Fitch Ratings has said that the decision made by Brazil’s government to raise taxes on gasoline and diesel is positive for sugar and ethanol (S&E) companies. However, the company has said that they will not materially alleviate the financial stress of these companies this year. The new taxes should allow ethanol producers to increase prices, but the positive impact on the EBITDA of most companies will, according to Fitch Ratings, be of up to 15% assuming a 50/50 split between ethanol and sugar outputs.
The impact on credit should be more positive n the long run as the tax increases should apparently cause Brazil’s producers to shift more output to ethanol, which in turn will benefit the recovery of sugar prices. At the moment, trading at the sugar equivalent levels of US$16.1 cents/lb, the price of hydrous ethanol is projected to increase to over US$18 cents/lb. This figure is approximately 20% higher than international sugar prices, which are trading at US$ 15.2 cents/lb.
On January 19, the Brazilian government announced that it will increase the PIS/COFINS taxes on gasoline and diesel. It will also reintroduce the CIDE tax on these products. The tax changes, which become effective on February 1, will raise the prices of fuel at the pump, as the underlying price charged by Petrobras will remain unchanged. They have the potential, according to Fitch Ratings, to increase hydrous ethanol prices by BRL0.15 /l given the 70% cap gasoline prices have on prices of hydrous ethanol. Within the next two months, the mandatory blending of anhydrous ethanol into gasoline is also anticipated to increase to 27.5% from 25%, which would further stimulate ethanol demand.
The PIS/COFINS social taxes on gasoline and diesel will be BRL0.12 and BRL0.10 /l, respectively. The CIDE which was reduced to 0 in 2012, will be BRL0.10 for gasoline and BRL 0.10 /l of diesel. The reintroduction of CIDE tax will become effective in 90 days time. Until then, the increase in the PIS/COFINS tax will be of BRL0.22 /l for gasoline and BRL0/15 /l of diesel. These taxes are part of a series of measures the Brazilian government is implementing this year in an effort to improve finances.
A reduction of gasoline prices at the refinery by Petrobras could offset the positive impact of higher fuel taxes for S&E companies, however Fitch has said that it does not expect this in the short term. Petrobras could reduce gasoline prices at the refinery in response to increased competition from fuel distributors which could take advantage of the recent plunge in international prices to import more gasoline and gain market share. Limited storage capacity and logistics are the main constraints for a relevant increase in gasoline imports.
Edited from press release by Claira Lloyd
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