Scenario for 2023 Brazilian biodiesel mandate remains unclear

Less than two months prior to the start of 2023, Brazil's biodiesel industry is unaware of details about the mandate the country is set to impose.

The National Agency of Petroleum, Gas, and Biofuels released Oct. 31 volumetric targets for the first two months of 2023 based on a mandatory biodiesel blending of 14%, up from the 10% that was in place during 2022, and then up 15% starting in March, but this last detail has not been on the ANP website since Nov. 7, increasing market participants' perception of instability.

While the ANP release could be considered a relief for biodiesel producers, which according to sources have an idle installed producing capacity near 10%, volumes that the regulatory agency settled were not considered enough to encourage producers to rely on it.

The lack of certainty can be attributed to the multiple changes seen in 2021 when the biodiesel mandate was expected to be at 13% starting in March but was reduced to 10% from May to August, then rose back to 12% between September and October and lowered again to 10% in the last two months, with all the movements attributed to a negative impact in the Brazilian inflation basket.

After a volatile mandate scenario Nov. 29, 2021, the National Council of Energetic Policies confirmed that the blending would keep at 10% for 2022, a year where the trading environment would change from the auction system to direct sales, not even knowing how the tax credits would be paid back to biodiesel producers since Petrobras would no longer be involved in the deals.

The last-minute decisions CNPE had taken in 2021 to change the official mandate formerly scheduled in the CNPE resolution 16/2018, are avoiding producers to celebrate the possible 40% increase in the biodiesel demand, while distributors are not feeling encouraged to start to plan the acquisition of the biofuel ahead of a more clear and official guides from the CNPE.

Market concerns

More than 400 decision makers were together in a biodiesel market event Nov. 7-8, and it was not possible to find a consensus on whether a mandate of 14% from January would be widely favorable or not for the industry.

The main points of concern were regarding the seasonality of the soybean oil supply in the country, as January is historically considered the month with less domestic supply, which could be translated into a biodiesel price spike in the first two months of the increased mandate.

Adding to the above, from a buyer's perspective it would add pressure on the whole logistical chain since the biodiesel acquisition would need to be scheduled a longer time in advance as the volumes would be much higher than the ones observed in 2021.

"We will start a month of World Cup, followed by end-year celebrations. Allocating logistics to deliver an additional biodiesel demand of 40% would require us to start doing it now," said a large fuel distributor.

In the first two months of 2021, Brazilian biodiesel consumption was at 902 million liters, therefore if the 40% is officialized the market would need at least 360 million liters more, in a scenario of stable diesel demand.

Another relevant aspect highlighted on the first day of the market event was soybean crushing, as more than 70% of the Brazilian biodiesel feedstock comes from soybean oil.

According to Irineu Boff from Ubrabio, Brazil's Biodiesel Union, nearly 2 million mt of soybean oil is needed to increase the biodiesel mandate to 3%, the volume is pretty like to the total volume expected to be exported from Brazil in 2022.

While some producers are optimistic that a 14% blending is feasible for January, others are more cautious and considered that a 12% for the first two months would avoid potential negative price and logistical impacts.

Platts assessed the import parity of ULSD 10 delivered in Santos at Real 5,279/cu m Nov. 8, and biodiesel DAP Paulínia at Real 6,530/cu m, a spread of Real 1,251/cu m between the fossil and the biofuel option.

The price spread between diesel and biodiesel was the main argument CNPE considered when blending was reduced in November 2021, since it was suggesting diesel at an average of Real 3,000/cu m discount over biodiesel in January 2022.

As the spread has widely narrowed in the full-year 2022, this economic perspective could be a supportive point for the 14% blending mandate to be imposed early in 2023.