| NEW YORK, July 12
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)