Porto Alegre, August 29th, 2022 – Weak demand for hydrated ethanol and a lower share of ethanol from cane production was already anticipated since the beginning of July by SAFRAS & Mercado in the region. The crop left its productive peak with a general decline in the production of cane derivatives. The sugar market was impacted in the late morning of Wednesday, August 24, by new data from Unica on the Center-South for the first half of August. There were three vectors predicted by SAFRAS & Mercado since the beginning of July: the reduction in hydrated ethanol demand in August (after the increase in sales in July); the reduction in the concentration of the hydrated ethanol mix and the exit of the supply curve from its productive peak in the first half of August. The reduction in the hydrated ethanol demand expected for August, which is currently projected based on the figures for the first half of the month, must occur due to the purchases for stock replenishment by distributors that took place in July, when an increase in sales suggested that the domestic market had been recovering with the initial downward movements in the PIS/Cofins and ICMS taxes.
However, as SAFRAS & Mercado has warned since then, these purchases were only to replenish the low stocks of distributors. Once that was done, the effective demand for hydrated ethanol is once again directed toward the base of 1.30 billion, which has been the consumption pattern of the crop. In turn, the reduction in the concentration of the ethanol production share (although it continues to absorb most of the reaped cane) stems from the strong selling tone of sugar assumed by mills between June and July (which took advantage of New York at 20.00 cents and the dollar above BRL 5.60), with shipments scheduled from August to October this year. Therefore, the data for the first half of August are just the first indications of a movement that should continue until the end of the current 2022/23 crop in the Center-South, with the first mills expected to stop operating at the end of October.
Looking at the effective production data, there is a highlight on the 21% decline in cane crush and 20% in sugar production between the second half of July and the first one of August. On the one hand, this is an expected move, since the crop is going through its seasonal stage of decline; on the other hand, it further stresses the supply of sugar in the short term, given the mills’ need to ship until October, which may further increase the downward trend in the ethanol share and the upward trend in the sugar share. As expected, hydrated ethanol production fell by 20%, and anhydrous production by 15% in the margin. As domestic demand is weak for ethanol and foreign demand is high for sugar, these decline levels observed for anhydrous and hydrated ethanol were even conservative given the short-term trend. These downward patterns are expected to deepen in the coming few weeks, not only due to the decline in production, but also because mills need to produce more sugar to meet export contracts amid a reduction in cane availability. Recent data from the second survey by Conab, which indicated the crush of 514 million tons for the Center-South in the 2022/23 crop, further aggravate this issue.