Analysis: Brazil boom takes world fuel markets by surprise

RIO DE JANEIRO/SAO PAULO Tue Aug 23, 2011 4:08pm EDT

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RIO DE JANEIRO/SAO PAULO (Reuters) - When Brazil discovered huge offshore crude reserves four years ago, state oil company Petrobras (PETR4.SA) sketched out plans to become a regional fuel exporter.

That plan has since been turned upside down.

Rapid domestic economic growth and rising fossil fuels use has turned it into a recurrent fuels importer, with occasional gasoline purchases in 2010 evolving into regular imports that may not cease until the end of the decade.

This leaves Brazil following the path of other emerging markets such as China, which upended the oil products markets ten years ago with explosive demand, and the Middle East, where rising incomes have spurred demand growth.

With few signs that Brazil in the short term will be able to boost supply of sugar cane ethanol, which supplies almost half the fuel for its cars, the country is shaping up to be a demand center that energy markets will watch more closely.

"In 2006 and 2007 the focus of our discussion was adding value to Brazilian petroleum and exporting products. We were going to have a surplus of products. But in 2010 the world changed," said Paulo Roberto Costa, Petrobras refining chief.

"The rule was that fuel demand grew slower than GDP, but this changed," he said, adding Petrobras will likely maintain its dependence on foreign fuel markets.

Petrobras says gasoline imports will reach 3.2 million barrels by the end of August, an amount almost equal to the total imported in 2010. It is likely to rise by the end of the year on the seasonal demand increase.

Supplies may tighten even further within the next five years following Petrobras' decision to postpone the 300,000 barrel per day Premium I refinery by two years as it focuses on more profitable exploration and production operations.

The company plans four new refineries. The first is slated to open by late 2012 or early 2013, though construction delays could push back its start-up. Even though all the refineries will provide fuel for the local market, Brazil still expects at least 5 percent of its domestic fuel to come from abroad.

The imports should have less impact on global fuel markets in the medium term, as a slowdown in Europe and the United States has eased tightness on oil products markets.

"Brazil's fuel demand growth is likely to slow down in the near future as economies around the world begin to slow," said Mark Routt, an energy industry consultant with KBC Advanced Technologies. "But the forecast for Brazil's growth remains very robust -- it's going to be a major feature of product markets going forward."

SUGAR BOOM SOURS ETHANOL

Complicating the picture is the dim outlook for new supply of sugar-cane ethanol used by Brazil's flex-fuel cars, which can run on any combination of the biofuel and gasoline. More than 90 percent of all autos sold in 2010 were flex-fuel models.

An 85 percent jump in the price of sugar over the last year has led millers to switch away from ethanol and toward the sweetener, pushing up prices at the pump just as policy makers struggle to cool inflation.

Brazil's cane output is about 120 million tonnes shy of the capacity of mills to crush the crop. The mills in turn are unable to produce enough ethanol to meet market demand.

"It will take about three to four years before we see new ethanol mills coming onstream again," said Plinio Nastari, president of sugar consultancy Datagro. "It will take that long before the cane crop catches up to current crushing capacity."

Both Petrobras and U.S.-based Bunge have promised to boost output recently with major investments, but this will probably take several years for this to meaningfully affect supplies.

While Brazilian officials for years have decried U.S. tariff barriers that protect less efficient corn-based ethanol, Brazil's fuel supplies are so tight that it has imported 400 million liters, equivalent to 2.5 million barrels, since the start of the 2011/2012 sugar cane season.

Datagro expects ethanol imports -- from the United States mainly -- to top 1.4 billion liters by the end of the season.

Many of Brazil's family-run ethanol businesses never recovered from the 2008 financial crisis, meaning that big milling groups with cash in their pockets see better returns from snatching up distressed rivals than from starting expensive greenfield projects from scratch.

"We are in a race to supply potential markets locally, internationally, with sugar and ethanol," said Eduardo Pereira de Carvalho, the former head of the cane industry association Unica and president of industry consultant Expressao.

(Editing by David Gregorio)

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