Until late February, one industry in Brazil seemed not to feel the effects of the global crisis caused by Covid-19. On 28 February, the price of ethanol sold from the mills to distributors reached its highest ever level: BRL$2.13 (US$0.37) per litre. Anhydrous ethanol, which is added to gasoline, reached its peak the week before at BRL$2.29.
Producers were excited. “We had expected a very productive crop, more so than in the past, because the weather was good for growth in the fields”, says Antonio de Padua Rodrigues, technical director of the Brazilian Sugarcane Industry Association (UNICA).
Then came the petroleum crisis, which resulted from the economic downturn caused by the coronavirus and the lack of an agreement among oil-producing countries about possible production cuts. On 9 March, the market saw oil prices plummet from US$45 to $31.5 a barrel, the largest drop since the Gulf War; today it stands at around $30.
The ethanol sector was one of the first to feel the impact, since lower prices made petroleum derivatives more attractive. From February to April, hydrous ethanol fell almost 40% to reach BRL$1.30, the lowest nominal sales price since 2017.
40%
The drop in the price of hydrous ethanol from February to April this year
Producers went from expecting the best season in 10 years to seeing a real threat to the future of the industry in Brazil, which is the second largest biofuel sector in the world, behind only the United States.
Some expected breaches of sales contracts that were already signed or even a general meltdown. The first to be affected will be groups with debt and no resources to withstand months without revenue, explains Marcos Fava Neves, a professor at the University of São Paulo specialising in strategic planning for agribusiness. Referencing the crop from which ethanol is often extracted, he says: “Never in my career have I seen a situation change as brutally as the sugarcane industry over just more than 30 days.”
The ethanol party in Brazil is over
Before the crisis, ethanol exporters nurtured hopes that they would reach a new and gigantic market – China. This optimism was based on a Chinese government initiative called E10, which required 10% ethanol to be added to gasoline starting this year. This measure would require imports of 10 million tonnes, double China’s production capacity.
The new policy, combined with restrictions that China imposed on ethanol imports from the US, encouraged the Brazilian sector. In October of last year, São Paulo governor João Doria announced an agreement to export ethanol to the Chinese market. It was an initial step to resume exports, which had been stalled since the last shipment of Brazilian ethanol was sent to China in 2016.
But the Chinese have decided to postpone implementation of the E10 programme, which may indicate that policies to reduce the country’s greenhouse gas emissions are weakening. As a result, China is not expected to buy ethanol from other countries this year, and will use what can be made from the country’s surplus maize.
As if this were not enough, the green incentive programme Brazilian processors were counting on, RenovaBio, has foundered. The programme, which entered into force this year, involves credits (CBios) that can be sold by producers who meet emissions reduction targets. But amid the pandemic, the government decided to reduce the targets – and with them, the impact of the programme. The new targets are expected to be presented by July.
How to circumvent the crisis
With the weakening of biofuels, other sugarcane derivatives have emerged to mitigate the losses. The Dutch bank Rabobank predicts that sugar production will account for 45% of the Brazilian sugarcane harvest, 10% more than in 2019.
Another product that has appeared in corporate product portfolios is sanitising alcohol. On 21 March, the Brazilian Health Regulatory Agency (ANVISA) authorised sale of rubbing alcohol for 180 days to help fight the coronavirus; this product had been banned since 2002.
But the most effective solutions identified by the experts involve guaranteeing fuel ethanol sales and prices. Representatives of ethanol plant owners say that the National Petroleum Agency should require contract compliance, while governments should suspend taxes on ethanol during the crisis.
Meanwhile in Brasília, the minister of agriculture, Teresa Cristina, implored the federal government for aid to the ethanol industry, such as increased taxes on gasoline to facilitate competition. But during a conversation with players in this sector in late April she indicated that she was still waiting for a reply.
The big question is whether this will accelerate the transition to a new and non-predatory economy, or whether it will delay peak oil demand
“I am a bit frustrated”, she admitted. “I thought that when we were talking here today that we would already have all the answers and everything would be decided”.
In addition to the crisis in the industry, the setbacks imposed on the biofuel sector raise questions about whether the petroleum crisis will really encourage cleaner energy.
“The big question is whether this will accelerate the transition to a new and non-predatory economy, or whether it will delay peak oil demand, which is coming anyway”, says Thiago Almeida of the Greenpeace Climate and Energy campaign.
But in the meantime, he notes that although peak oil demand has not yet come, the transition to renewable energy sources like ethanol is inevitable:
“We are seeing more and more measures aimed at abandoning fossil fuels”.
