* Brazil cuts PIS/Cofins tax, extends credit for ethanol
* Ethanol industry says measures do not go far enough
* Measures will help industry's margins, competitiveness
By Alonso Soto and Reese Ewing
BRASILIA/SAO PAULO, April 23 Brazil's government
threw its sugar-ethanol industry a lifeline on Tuesday, by
cutting taxes and sweetening credit for the struggling sector it
hopes will resume investments in new biofuel plants to bolster
Finance Minister Guido Mantega, who announced the measures,
said he expected a recovery in the ethanol industry could also
help curb stubborn consumer inflation by bringing down fuel
prices and reducing Brazil's dependence on gasoline imports.
The reduction of the so-called PIS/Cofins - payroll and
social security taxes - and interest rates on loans is expected
to help ethanol groups such as Louis Dreyfus, Bunge
, Cosan and others offset production costs that
have risen steadily in the last decade.
"The government measures will create better conditions for
investment in expanding output (of ethanol)," he told reporters
of the measures that have been in the works for the past months
to revive the industry that Brazil pioneered in the 1970s.
Elizabeth Farina, president of Brazil's leading cane
industry association Unica, said that the measures, which will
cost the government 970 million reais ($480.95 million) in tax
revenue this year, were "a step in the right direction" and
But Farina said the measures fall short of what the industry
will need to resume the level of investments that flowed into
new ethanol plants prior to 2009. The industry has long cried
out for a clear government policy on the price of gasoline, the
main competitor to ethanol on the Brazilian fuels market.
But the government has given no sign it will loosen its
control of domestic gasoline prices as a tool against inflation.
President Dilma Rousseff's government is scrambling to
contain a surge in prices - of everything from tomatoes to hair
cuts. Her government has eliminated federal taxes on food
staples and slashed electricity rates to curb inflation that has
started to hit Brazilians' purchasing power - one of the main
growth engines of Latin America's largest economy.
After months of pressure and mounting losses at state oil
giant Petrobras, the government agreed to allow a 6.6
percent increase in wholesale gasoline prices in January.
However, analysts estimate local gasoline prices are still about
15 percent below international levels, allowing the
petroleum-based fuel still to undercut ethanol's
A steady rise in production costs for the biofuel in the
last decade has turned the industry's profits into losses and
made more than 10 percent of Brazil's 380-some mills insolvent
in the last few years.
Since 2009, hydrous ethanol's share of the light vehicle
fuel market has fallen from nearly 50-50 with gasoline to just
over 30 percent, according to the National Petroleum Agency.
Mantega announced that Brazil's PIS/Cofins taxes, which
stand at a combined 12 percent for ethanol, will be slashed to
almost zero for the biofuel starting on May 1, the same day the
government had previously announced it would raise the mandatory
blend of anhydrous ethanol in gasoline back to 25 percent.
The blend was cut 20 percent in October of 2011, after the
government grew concerned that the drop in supplies due to
drought and poor cane yields would feed into higher inflation
via fuel prices. The extra five points of ethanol in gasoline
will soak up nearly 2 billion liters of the biofuel.
The tax cuts will likely create demand for an additional 1.6
billion liters of hydrous ethanol, which is sold pure at the
pump alongside gasoline, according to analysts at the local
investment bank Itau BBA.
In all, the two measures would go a long way to soaking up
the additional 4.6 billion liters of ethanol forecasters expect
the record cane crop will yield this season, Itau BBA said.
Brazil is in the initial stages of harvesting a record 580-590
million tonne center-south cane crop.
Shares of Cosan, Brazil's leading sugar and
ethanol producer, were up more than 3 percent in late afternoon
trade after the announcement by Mantega.
The improved terms for ethanol will not likely bring down
mills' intentions to produce record amounts of sugar this
season, analysts say. The center-south is expected to produce
36.6 million tonnes of sugar, as mills' race to harvest all of
the crop and will nearly exhaust capacity to process it into as
much sugar and ethanol as they can.
Mantega also detailed the lines of government-subsidized
credit the BNDES development bank will extend to the industry
for building ethanol stocks and replanting cane.
The bank will renew a 4 billion real ($2 billion) line of
credit for the replanting of cane fields, one of the most costly
expenses of running a mill. Mantega said rates on the loans,
which have now been opened to foreign owned companies, will fall
to 5.5 percent from 8.5-9.5 percent last year.
The government will also extend 2 billion reais in credit to
finance the storage of ethanol over the interharvest period
(December-April) when prices typically spike due to tight
supplies. Rates will fall to 7.7 percent from 8.7 percent
Mantega also announced a reduction in taxes for the chemical
industry, which will cost the government 1.1 billion reais this
year alone. He said the tax cuts will help the local chemical
industry better compete against companies in the United States
that have seen their input costs dwindle.