Fitch: Brazilian Sugar and Ethanol Producers to Benefit Modestly From Fuel Tax Changes

The Brazilian government's decision to raise taxes on gasoline and diesel is positive for sugar and ethanol (S&E) companies but will not materially alleviate the financial stress of these companies in 2015, according to Fitch Ratings. The new taxes should allow ethanol producers to increase prices, but the positive impact on the EBITDA of most companies will be of up to 15% assuming a 50/50 split between ethanol and sugar outputs.

The impact on credit should be more positive in the longer run as the tax increases should cause Brazilian producers to shift more of their output to ethanol, which in turn will benefit the recovery of sugar prices. Currently, trading at the sugar equivalent levels of USD16.6 cents/pound, the price of hydrous ethanol is projected to increase to over USD18 cents/pound. This figure is about 20% higher than international sugar prices, which are trading at USD15.2 cents/pound.

The Brazilian Government announced on Jan. 19 that it will increase the PIS/COFINS taxes on gasoline and diesel. It will also reintroduce the CIDE tax on these products. These tax changes, which become effective on Feb. 1, 2015, will raise the prices of fuel at the pump, as the underlying price charged by Petroleo Brasileiro S.A - Petrobras (IDR 'BBB'/National Scale 'AAA(bra)') will remain unchanged. They have the potential to increase hydrous ethanol prices by BRL0.15 per liter 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 expected 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 per liter, respectively. The CIDE, a fuel tax that was reduced to zero in 2012, will be BRL0.10 for gasoline and BRL0.05 per liter of diesel. The reintroduction of CIDE tax will become effective in 90 days. Until then, the increase in the PIS/COFINS tax will be of BRL0.22 per liter for gasoline and BRL0.15 per liter of diesel. These taxes are part of a series of measures the Brazilian Government is implementing in 2015 in an effort to improve its finances.

While not expected by Fitch in the short term, a reduction of gasoline prices at the refinery by Petrobras could offset the positive impact of higher fuel taxes for S&E companies. Petrobras could reduce gasoline prices at the refinery as a 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.

Additional information is available on www.fitchratings.com.

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