COMMODITIES 2025: Brazil's ethanol industry at a crossroads in 2025

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Brazil's ethanol market is heading into 2025 at a pivotal juncture as fierce domestic competition, a growing blending mandate and the newly announced EU-Mercosur trade deal all have the potential to change trade flows, both regional and global.

Higher debt levels and a more cautious approach from key industry players suggest that the sector, once accustomed to ambitious growth, could also be on a more conservative path moving forward.

Sweet solution

Retail ethanol sales have been on a tear in 2024, and the introduction of new fixed rates for the state-level ICMS tax on gasoline, effective Feb. 1, should sustain hydrous E100's status as the fuel of choice for many motorists in the early months of the new year. But 2025 will also see higher mandate expectations, which could sweeten the appeal of anhydrous (pure) ethanol for producers.

In October, President Luiz Inácio Lula da Silva signed the long-awaited Fuel of the Future program into law, which increases the anhydrous blend in gasoline from a range of 18%-27.5% to 22%-35%. The fossil fuel currently contains a 27.5% blend, which the government aims to push to 30% in 2025.

"In a few months, we will be able to effectively put E30 on the market," said Henry Joseph Junior, sustainability director at Brazil's vehicle association Anfavea, during a workshop in October. "We have the means to do it, to put this out effectively, which is why we see E30 as an intermediate step."

This change could result in a shift of up to 1.2 billion liters of supply from hydrous to anhydrous, according to industry estimates. Total production is expected to hover close to 33 billion liters in the 2025-26 season, consistent with recent trends. An increase in corn-based ethanol output will help offset potential losses from a decline in sugarcane harvesting and a sugar-oriented production mix.

A more cautious outlook

The expected growth in corn ethanol production could lead to a greater presence of Center-South producers in the North-Northeast. Markets in these regions, which have been dominated by local sugarcane mills and cabotage operations by major trading companies, are attracting more interest not only from the corn biofuel investors, but also from traders, brokers and logistics firms.

Inpasa, Brazil's largest corn ethanol producer, is already positioning itself to capitalize on this trend. The company plans to invest Real 1.2 billion in a plant in Luís Eduardo Magalhães, Bahia, and an equal amount in Balsas, Maranhão, competing head-on with local players.

The two units are part of a broader wave of new corn ethanol plants emerging across the country. While this expansion trend is expected to continue, industry experts are beginning to voice concerns, drawing comparisons to the boom-and-bust cycle seen in the sugarcane sector during the early 2000s.

"There was a crazy euphoria in which everyone started opening units. But then came the hangover, with the closure of many mills," said BTG Pactual equity analyst Thiago Duarte at an industry event in September.

Analysts are also tempering their expectations for the future of cellulosic, or second-generation (2G), ethanol. Changes in leadership at Raízen, a top sugar-alcohol processor, are expected to lead to a reevaluation of the company's business plan, which once aimed for 20 cellulosic plants by 2030—a target that now seems unlikely.

Meanwhile, in a surprising shift, state-controlled Petrobras, which refocused on oil and gas in 2015, is now planning to invest $2.2 billion in the ethanol sector, raising questions about potential partnerships as the oil giant looks to re-enter the biofuels market.

The international scenario

On the global stage, uncertainty around the impacts of President Donald Trump's second term on international trade flows hinges on whether the US will pressure Brazil to permanently remove its tariffs or impose restrictions on Brazilian imports.

The EU-Mercosur deal brings more positive expectations for international trade as it could boost the ARA hub as a major long-haul destination for Brazilian ethanol, potentially rivaling the US and South Korea. The deal envisions a 650,000 mt ethanol import quota, with 450,000 mt exempt from duties for chemical use. A 200,000 mt quota for fuel use will be subject to a one-third MFN duty.

Brazil is expected to receive the largest share of this quota, with smaller portions allocated to Argentina and Paraguay. However, the deal will likely include a phase-out period during which tariffs are gradually reduced, offering partners a period of adjustment.

"Internally, Brazil will need to establish a procedure for allocating this quota among interested parties," said an analyst at a major trading firm. "This system could resemble the one in place for sugar, where volumes are allocated annually to mills in Northeast Brazil, as mandated by law.

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