FEATURE: Traders weigh potential increase in Brazil-EU ethanol flows in 2025

Brazilian ethanol exports to Europe remained limited throughout 2024, but traders on both sides of the Atlantic are speculating that these flows could increase in the coming months, driven by the potential for an open arbitrage window in the middle quarters of 2025.

Exports of ethanol from Brazil totaled a modest 1.90 billion liters in 2024, reflecting a 25% decline from the 2.52 billion liters shipped overseas in 2023. Of this total, the Amsterdam-Rotterdam-Antwerp hub ranked third among the top five destination markets, receiving just 152 million liters, or 7.9% of Brazilian exports – compared with 586 million liters, or 23%, in 2023.

However, expectations of low prices in the second and third quarters of the year, coupled with sustained demand for biofuels in European countries with mandated ethanol usage standards, could pave the way for increased ethanol exports from Brazil to the bloc.

This outlook is primarily driven by more optimistic expectations for the 2025-26 sugarcane harvest in Center-South Brazil, which begins in April, and the subsequent increase in ethanol supply. Analysts, who previously anticipated cane processing as low as 580 million tons, have recently revised their forecasts to 600-620 million tons, contingent on favorable weather conditions.

"It will depend on the price curve of each product, but it no longer seems so unlikely to find someone willing to export anhydrous at competitive prices from July to September," assessed a Brazilian trader involved in exports. "If we look at the curve today, June-July is indeed getting closer, but there's still a gap left before it truly opens."

Ethanol T2 FOB ARA price rebounded compared with the same period last year, with Platts assessing T2 at Eur682.25/cu m on Jan. 23, an increase of approximately 15%. The depreciation of the Brazilian Real, combined with T2 FOB ARA in contango and Brazil in inverse, has widened the gap, creating an opportunity for arbitrage if the T2 price rises further, a Europe-based trader said.

Another trader noted that ethanol prices in Brazil remain well-supported, so the US continues to be more competitive. However, favorable conditions for crop next season could mean more flows to Europe. Additionally, the Euro has been weakening against the US dollar, with nearing parity further impacting the appeal of US flows into ARA.

"Brazil has much more ability on the ISCC and high greenhouse gas (GHG) savings, so it's much easier to load big vessels with more appealing incentives for the buyers in Europe. If the buyer has a choice between Brazil and the US, I think Brazil has an advantage," the trader said.

The deadline for implementing Renewable Energy Directive III measures is May this year, although delays are expected. Under RED III, member states are given the option to reduce the GHG intensity of transport fuels by 14.5% by 2030 or ensure that renewable energy constitutes at least 29% of the energy consumed in the transport sector by 2030.

The US angle

Higher ethanol prices in the US driven by strengthening corn markets may add additional upside to Brazilian export opportunities in the near-term. On Jan. 10, the US Department of Agriculture released monthly data that painted a bullish picture for US corn markets this year, which has prompted a jump in tradable levels across the US ethanol markets as well. The USDA slashed estimates for 2024-25 corn ending stocks by 12.65%, while also lowering output projections by 1.82%—leading to a significant influx of newly initiated long positions from managed money funds.

According to the US Commodity Futures Trading Commission, net long managed money positions for Chicago Board of Trade corn futures reached 292,228 contracts the week ended Jan. 14, up 13.31% over the week and reaching its most bullish level since April 2022. Since Jan. 9, the front-month CBOT corn futures contract has risen nearly 35 cents—pushing spot Chicago ethanol prices to their highest level since September 2024, according to Platts assessments.

A US-based trader said that he expected Brazil to be back in the overseas export market in 2025 amid a weaker Real and competitive Brazilian ethanol prices, while new US export bookings for Q2 and beyond may be lower compared with the previous year amid tighter US corn inventories and rising prices; along with the possibility of tariffs—particularly on Canada.

The primary concern is that newly elected President Donald Trump may impose significant tariffs on Canada. A trade dispute with Canada—the top destination for US ethanol—could harm US ethanol producers, who might then look to increase exports to the EU to make up for the shortfall.

"Regardless of tariffs, it's not that hard to imagine a leading US exporter aiming slightly below the average Brazilian price to secure sales," the Brazilian-based trader said.

The US exported 486 million liters of fuel ethanol to the EU from January to November 2024, an increase from 385 million liters the same period the previous year, or 26% higher, according to S&P Global Commodity Insights data.

Predictions for Brazil's 2025 exports

In Brazil, forecasts about the size of ethanol exports in 2025 vary widely, largely due to the uncertainty regarding how much ethanol will be produced in the upcoming harvest. A pool of sources consulted by Commodity Insights predicts a range between 1.90-2.2 billion liters.

If the more optimistic estimates from analysts prove accurate, shipments of Grade B—industrial-grade, non-fuel hydrous ethanol used by manufacturers in sectors like pharmaceuticals and cosmetics—arriving in South Korea would account for the bulk of export growth next year, with exports potentially matching or even surpassing 2024 levels. In addition to the expected increase in volumes to Europe, there would also be a rise in shipments to secondary markets such as Nigeria and India. But that remains to be seen.

Analysts also have widely varying opinions on the Brazilian domestic market. Locally, factors such as the booming consumption of E100 at the pump, the increase in the anhydrous ethanol content of gasoline, and the pricing strategy of state-controlled Petrobras are all closely watched by the market.

In a long-term perspective, the agreement between the EU and four Mercosur members (Argentina, Brazil, Paraguay, and Uruguay), announced in December, could boost the ARA hub as a major long-haul destination for Brazilian ethanol, potentially rivaling the US and South Korea.