Ethanol producers the world over will have ample reason to celebrate the coming new year on Saturday when the clock strikes midnight.
With the US ethanol subsidy and import tariff set to expire on December 31, Brazil clearly stands to gain the most from an open US market. But most ethanol producers around the globe are using sugarcane, sorghum or beet as a feedstock, and may now be able to count on the US as an insatiable export market where their product will be more desirable (ie: “advanced” classification) and cheaper than local maize-based ethanol.
This new chapter for the US market could hasten the demise of less efficient maize-based ethanol, and reinvigorate fact-based assessments by policymakers and consumers alike about the various feedstocks used around the world to produce ethanol.
The fact that US lawmakers didn't renew the nation's protectionist ethanol subsidy and tariff on biofuel imports before Congress ended its final session before Christmas doesn't prevent them from picking the subject back up in 2012. But approval of new protectionist measures seems unlikely in a political environment hostile to increased public spending.
US lawmakers have been renewing these ethanol measures every two years since the early 1980s, but couldn't justify the US$6 billion per year cost any longer with the current economic climate.
In June of this year, the US Senate passed an amendment that would slightly lower the US$0.45-per-gallon subsidy paid to domestic blenders, as well as the US$0.54-per-gallon import tariff on foreign ethanol. But to take effect it had to be approved by the House of Representatives, which didn't happen.
With sufficient supply and fair pricing from distributors and fuel pump operators, Brazil's cane ethanol could almost instantly lower per-gallon gas prices for American drivers by as much as US$0.10 next year, fuel analysts say. It's still a rigged game of sorts for ethanol in the US with oil refiners playing such a large role in ethanol purchase and resale, but the potential for real price reduction is there.
The timing of the end of the US tariff could be seen as both fortuitous and ill-placed. On the heels of a weak cane crop, Brazil cannot meet its own rising domestic consumption of ethanol, and has had to import a record amount of US maize ethanol this year. Tight supply has caused the price of hydrous ethanol to rise 11.6% this year, and anhydrous 9.86%.
But the fall of the import tariff will be a boon to Brazil's cane ethanol industry over the rest of this decade. Brazil currently exports 1.5 billion litres of ethanol, 60% of which goes to the US market either directly, or routed through Caribbean islands that had served as dehydrating stations.
A strong renewal in foreign investment for new Brazilian cane mills and ethanol distilleries would appear to be on the horizon. The sharp decline in greenfield projects within the last two years, compared to the boom period prior has been one of the biggest contributing factors to today's ethanol shortage in Brazil.
Demand in the US is guaranteed through 2022 with the federal mandate requiring refiners to blend higher levels of ethanol with gasoline every year. A growth cycle set in stone like that can remove nearly all doubt from the minds of investors.
According to UNICA, Brazil has the potential to export 15 billion litres to the US by 2022. By that time, government mandates in the US will require 57% of ethanol consumed to be “advanced,” which Brazil's cane ethanol has been recognized as by the Environmental Protection Agency since 2010, because it emits up to 90% fewer greenhouse gases than gasoline.
This is a unique opportunity for both ethanol industries to prosper with one another. Together, the US and Brazil account for more than 80% of global ethanol production, and neither will impose an import tariff. These two countries could have great influence in developing a global free market for ethanol, just like oil.
South America's free trade bloc, Mercosur, could be the next round of ethanol tariffs to fall. While Brazil has removed its tariff, other Mercosur countries, including Argentina and Columbia, still protect their local industries with tariffs as high as 20%. Working in unison, Brazil and the US would have an enormous amount of leverage on many of these markets. |
