Brazil Southeastern ethanol, gasoline prices diverge on tax cuts

The Brazilian government has approved a bill capping the ICMS tax on fuels at 17%-18% and reduced the PIS and Cofins and CIDE taxes on gasoline and ethanol to Real 0/cu m.

The bill capping the ICMS tax took effect June 27, and the revised PIS and Cofins and CIDE taxes took effect June 23.

Hydrous ethanol has gradually lost competitiveness against gasoline at the pump since early May, as prices were discounted to reflect the proposed cut in federal and states taxes.

The ICMS tax capped at 17%-18% will increase gasoline's competitiveness over ethanol in many regions of Brazil and will ultimately cause ethanol prices to fall in the near term.

Southeast hydrous ethanol prices at the pump have decreased 6.62% on average year to date, recently driven by gasoline's now reduced tax rate advantage in some of the larger fuel consuming regions of Brazil.

Southeast gasoline prices at the pump have increased 10.26% on average year-to-date supported by higher international energy markets, Petrobras' hiking ex-refinery gasoline prices by a collective 30.14%, and reduced tax rate.

Center-South ethanol prices down in first-half 2022

Platts assessed hydrous ethanol ex-mill Ribeirão Preto at Real 3,545/cu m June 27, down Real 205 on the week and down Real 460 so far in 2022, according to S&P Global Commodity Insights data.

The weakness in ethanol prices during the week ending June 27 was because large distributors were absent from the spot market having restocked in prior weeks, the ICMS tax dropping to 18% from 25% in Sao Paulo state, and the reduction in PIS and COFINS taxes to Real 0/cu m, according to multiple sources.

PIS, or Program of Social Integration, and COFINS, or Contribution for the Financing of Social Security, are taxes on the federal level.

The ICMS 17%-18% tax cap is is expected to be implemented in the coming weeks in all states, but as of June 28 only Sao Paulo state (18%) and Goias state (17%) have implemented the ICMS tax cap.

ICMS is a state tax charged on the circulation of goods and services including fuels.

The Biofuels bill (PEC 15/2022), announced June 7, will lower the existing ICMS tax on ethanol by the same ratio as the tax savings for gasoline, but market participants believed this proposed tax change might take longer to implement compared with the 17%-18% ICMS tax cap. The second PEC will have greater affect in São Paulo state, where the ICMS tax on ethanol is 13.3%, which remains unaffected by the originally proposed 17%-18% ICMS tax cap.

Hydrous ethanol ratio to gasoline falls further below 70%

The Southeast hydrous ethanol price ratio to gasoline decreased to 64.48% in the week ended June 25, compared with 66.23% in the week prior, National Petroleum and Biofuel Agency data showed.

Consumers with flex-fuel vehicles can opt for E100 or gasoline, which has a blend of 27.5% anhydrous ethanol. Consumers generally fill up with E100 only when its price is 70% or less than the gasoline price, because of hydrous' lower energy content, or if the absolute gasoline-to-E100 price premium increases well above the Real 1/l mark.

The absolute price differential between gasoline and hydrous ethanol at the majority of the gas stations in Center-South Brazil was at Real 2.587/l June 25, above the Real 1 mark that typically encourages demand from consumers.

A price differential of Real 2.587/l between gasoline and E100 could encourage consumers to favor less-expensive hydrous ethanol when considering savings of about Real 129 while refilling an average-sized tank.