Sales of flex-fuel cars made up nearly 77 percent of all new light vehicle sales in Brazil in February, up from nearly 73 percent in January, automobile manufactures said this week.

But Datagro estimated that flex-fuel car sales would fall back to 60 percent of new car sales over the coming year.

Flex-fuel models were first launched in early 2004 and have consistently accounted for a growing share of new cars sales ever since, thanks to the high cost of gasoline.

Brazil has more than 30,000 filling stations that sell pure ethanol as fuel for cars and that also blend all gasoline sold at the pump with 20 to 25 percent ethanol.

Datagro President Plinio Nastari said flex-fuel will become less economical for drivers this center-south cane season, which begins in the coming weeks. Ethanol prices are expected to remain atypically high even through the peak of harvest.

"As we believe that ethanol prices will not fall as much as they did in 2005 (during harvest), the percentage of flex-fuel vehicles that fill up with ethanol will not be as great," Nastari told Reuters after a seminar on ethanol in Sao Paulo.

In the 2005/06 (May/April) center-south cane crop, ethanol prices at the mill gate averaged about 60 centavos ($0.28) a liter. In 2006/07, prices are not expected to fall below 90 centavos, Nastari forecast.

Prices have been rising amid increasing domestic demand from a growing flex-fuel fleet and also strong demand abroad for the alternative fuel, which typically serves as a fuel additive or oxygenate to reduce countries' dependence on oil imports and improve urban air quality.

International sugar prices recently reached 25-year highs, contributing to the price rise in the fuel. About half of Brazil's massive cane crop goes to produce sugar for use in food, while half goes to ethanol production.

EXPORTS

The Brazilian government reduced the mixture of ethanol in gasoline sold nationally to 20 percent from 25 percent on March 1 due to tight supplies and high prices. The blend is expected to remain at this level most of the year, Nastari said.

Before the reduction, Datagro was forecasting an ethanol supply deficit of 1.4 billion liters at the end of the new crop year on May 1, 2007. Now, stocks are seen at merely zero at that time.

The reduction in the ethanol blend in gasoline will also create some room for greater ethanol exports that reached a near record 2.6 billion liters in 2005/06, Nastari said.

Currently, international ethanol prices are offering better returns for mills than the internal market, despite the recent rise in local prices and strength of the Brazilian real against the US dollar.

Nastari said a contract closed recently for a shipment of ethanol at a record $600 a cubic meter FOB.

"With ethanol above $3 a gallon in the United States, it is viable to export directly to the US from Brazil (despite a 54 cent a gallon tariff)," said Nastari.

Brazil typically exports ethanol to the United States via the Caribbean Basin where a trade initiative with the US market allows it to avoid the import tariff.

Nastari said US imports via the Caribbean would reach around 1 billion liters, roughly the limit of 7 percent of US demand permitted under the initiative.