Brazil Ethanol Shares Down On Regulatory Concerns

Brazilian biofuels shares posted their biggest tumble in two months on Wednesday on concern President Dilma Rousseff's government will toughen oversight of the sector to control supply and prices.

Brazil's oil and energy industry watchdog ANP is considering broadening oversight of the ethanol sector in the hopes of boosting production, ANP President Haroldo Lima told Reuters on Wednesday.

According to Lima, ANP could regulate supply, inventory and set output targets. Newspaper Valor Economico reported earlier in the day that worries over a surge in ethanol prices could lead to changes in the blend of the fuel that is used in gasoline.

Shares of sugar and ethanol maker Cosan, the world's biggest, plummeted as much as 3.4% to 25.95 reais, the steepest decline since Feb. 9. Sao Martinho sank 3.2% to 24.91 reais, a one-week-low.

Investors fear that Rousseff's wish to boost state presence on Brazil's fastest-growing sectors could lead to price controls and lower profits. Rousseff is pushing forward with the implementation of new rules for the oil industry, and her coalition is gauging changes to mining royalties legislation.

The government could be seeking to use industry regulation to arrest the fastest surge in inflation in six years. Ethanol prices, which are a big component of transport prices, have jumped about 70% since September.

"We see this news as very negative for the sector, not only because of the measures per se, but also because agribusiness in Brazil has always been seen ... as an attractive sector given its competitiveness and lack of government interference," Credit Suisse analyst Luiz Otavio Campos said in a report.

Over the last three years, sugar conglomerates have stepped up acquisitions of smaller rivals, asserting more control of supplies and pricing power in the ethanol sector. The government through state-controlled oil company Petrobras has, in turn, not kept pace with mergers among its private rivals.

The Valor article suggested that the government will seek to convince sugar and ethanol executives, known in Brazil as usineiros, to better align their interest with those of the nation. Failure to do that, Valor said, could lead her to impose a tax on sugar exports. A tax on sugar, Campos said, would be ineffective to destine more cane to the production of ethanol because of Brazil's dominance of the global sugar market.

"This means that increasing export taxes could actually lead to higher international sugar prices, since prices would be adjusted for the higher taxation," keeping sugar highly profitable, he noted.