March 10, 2013 12:49 pm

Brazil ethanol industry set for tax cut

Brazil is set to cut taxes this month in the country’s ethanol industry as the government looks to throw a lifeline to the biofuel’s struggling producers and curb inflation.

Pedro Mizutani, vice-president of Raízen, Brazil’s largest seller of sugar and ethanol, told the Financial Times that after discussions with the industry the authorities are preparing to reduce the tax burden on ethanol from R$120 (US$62) per cubic metre to R$25.

The near-80 per cent reduction in the tax is set to be announced by next month, according to Mr Mizutani, and could be followed by a reduction in the social security tax on ethanol, he said.

The tax cut is one of the biggest moves yet by the government to support ethanol producers, many of whom are facing bankruptcy because of heavy debts and difficulties competing with subsidised petrol prices in Brazil.

Alexandre Figliolino, commercial director at Brazil’s Itaú BBA bank, estimated that mills accounting for about 18 per cent of production in the country’s key south-central region are facing severe financial difficulties.

The planned tax reduction could boost ethanol producers’ margins by about R$30-R$40 per cubic metre, said Mr Figliolino, giving them the option to reduce prices for consumers in a move that would also help the government curb fuel inflation.

However, while the tax incentives would provide welcome relief to mills – especially as a global sugar surplus starts to put pressure on their sugar sales – it would not be enough to boost capacity or even ensure the survival of some producers, said Mr Mizutani.

“It certainly helps but not to the point where it will attract more investment to the industry,” he said.

Ethanol producers say the main obstacle to their development is the government’s policy of capping petrol prices, encouraging drivers of Brazil’s popular “flex-fuel” dual-mode cars to fill up with petrol rather than ethanol at the pump.

Mr Mizutani estimates that petrol prices would have to be 15-20 per cent higher in Brazil to make ethanol a viable alternative for drivers and turn the industry into an attractive target for investment.

Although the government has allowed state-run oil company Petrobras to raise the prices of both petrol and diesel recently, substantial increases are out of the question because of concerns over inflation, according to Giovana Araújo, an analyst at Itáu.

Monthly inflation accelerated to its fastest rate in almost eight years in January, while the 12-month rate remains close to the 6.5 per cent ceiling of the central bank’s target range.

“Inflation is still the government’s number one priority and it will likely stay that way,” said Ms Araújo.

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