Thursday, July 29, 2010

Brazil’s Import Barriers

Brazil made a big show of reducing their ethanol import tariff to zero earlier this year in order to spark the debate about the US ethanol import tariff that is up for renewal at the end of this year. Brazilian representatives cast themselves as supporters of free trade.

In today’s global ethanol market, Brazilian ethanol prices are very high relative to the US and Europe. Brazilian producers are holding onto inventory where in past harvest seasons they would be selling ethanol aggressively as the harvest gets into full swing. Recent consolidations in the ethanol industry, government inventory loan programs for producers and strong sugar prices all have lead to a more disciplined ethanol market in Brazil leading to the high prices.

Now that a price arbitrage is open to Brazil, US exporters are attempting to ship material to Brazil to capture these prices.

Brazil has imposed non- tariff barriers in two ways. One, the ethanol specification used for import requires that non-sugarcane produced ethanol must be 99.6% ethanol by volume while standard fuel anhydrous ethanol produced from sugarcane be 98% ethanol by volume (actual measurement is alcoholic degree of 99.3 that translates into 98% volume percent). There is no valid scientific reason to make this distinction for ethanol that is to be blended into gasoline.

Obviously, high purity(99.6%) ethanol produced in the US is a small fraction of the total ethanol produced and what is produced commands a 10-15 cpg premium over standard denatured ASTM specification ethanol.

The second non-tariff barrier has been extended bureaucratic delays in issuing import licenses. Traders trying to import ethanol into Brazil report frustrating delays in getting import licenses to take advantage of the wide open arbitrage. It is hard to determine the exact delays but with a strong price arbitrage to export to Brazil and reports of limited smaller cargos being shipped to Brazil, the bureaucratic delays are real.

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