Hydrated ethanol has been below New York sugar since March this year in a scenario of strong depreciation of the biofuel. New price perspectives for the fourth quarter of 2020 and the first quarter of 2021 must reverse this scenario of negativity to the biofuel. A stronger real in the short to medium term along with bearish sugar fundamentals in the medium to long term must reinforce this scenario.
In July, the average price ratio between hydrated ethanol in the Brazilian physical market and raw sugar prices in New York showed once again a prevailing disadvantage of the biofuel against the commodity. Although this disadvantage showed a brief deceleration in the margin, limited to only 1%, the scenario is still of strong negativity for hydrated ethanol. Since the beginning of this stage of lower comparative prices, the month of July was the third worst moment for the biofuel by hitting -17.54%, only behind May (with -22.65%) and June (-18.55%). Despite this, SAFRAS & Mercado warns that the scenario must start showing a strong change over the remainder of the second half of 2020 and the first half of 2021.
In fact, mathematically, it is possible to state that this movement has already started, although on a very moderate scale, with the aforementioned decrease of 1% in hydrated ethanol losses between June and July. The three main vectors for the price formation ratio must converge towards the same direction. Firstly, there are projected highs for hydrated ethanol in the physical market for the remainder of this year, which must gradually move from the current level of BRL 2.04 per liter to BRL 2.18 in September, BRL 2.28 in December, and finally BRL 2.30 between January and February next year. After that, we have sugar, which must remain with a neutral to bearish trend due to the pressure of fundamentals from the Asian and Brazilian crops. Completing this scenario, there are indications of a more ‘well-behaved’ exchange rate in Brazil, which must remain between BRL 5.10 and 5.20 for the remainder of the year, in contrast to the first half. In this sense, we gradually project reductions in the comparative disadvantages of hydrated ethanol in the second half of 2020 until the reversal in gains against sugar between the end of the fourth quarter of this year and the first of 2021.