Brazil's government threw its sugar-ethanol industry a lifeline on Tuesday, by cutting taxes and sweetening credit for the struggling sector it hopes will resume investments in new biofuel plants to bolster output.

Finance Minister Guido Mantega, who announced the measures, said he expected a recovery in the ethanol industry could also help curb stubborn consumer inflation by bringing down fuel prices and reducing Brazil's dependence on gasoline imports.

The reduction of the so-called PIS/Cofins - payroll and social security taxes - and interest rates on loans is expected to help ethanol groups such as Louis Dreyfus, Bunge, Cosan and others offset production costs that have risen steadily in the last decade.

"The government measures will create better conditions for investment in expanding output (of ethanol)," he told reporters of the measures that have been in the works for the past months to revive the industry that Brazil pioneered in the 1970s.

Elizabeth Farina, president of Brazil's leading cane industry association Unica, said that the measures, which will cost the government 970 million reais ($480.95 million) in tax revenue this year, were "a step in the right direction" and "much welcomed."

But Farina said the measures fall short of what the industry will need to resume the level of investments that flowed into new ethanol plants prior to 2009. The industry has long cried out for a clear government policy on the price of gasoline, the main competitor to ethanol on the Brazilian fuels market.

But the government has given no sign it will loosen its control of domestic gasoline prices as a tool against inflation.

President Dilma Rousseff's government is scrambling to contain a surge in prices - of everything from tomatoes to hair cuts. Her government has eliminated federal taxes on food staples and slashed electricity rates to curb inflation that has started to hit Brazilians' purchasing power - one of the main growth engines of Latin America's largest economy.

After months of pressure and mounting losses at state oil giant Petrobras, the government agreed to allow a 6.6% increase in wholesale gasoline prices in January. However, analysts estimate local gasoline prices are still about 15% below international levels, allowing the petroleum-based fuel still to undercut ethanol's competitiveness.

A steady rise in production costs for the biofuel in the last decade has turned the industry's profits into losses and made more than 10% of Brazil's 380-some mills insolvent in the last few years.

Since 2009, hydrous ethanol's share of the light vehicle fuel market has fallen from nearly 50-50 with gasoline to just over 30%, according to the National Petroleum Agency.

Tax break

Mantega announced that Brazil's PIS/Cofins taxes, which stand at a combined 12% for ethanol, will be slashed to almost zero for the biofuel starting on May 1, the same day the government had previously announced it would raise the mandatory blend of anhydrous ethanol in gasoline back to 25%.

The blend was cut 20% in October of 2011, after the government grew concerned that the drop in supplies due to drought and poor cane yields would feed into higher inflation via fuel prices. The extra five points of ethanol in gasoline will soak up nearly 2 billion liters of the biofuel.

The tax cuts will likely create demand for an additional 1.6 billion liters of hydrous ethanol, which is sold pure at the pump alongside gasoline, according to analysts at the local investment bank Itau BBA.

In all, the two measures would go a long way to soaking up the additional 4.6 billion liters of ethanol forecasters expect the record cane crop will yield this season, Itau BBA said. Brazil is in the initial stages of harvesting a record 580-590 million ton center-south cane crop.

The improved terms for ethanol will not likely bring down mills' intentions to produce record amounts of sugar this season, analysts say. The center-south is expected to produce 36.6 million tons of sugar, as mills' race to harvest all of the crop and will nearly exhaust capacity to process it into as much sugar and ethanol as they can.

Credit

Mantega also detailed the lines of government-subsidized credit the BNDES development bank will extend to the industry for building ethanol stocks and replanting cane.

The bank will renew a 4 billion real ($2 billion) line of credit for the replanting of cane fields, one of the most costly expenses of running a mill. Mantega said rates on the loans, which have now been opened to foreign owned companies, will fall to 5.5% from 8.5-9.5% last year.

The government will also extend 2 billion reais in credit to finance the storage of ethanol over the interharvest period (December-April) when prices typically spike due to tight supplies. Rates will fall to 7.7% from 8.7% presently.

Mantega also announced a reduction in taxes for the chemical industry, which will cost the government 1.1 billion reais this year alone. He said the tax cuts will help the local chemical industry better compete against companies in the United States that have seen their input costs dwindle.