FocusBrazil-US ethanol arbitrage seen in 08

08 April 2008 23:28  [Source: ICIS news]

By William Lemos

HOUSTON (ICIS news)--Arbitrage opportunities for Brazilian ethanol in the US market could be on the verge of re-opening in spite of weak exports in March, sources said on Tuesday.

“We may see a lot of ethanol going to the US,” a broker in Brazil said in a telephone interview.

Brazil’s ethanol exports in March fell sharply compared with February, but exports would likely trend up this year as US corn prices march steadily higher. Brazilian producers use sugar cane, not corn, as feedstock.

Brazil’s ethanol exports in March totalled 279m litres, a 23.6% drop from 365m litres in February. But, exports were 24.6% more than 224m litres in March of the previous year, according to official data. Viewed on a quarterly basis, the drop in March left Brazil's first-quarter exports at 864m litres, or some 12.3% higher than 769m litres in the first three months of the previous year.

“The projection is that exports will jump to 3.8bn litres this year,” a source at a producer in Sao Paulo said, citing a perception that the US ethanol arbitrage with Brazil may reopen due to surging US corn prices.

Brazil’s ethanol exports have held broadly steady in the past two years. In 2007, they totalled 3.44bn litres, representing little change from 3.43bn litres in 2006, based on figures from the foreign trade ministry.

With an ongoing drop in Brazilian ethanol prices, due to the start of the new sugarcane crop in the centre-south region, market participants said reopening of arbitrage between the two countries looked viable.

Brazil’s ethanol prices were assessed at $510/m³ (cubic metre) ($1.92/gal) FOB (free-on-board) Santos in the week ended 2 April, down from $550/m³ four weeks earlier, according to global chemical market intelligence service ICIS pricing.

Including 21 cents/gal in freight costs and 56 cents/lb in taxes and tariff, Brazilian ethanol could now reach US shores at about $2.70/gal, one broker in Sao Paulo said.

That is just above New York Harbour FOB spot ethanol, which ICIS pricing assessed at $2.64-2.66/gal in the week ended 4 April.

However, another participant in Houston was more cautious, noting that it takes about a month to ship ethanol from Brazil.

“Futures for June delivery are at [about] $2.45/gal, so why pay $2.70/gal if you can get it for $2.45/gal now,” the source said.

On the other hand, the source acknowleged US prices could be even higher in a month or so, making Brazilian ethanol a cheaper alternative.

Based on trends in the US corn market, imports from Brazil may be a risk worth taking, the source said.

For more on ethanol visit ICIS chemical intelligence

Bookmark Simon Robinson’s Big Biofuels Blog for some independent thinking on biofuels

By: William Lemos
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