Brazilian Fuel Distributors Declare Force Majeure on Ethanol

(Bloomberg) --

Brazil’s two largest fuel distributors declared force majeure on purchases of ethanol as the coronavirus pandemic hammers demand in Latin America’s largest economy.

The Raizen venture owned by Royal Dutch Shell Plc and Cosan SA sent a letter to suppliers invoking the clause for both anhydrous ethanol that’s blended in gasoline and the hydrous variety used directly in cars, a spokesperson said by telephone.

Petrobras Distribuidora SA, known as BR Distribuidora, said it also invoked the clause, adding that contracts were maintained but at reduced volume.

Brazilian Fuel Distributors Declare Force Majeure on Ethanol

The two companies, which account for most fuel sales in Brazil, said in the letters that consumption has collapsed at gasoline stations because of lockdowns to contain the spread of the disease. Raizen, which is also Brazil’s top producer of the biofuel made from sugar cane, doesn’t have enough capacity to store ethanol from third parties, according to the people.

Ethanol producers affected by the decision are looking to begin talks with distributors to contest the rationale for declaring force majeure, the people said. If that fails, they could turn to a formal arbitration process. Force majeure allows companies to remove liability for natural and unforeseeable catastrophes

Fuel consumption in Brazil has plunged by about 50% in a week as drivers hunker down at home, Paulo Miranda Soares, president of a group representing gas stations, said March 25. Brazil’s oil regulator, known as ANP, said in a note that the drop will only get worse in the coming weeks.

The glut is set to widen as a new cane harvest begins in the country. Industry group Unica estimates that mills in the Center-South, the nation’s largest cane-producing region, have capacity to hold 60% of total annual ethanol production in tanks.

The coronavirus and cheap oil are hitting the fuel business across the world. In the U.S., Valero Energy Corp. is temporarily closing two ethanol plants, Andersons Inc. is suspending operations at its biofuel plants while Pacific Ethanol Inc. is cutting output by as much as 60%.

©2020 Bloomberg L.P.

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