NEW YORK, July 12 Importing cheap Brazilian ethanol into the United States could become much less profitable next year if a proposal by the Environmental Protection Agency to expand tough documentation and transportation rules to non-U.S. producers takes effect.
The proposal, made on June 14, could seriously disrupt a signature Latin American energy trade, triggering auditing, documentation and transportation requirements, including physically separating U.S. ethanol imports from each other until those requirements are met.
Foreign producers and importers would also have to post a higher bond with the EPA to offset any potential penalties for violating the rules. The EPA insists the additional safeguards were needed to prevent fraudulent ethanol production.
"You've got here an expansion of regulated parties and higher compliance costs associated with it," said Graham Noyes, an energy lawyer at law firm Stoel Rives in California.
If enacted this year, the rules would probably not have an immediate impact. But they would raise the costs of next year's ethanol shipments, making the EPA's 2014 fuel targets for blending renewables into the national fuel supply tougher to meet. The EPA estimated in February that 666 million gallons of Brazilian ethanol would be needed to meet its 2013 goal.
The rules could also squeeze next year's prices for renewable fuel credits tied to ethanol if enough importers and producers decide compliance costs are too high for them.
"The proposed rules would drive up the transactional cost of shipping sugarcane ethanol to the U.S. to a point that it won't make any sense to send ethanol from Brazil to the U.S.," Joel Velasco, who advises Unica - the Brazilian Sugarcane Industry Association - said in an email to Reuters.
According to Velasco, the bond requirement would cost about $1 million for every 5 million gallons of ethanol exported, or about 20 cents a gallon.
No date has yet been set for when the rules take effect, an EPA spokeswoman said, and the EPA has turned down a request by Unica to extend the comment period to Aug. 14 from July 15.
"We basically see it purely as a bureaucratic requirement to limit the amount of ethanol coming into the U.S.," said a trader at a large global bank, who declined to be named.
The industry's big players can easily afford the extra costs, said Kevin McGeeney, chief executive of Starsupply Commodity Brokers, a Swiss renewable fuel broker. The additional paperwork would be inconvenient, but not a deal-killer.
"The current regulations are already pretty darn onerous for a foreign producer, so a couple of extra forms aren't going to sink them," he said.
Investment bank Morgan Stanley, oil major Royal Dutch Shell Plc and Swiss commodity trader Vitol SA are the top three importers, accounting for 56 percent of all U.S. ethanol imports through April 2013, or some 18 million barrels, U.S. government data show.
are the top three importers, accounting for 56 percent of the nearly 18 million barrels of all ethanol imported into the United States through April 2013, government data show.
But McGeeney says smaller players such as Brazilian farming cooperatives might not be able to overcome the hurdle, which would concentrate the market among "a smaller number of players who can afford the bond and can afford the regulations."
Brazilian ethanol exports so far in 2013 are nearly double the amount of the first six months of last year, according to preliminary figures from the Brazilian trade ministry. Most of the 305 million gallons exported likely landed on U.S. shores.
And more might come in the second half of the year, when Brazil's ethanol exports typically peak.
RINS DRIVING TRADE
The EPA's renewable fuel blending requirements are a key driver of the imports, which are needed to satisfy the 2007 Renewable Fuels Standards law aimed at making U.S. cars and trucks burn more renewable fuels.
Each gallon of ethanol produced to satisfy the requirements generates a credit called a renewable identification number, or RIN, which is used by refiners and importers to show proof they have blended their share of renewables into their fuel output.
EPA rules require 2.75 billion gallons of advanced biofuels such as Brazilian sugarcane ethanol to be blended into U.S. fuel supplies in 2013. That is on top of another 13.8 billion gallons that would primarily come from fuels such as U.S. corn ethanol.
The 2014 targets are due by the end of the summer and fear the agency will not lower targets drove ethanol RINs to an all-time high this week, making the Brazil-U.S. trade even less profitable. That is because RINs generated from advanced biofuels such as Brazilian sugarcane ethanol have long traded at a premium over RINs from U.S. corn ethanol. But now with the run-up in the corn ethanol RINs, the premium is all but gone.
As of Friday, a gallon of U.S. corn ethanol fetched a RIN worth $1.20 on the open market versus $1.23 for an "advanced" RIN from a gallon of Brazilian sugarcane ethanol. Earlier this year, the premium was upwards of 40 cents.
It is that premium, along with the lower underlying cost of Brazilian ethanol versus U.S. corn ethanol, that made the Brazil-U.S. ethanol trade so profitable. Now, if only for a moment, current prices have closed the arbitrage window.
That could be good news for domestic producers such as Adam Dunlop, who handles regulatory and strategic planning management for Blue Flint Ethanol, a 65 million gallon-a-year ethanol plant in Underwood, North Dakota.
He said he already has to apply the EPA safeguards, so it is only fair to broaden their reach to more foreign producers.
"I would just say, that's equitable to what we're doing right now," he added. (Reporting By Cezary Podkul. Additional reporting by Caroline Stauffer and Reese Ewing. Editing by Andre Grenon)