Uncertainty surrounding the changes to ethanol content in Brazilian gasoline could mean naphtha imports from Europe increasing by up to 100,000 mt/month, trading sources said Tuesday.
"There is talk about changes to the gasoline blend but a lot of uncertainty around the reduction of ethanol that some say will be enforced between August and November," a Brazilian based naphtha trader said.
The Brazilian government is currently discussing the possibility of cutting the ethanol blend in gasoline to 18% from 25%, resulting from lower supplies of biofuels and poor production rates.
Between April 1 and June 15, ethanol output in Brazil's center-south region was 2.9 billion liters, down 29% from the same period of 2010 data from the sugarcane industry association UNICA shows.
Extreme weather conditions for much of 2010 has hindered the developments of vital crops, hitting yields and reducing harvests.
Given that fuel ethanol loses competitiveness at filling stations when it goes over 70% of the price of gasoline, drivers of flex-fuel cars in Brazil will switch motor fuels. In the week from July 3-7, hydrous ethanol averaged Real 1.99/liter ($4.82/gallon) at more than 8,000 filling stations polled by the national petroleum agency ANP, up over 4% from a month earlier. Gasoline was priced at Real 2.759/liter over the same period, putting ethanol at 72% of the gasoline price.
"We estimate that if the gas blend changes from August on, we may see demand for naphtha increasing by around 100 kt [a month]," a trader said. "The government's intention under this change is to keep the supply side more stable especially during summer time," the source continued.
Typically, supplies of ethanol fall between January and April due to the sugarcane inter-harvest period, when production of the fuel almost comes to a halt. During these months, ethanol prices rise and it loses competitiveness with gasoline at the pump, triggering a major switchover to gasoline.
Brazilian companies Braskem and Petrobras have monthly naphtha term contracts with Sonatrach out of Skikda in Algeria. Together they purchase around 100,000-200,000 mt/month, half of all monthly naphtha production from Skikda.
Given that European naphtha exports to Brazil could rise by a further 100,000 mt/month, the future arbitrage will likely alleviate a large structural surplus each month, often running at 1,000,000 mt, owing to fewer exports to Asia.
