Brazil biodiesel seen weathering price pressure

By Andrei Khalip

RIO DE JANEIRO, Jan 11 (Reuters) - High raw material costs and low selling price of biodiesel will not compromise Brazil's compulsory diesel blending program, which kicked off on Jan. 1, a senior government official said on Friday.

Edson Silva, supplies superintendent with the government's ANP oil and fuels market regulator, told Reuters deliveries of the renewable fuel additive were guaranteed, brushing off some analysts' concerns of shortages.

"What we saw from the first days since blending began and what we expect further on is a setting with guaranteed, comfortable supplies in the coming weeks ... Institutional control mechanisms allow us to affirm that there will be no shortages in the longer run," he said.

About 90 percent of biodiesel is made from soy in Brazil, which is the world's No. 2 soy grower. A rise in global soy prices, which hit a new record high on Friday, and demand from biodiesel producers have pushed prices of soy oil up sharply.

As a result, biodiesel production costs overshot the medium price set at last year's auctions for biodiesel delivery contracts in November, of 1.807 reais ($1.03) a liter, leading some fuel market experts to doubt firm supplies.

"It's cheaper for producers not to produce biodiesel than to make it," said Adriano Pires, director of the Brazilian Center for Infrastructure consultancy.

"There are fines for not delivering, but producers can go to court claiming unfavorable economic conditions... Either prices have to become realistic at the next auction or open subsidies have to kick in," Pires added. The ANP will hold an auction some time in the first half of 2008.

Producers who do not deliver the amounts contracted at the auctions are fined and are barred from future auctions.