30.09.2021 (www.argusmedia.com) - An oversupply of biodiesel in Brazil is likely to push prices lower at an October auction, the country's last, that will cover market supply in the last two months of the year.
The farewell to the auction model is also expected to include the lowest sales volume of 2021, the result of seasonally weaker demand and a recent reduction of the mandatory blending mandate to 10pc from 12pc.
Uncertainties about the tax framework, pricing, and marketing of biodiesel that still require definition before January 2022, the start of the new direct sales model, are expected to permeate the 4-8 October auction launched by oil regulator ANP.
Market participants expect the average price to drop 1.2pc to R5,613/m³ ($3.90/USG) on average in the forthcoming auction from R5,683/m³ in the round covering market supply in September and October, according to the results of a recent Argus survey with facilities and fuel distributors. Producers estimate that prices will average around R5,654/m³, slightly higher than the R5,572/m³ assumed by retailers.
Although prices for soyoil and beef tallow historically increase in the last quarter of the year because of the end of the harvest season for oilseed, market participants attribute the likely decrease in biodiesel prices to the mismatch between supply and demand. The period is also marked by collective downtime in the sugarcane and soy sectors following the end of harvests, an additional weight on domestic sales.
Prices for degummed soybean oil, the most important biodiesel component, rose by 1.7pc between 13 August and 24 September to R7,375/t cif Sao Paulo including 12pc state-level, VAT-like tax ICMS. A drop in the volume of cattle slaughtered has also reduced supplies of beef tallow, with prices increasing by 6.7pc to R7,200/t cif Sao Paulo in the same period.
The value of soybean futures contracts traded on the Chicago stock exchange dropped by 9.2pc between 13 August and 29 September, when the start of the US harvest held prices at around 57.83¢/lb. According to Brazil's Central Bank data, the Brazilian real fell by 4pc to R5.45 per US dollar between 13 August and 30 September, favoring soybean exports.
Argus' survey shows that auction participants expect that biodiesel to be offered in next month's round should average around 1.408bn l, almost 72pc of the production capacity announced by plants. Estimated demand is 1.014bn l, 22pc below the estimate for the August 2021 auction.
For producers, average supply is estimated at around 1.392bn l and demand at 1.033bn l. Distributors project the offer to be slightly higher, around 1.425bn l, and demand to drop further to 996mn l.
Sources speaking with Argus said facilities from the country's south should enter the auction with higher volumes because soy available for crushing in the region exceeds supply in the center-west, where commercialization rates for the grain exceed 90pc.
The ANP has so far pre-qualified 44 mills for the October auction. Two units belonging to Binatural in the northeast state of Bahia and Brejeiro in the southeastern state of Sao Paulo, are appealing an ANP decision disqualifying the mills for the last tender.
Stock and model change
With the end of public biodiesel auctions, some distributors are studying the possibility of carrying biofuel stocks held into December and January. The strategy is in response to concerns that tax complications could make it impossible to purchase the product in the first days of 2022, when the new open market system should start in earnest.
Large retailers generally carry stock over from one bi-monthly term to another, usually enough to cover between 5-10 days of average consumption. Those volumes could be bumped to cover at least an additional three days to ensure a safety margin, in case a change in the tax system hampers new sales.
By Alexandre Melo