Ethanol inventories are rising in Brazil as drivers embrace cheaper gasoline, delivering an earnings blow to the nation’s large sugar-cane producers and prompting a pivot toward higher sugar output.
Ethanol stockpiles from Brazil’s top producer, Raizen SA, more than doubled in second quarter from the prior three-month period as the firm curtailed sales in hopes of better pricing, Chief Financial Officer Carlos Moura told journalists on Tuesday. He said Raizen is reacting by increasing sugar output as much as it can.
A slump in Raizen’s biofuel business hurt its second-quarter results and contributed to Monday’s earnings miss, following a similar trend reported by rivals Sao Martinho SA and Jalles Machado SA. Sales of 100% ethanol fuel dropped 9% in July, according to industry group Unica, which Jalles Machado estimates elevated total stockpiles in the South American nation by 5% from the prior year.
Recent dry weather could allow producers to allocate a bigger share of the cane juice to make sweetener. That could boost sugar supplies when the group is already crushing more cane this season. Raizen said it may process 80 to 83 million tons of cane, more than the 74 million from last year.
Read More: Brazil Ramps Up Sugar Capacity as Drought Threatens World Supply
While biofuels make for a huge part of Brazil’s economy, ethanol demand has weakened with prices recently becoming less competitive to gasoline. Most of the country’s cars can run on any mix of gasoline or ethanol, so lower gasoline prices reduce consumers’ appetite to fill up tanks with ethanol.
The sugar industry’s hopes now rely on a shift in direction after oil giant Petroleo Brasileiro SA raised fuel prices. The increases, announced Tuesday, are seen by Raizen’s Chief Executive Officer Ricardo Mussa as a positive sign to keep local fuel prices in line with international markets, offsetting fears that the state-controlled company would freeze rates to tame inflation.
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