SAO PAULO - Brazil's ethanol demand, which soared 20 percent in 2015, is unlikely to make any gains this year and may fall as higher prices and the economic slump hit sales, raising the possibility of higher sugar exports, according to experts.
The fuel's price advantage against gasoline could also evaporate in several Brazilian states as prices are unlikely to fall as low as last year when the cane harvest hit full swing.
Brazil's domestic ethanol demand is a key factor in how much sugar the country exports, since both products compete for cane and milling capacity is partially based on market conditions.
"If gasoline prices stand as they are, we see ethanol losing competitiveness (this year) because mills are better capitalized and sugar prices went up, carrying ethanol with it," said Fabio Meneghin, a sugar and ethanol analyst at Agroconsult.
The firm projects the market share of hydrous ethanol, which is used by the country's flex-fuel fleet in lieu of gasoline, will dip to 28 percent in 2016 from 30 percent in 2015, equivalent to a drop of 600 million liters.
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Plinio Nastari, chief analyst at the Datagro consultancy, also expects much less pressure on ethanol prices at the peak of the cane crop. He said mills have hedged a good deal of theirsugar at good prices and do not need to sell the biofuel for quick cash, as was seen last year.
"Last year we saw ethanol prices as low as 1.15 reais ($0.31) per liter for producers, below production costs," said Nastari.
"This year we are projecting the floor price for the fuel at the peak of the harvesting in June to hit between 1.50 and 1.55 reais," he said.
Gasoline prices in Brazil - set by the government - are currently above international levels and seen likely to stay that way as the government tries to restore cash flow to the heavily indebted state-run oil company Petrobras.
Datagro also projects a drop of 3 percent in combined gasoline and ethanol consumption this year due to a severe economic recession, which would eliminate the consumption of 1.6 billion liters in gasoline equivalent.
A recent tax change in some northern states favoring ethanol over gasoline should increase volumes there, but experts say it is unlikely to boost total consumption much.
Agroconsult sees a rise of 100 million liters in ethanol consumption in the six states with the tax change.
