for undenatured, making up a substantial cost on imported material.

The news was received negatively by the European Renewable Ethanol Association (ePure), the industry group representing a majority of European ethanol producers.

"The European Commission ignored repeated warnings from European bioethanol producers and decided to offer Mercosur countries a huge share of the EU's ethanol market. In doing so, the EU is putting at risk European biorefineries producing food, feed, fuel, fertilizers and much more," a statement from ePure said Dec. 6.

"The share of the ethanol market ceded to Mercosur, which was projected to represent about 6% of a balanced and dynamic ethanol market, now represents 12% of the total EU production capacity, in a market that is not growing anymore and already fully open to imports from many other countries."

Flows of Brazilian ethanol to Europe eased off in 2024 due to stronger domestic demand, after record imports in 2022 amounting to 972 million liters, S&P Global Commodity Insights data showed.

Brazil trade flows likely to change on increased EU exports

In Brazil, ethanol players are also trying to work out the potential impacts of the trade agreement on their operations. Traders consulted by Commodity Insights throughout this week welcomed President Luiz Inácio Lula da Silva's effort to land the prospective EU-Mercosur deal, but offered partial insights or declined to speak on the record until the deal is in place.

"For 25 years, we've heard about an EU-Mercosur agreement," a senior trading manager said late on Dec. 5, expressing skepticism about the deal's imminent signing hours before the official announcement.

However, he noted that reducing or eliminating tariffs could help strengthen the Amsterdam-Rotterdam-Antwerp (ARA) hub as a primary long-haul destination for Brazilian ethanol, potentially rivaling the US West Coast or South Korea. Currently, ethanol faces a 21% tariff when entering the EU.

As of Oct. 31, South Korea has remained the largest foreign market for Brazilian ethanol in 2024, with 696,273 cu m, or 41%, of total ethanol exports destined for the country. The US has received 272,897 cu m, or close to 17% of Brazilian ethanol exports. In comparison, only 119,270 cu m, or 7%, were sent to the Netherlands, according to official tallies compiled by sugarcane industry group UNICA.

"Internally, Brazil should establish a procedure to allocate this quota among interested parties," an analyst at a major trading firm said. "This could be similar to the system already in place for sugar, where a total volume is set annually and distributed among mills in Northeast Brazil, as mandated by law."

He added: "In practice, the core principle remains unchanged. The critical factor will continue to be the arbitrage between the price in Europe and the price paid in the domestic market."

Platts assessed FOB Santos anhydrous ethanol for loading 10-30 days forward at $542/cu m on Dec. 5, up by 2.2% compared to the same time last year.