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

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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 first acts of the government was to publish a decree on Monday to keep the fuels exempt.

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

“Politics beat the economy,” said broker Marex in a note. “In our perspective, this measure could have negative effects on the S&E sector, as it keeps ethanol prices below market forecasts, while the expectation was for an increase in the prices of -ethanol in early 2023,” Citi Research said.

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

The sugar and ethanol industry group Unica said that the new administration has become “complicit” to the attack on the environment started under the previous administration, adding that the measure contradicts d -Lula’s speech at the UN COP 27 climate meeting in November.

The group said the tax exemption was unconstitutional, as 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 ahead of the expected tax return. That purchase may now put pressure on the price of biofuel in the local market.

(Reporting by Roberto Samora in Sao Paulo and Marcelo Teixeira in New York; editing by Barbara Lewis)

By Roberto Samora and Marcelo Teixeira

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