Fitch Ratings sees Brazilian law allowing direct ethanol sales as neutral

In Brazil, earlier this month Brazilian president Jair Bolsonaro approved a new law allowing Brazilian producers to sell ethanol directly to gas stations. Fitch Ratings believes this change will be neutral for Sugar & Ethanol (S&E) companies. The expected impact on prices at the pump and producer margins will be immaterial to the issuers’ credit metrics.

Direct ethanol sales to retailers are optional, and only a small number of players are likely to opt in since significant logistical updates would be necessary to participate. Direct sales would also be challenging from a working capital perspective as fuel distributors store ethanol in Brazil during both the season and offseason.

Fuel distributor margins are typically small, and their large scale benefits the supply chain. Depending on tax considerations, any margin gain from logistics from a producer standpoint could be offset by higher taxes. Direct sales to gas stations also limit the gains ethanol mills will generate from Brazil’s carbon-credit program RenovaBio, as decarbonization credits (CBIOS) are issued by ethanol producers based on sale invoices with fuel distributors.

Depending on their size and distance from large consumer markets, direct sales from the mill to gas stations would only make economic sense for a fraction of the companies. For large players like FS Agrisolutions Industria de Biocombustiveis (FS: BB-/A+(bra)/Stable) and Sao Martinho (unrated), it would be logistically challenging to fragment sales into smaller portions to be sold to retailers. For companies far from larger consumer markets, like FS and Jalles Machado (A+(bra)/Positive), any potential gains form direct ethanol sales would be more limited compared to mills located in the State of Sao Paulo, which accounts for over 50% of all ethanol sold in the country. Located in Sao Paulo, Acucareira Quata (A-(bra)/Stable) would not benefit from the measure as the company sells 100% of its ethanol to Copersucar S.A.