Lula's fuel tax U-turn likely to hit sugar, ethanol industry

By Roberto Samora and Marcelo Teixeira

SAO PAULO/NEW YORK (Reuters) - Brazilian sugar and ethanol companies are likely to be negatively impacted after Brazil's new President Luiz Inacio Lula da Silva surprised markets with a decree that keeps fuels exempt from federal taxes, analysts said on Tuesday.

The sugar and ethanol (S&E) industry, as well as international sugar traders, were widely expecting the resumption of federal taxes on gasoline and ethanol, as indicated by Finance Minister Fernando Haddad last week.

But one of the government's first acts was to publish a decree on Monday keeping the fuels exempt.

In response, raw sugar futures in New York fell nearly 2% on Tuesday.

"Politics has beaten economics," said broker Marex in a note. "In our perspective, this measure might have negative effects on the S&E sector, as it maintains the ethanol prices below the market's forecast, while the expectation was for an increase in ethanol prices in the beginning of 2023," said Citi Research.

Since federal taxes, called Pis-Cofins, are usually heavier for gasoline, their return was widely seen as positive for ethanol, which could gain market share, and as a consequence also positive for sugar prices, since mills would have an incentive to produce more of the biofuel and less sugar.

Sugar and ethanol industry group Unica said the new administration had become "an accomplice" to the attack on the environment begun under the former administration, adding that the measure contradicts Lula's speech at the COP 27 U.N. climate meeting in November.

The group said that the tax exemption was unconstitutional, since the law requires the federal government to give a tax incentive to biofuels.

Lula's team did not respond to a Reuters request for comment.

Mauricio Muruci, an analyst with Safras & Mercado, said fuel distributors were actively buying ethanol late last year before the expected tax return. That buying could now pressure the biofuel's price in the local market.