Fitch Ratings concerned of policy risk for ethanol following Petrobras CEO shuffle

In Brazil, the request to replace Petroleo Brasileiro S.A.’s CEO made by the Brazil’s Ministry of Mines and Energy is viewed by Fitch Ratings as raising uncertainties for the ethanol sector whose price dynamics are strongly correlated with Petrobras’ pricing policy.

The government influence on Petrobras’ business strategy could be a cash flow negative for Brazilian sugar and ethanol (S&E) participants, though Neutral for their ratings. Fitch understands that any potential change to Petrobras’s pricing policy that deviates from the import parity, as has previously occurred, would likely put the expected recovery of the ethanol sector at risk. Hydrous ethanol’s competitiveness as a gasoline substitute in Brazil declines when gasoline prices fall.

On Feb. 19, 2020 Brazil’s Ministry of Mines and Energy requested that Petrobras’ board of directors replace the company’s CEO. The government’s request coincides with a period of growing social pressure over domestic diesel prices, demonstrating the impact of political risk on the company’s strategy. The maintenance of Petrobras’ current import parity policy is important for the recovery of the domestic ethanol sector in 2021. In 2020, ethanol producers with little presence of sugar in the mix were the most affected by lower demand and oil price volatility that followed the outbreak of the coronavirus pandemic in Brazil.

While the Outlook is Stable for 70% of Brazilian S&E players rated by Fitch, the Outlook is Positive for the sector. The expected recovery in average oil prices combined with the relaxation of social distancing measures in Brazil should contribute to higher ethanol demand in 2021, supporting Brazilian producers’ cash flow. Companies with a large sugar presence in the product mix will fare even better as they continue to benefit from the recent spike in sugar prices and historically high levels of hedged sugar positions.