Sugar market eyes Brazil draft fuel tax that may weaken sugar prices

Credit: REUTERS/MARCELO TEIXEIRA

By Roberto Samora and Marcelo Teixeira

SAO PAULO/NEW YORK, June 7 (Reuters) - The sugar market is following the progress of a draft Brazilian bill that could cut taxes on fuels, particularly gasoline, likely leading mills to switch to sugar production from ethanol and ultimately pushing global sugar prices lower.

A new version of the bill is expected to be presented on Wednesday. No date has yet been set for the vote.

Brazil's government is pushing for legislation that would cap the ICMS state tax on fuels at 17%. Since the ICMS tax is highter on gasoline than ethanol, and higher than 17%, the law would cut gasoline prices. To remain competitive, ethanol would also have to drop in price.

Investment Bank Itau BBA said on Tuesday that if the legislation is approved, it would lead to a new, lower support level for raw sugar prices on ICE.SBc1

If ethanol prices fall, mills that have the flexibility to make more ethanol or more sugar depending on market prices might switch to sugar, increasing global supplies.

Sugar and ethanol analyst Julio Maria Borges said the new law could cut ethanol's competitiveness compared to gasoline in the key Sao Paulo fuel market by 8 percentage points, making it hard for the biofuel to compete.

"So now we are at the whim of the Brazilian political system, which at its best is confusing," said a U.S.-based sugar broker.

European trader Marex Spectrum, however, said in a note that pressure from state governments, who would lose revenue with the new law, may lead to delays in the vote and possibly postpone it indefinitely as Brazilian lawmakers have a recess in July and then go into campaign mode ahead of the October Presidential election.

(Reporting by Roberto Samora and Marcelo Teixeira, Editing by Alexandra Hudson)

((marcelo.teixeira@tr.com; +1 332 220 8062; Reuters Messaging: marcelo.teixeira.thomsonreuters.com@reuters.net - https://twitter.com/tx_marcelo))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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