Brazil biodiesel auctions ease price unbalance

Fri Apr 11, 2008 6:48pm EDT
By Andrei Khalip
RIO DE JANEIRO, April 11 (Reuters) - The price of biodiesel sold in two Brazilian auctions on Thursday and Friday jumped 45 percent from the previous sale, which organizers said should encourage output and ensure supplies.
Brazil's state-run energy company Petrobras (PETR4.SA: Quote, Profile, Research) (PBR.N: Quote, Profile, Research), which accounts for practically all fuel output in Brazil, bought 330 million liters (87 million gallons) of biodiesel in the two auctions at a price of 2.69 reais ($1.59) a liter, up from 1.86 reais in November's auction.
"The price that we saw at these two auctions is a comfortable price that can absorb hikes in the costs of raw materials," Edson Silva, supplies superintendent with the government's petroleum regulator ANP told Reuters. ANP organized the auctions.
Latin America's largest country made the 2 percent mix of biodiesel in diesel compulsory in January, and in July, it will raise the proportion to 3 percent.
Brazil plans to switch to a 5 percent mix by 2013.
At the start of the year, biodiesel production costs overshot the medium price set at last year's auctions due to a jump in soy and soyoil prices, leading some fuel market experts to doubt firm supplies.
About 90 percent of biodiesel is made from soy in Brazil, which is the world's No. 2 soy grower.
"The base price we had come up with for these latest auctions took into account various scenarios including soy oil prices in Chicago and futures," Silva said.
"Probably there will be no new raw materials price hike at all as we are expecting a big harvest in Brazil," he added.
Around 30 percent of the volumes contracted at the previous low price failed to materialize but was compensated by sales from strategic stocks, he said.
"The undelivered amounts failed to bring about any supply problems," he said. Silva said that even though prices set in November were too low, many producers had stocks of cheap soy oil bought earlier or hedged themselves to avoid losses.
"Now, we have a comfortable price and supplies guaranteed for the third quarter," he said.
The ANP said a record 16 companies took part in the bid, up from 12 companies in November.
Producers have sold 1.26 billion liters of biodiesel in seven ANP auctions between 2005 and 2007.
Increasing biofuel consumption will allow Brazil to import less diesel, of which it consumes 400 billion liters a year. The biodiesel program is also marketed by the government as key to slashing poverty and slowing global warming.
But although booming demand for biodiesel has become a source of hope for poor farmers who plant oil seeds in the arid northeast, nearly 95 percent of the 1 billion liters of biodiesel produced per year is made from soybean oil or animal fat, made by big farm businesses.
Brazil is a world leader in biofuels with decades of valuable expertise in using ethanol in cars.
ANP's Silva also said that Brazil's consumption of ethanol derived from sugar cane surpassed that of gasoline in February for the first time in two decades.
Brazil consumed 1.43 billion liters of ethanol and 1.41 billion liters of gasoline in February. The trend is driven by a drop in ethanol prices and higher sales of flex-fuel cars. (Editing by Christian Wiessner)