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Brazil's ethanol-stocks rule obligation to drop for the 2018-19 season: ANP

Sao Paulo (Platts)--23 Feb 2018 759 am EST/1259 GMT


The volume of mandatory anhydrous stocks that ethanol producers in Brazil must carry as of March 31 will be reduced in the next season to 4% of traded volumes, down from 8%, the National Petroleum Agency said on Thursday.

The modification in the stocks rules applies starting with the 2018-2019 (April to March) sugarcane crop, the ANP clarified later via email on Thursday.

In another key change, Brazil's ethanol importers are now also required to follow the same rules as domestic producers regarding stocks, according to the text of resolution 719/2018 published in the country's official gazette Thursday.

In 2011, the ANP created a regulation that made it mandatory for mills and fuel distributors to close deals early in the season and have contracts equal to an anhydrous volume representing 90% of their sales of gasoline in the previous year, in order to guarantee anhydrous supply in the domestic market during the entire year.

The original rule, ANP 67/2011, aimed to ensure there would be enough anhydrous ethanol available during the intercrop season in Center-South Brazil, following a serious supply disruption that forced the country to turn to imports, mostly from the US. The intercrop period in CS Brazil runs from December until March 31.

Ethanol producers and now importers must carry 25% of the total anhydrous volume traded in the previous year as stocks until January 31. And then, after that date, they will have to hold the above-mentioned stocks of 4%.

Importers have traditionally run very lean operations, meaning potentially limited ability to hold the required stocks. Importers may need to either lower their volumes or hire tank capacity in port areas, which is commonly not available. Brazilian tank capacity is limited and is more often used to store gasoline or diesel, which have a wider import margin over ethanol.

One trade source said smaller importers would be most likely to face issues.

"It will not impact in our import business as we do have a large tank capacity," a trader from the country's largest ethanol importer said. "The stock obligation for importers will strongly affect the small ones, as they don't count on tank capacity and just come to the market once the arbitrage is open."

In another change, the volumes that distributors need to have in stock by March 31 will now correspond to 10 days of sales instead of 15 days. However, ANP says it can change this back to 15 days every January, depending on market conditions.

Other alterations published in the resolution include giving more time for distributors and producers to negotiate long-term contracts.

MARKET REACTION AND IMPACT

The initial reaction by market participants focused on the fact that the reduced level of stocks that producers need to carry by March 31 could put downward pressure on market prices, as mills needing to generate cash to close their fiscal year-end might liquidate more product than in previous years. "With a lower stocks obligation, folks will clean out more product in March," said a trader. There is a potential for more pressure on prices in April, if there are delays to the start of crushing in April, he added.

"Although the crop usually starts in early March/early April, it begins with lower productivity and more focused on hydrous," said another source.

Another potential impact noted by market participants concerned the obligation for importers to carry stocks. "This should limit the participation of trading houses," a source said.

This would be due to the additional costs of storage, which might hamper the economics of bringing in imports, depending on how wide or small the arbitrage window is.

"It's very early to evaluate the impact of this change in rules, but we can say it puts producers and importers in a more equal position," said Marcelo Guerra, director of Sindacucar, the sugarcane industry association of Pernambuco state.

"Why only producers had the obligation to carry stocks?" he added.

Another trade source said that there was a lot of chatter in the market earlier in the morning, when it was not clear if the changes in mandatory stocks would have to be implemented immediately, for the remaining weeks of the 2017-18 season.

"But when it became clear it would be valid only for 2018-19, people got calmer. We will now read and evaluate the changes with time," said the source.

--Beatriz Pupo, beatriz.pupo@spglobal.com

--Gustavo Bonato, gustavo.bonato@spglobal.com

--Nicolle Monteiro de Castro, nicolle.castro@spglobal.com

--Edited by Lisa Miller, lisa.miller@spglobal.com




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