SOFTS-Sugar firm on possible ethanol tax cut in Brazil

* Brazil considers cutting ethanol tax

* Vietnam coffee trade slows ahead of holidays

(Adds details, quotes, updates prices)

LONDON, Feb 5 (Reuters) - Raw sugar futures on ICE nudged higher on Tuesday, underpinned by developments in Brazil's ethanol industry including potential tax cuts, while arabica coffee rose and cocoa was steady.

The Brazilian government could cut taxes on sugarcane-derived ethanol, Energy Minister Edison Lobao said, as part of an effort to alleviate pressures on the biofuel sector, which has been struggling to compete with gasoline due to rising costs.

Brazil has already announced price increases for gasoline and diesel along with an increase to 25 percent ethanol in the gasoline blend from 20 percent starting on May 1, which should support the ethanol market and increase the amount of cane used to produce the fuel instead of sugar.

March raw sugar futures on ICE were up 0.09 cents, or 0.5 percent, at 18.82 cents a lb at 1142 GMT, above a more than two-year low of 18.06 hit in January.

"Following the Brazil news it's (the outlook) less bearish than it was," said Jack Pollard, an analyst at brokerage Sucden Financial.

"A lot of the fundamental news including the gasoline price rise has been priced in."

Speculators hold a historically large short position on the ICE market, which makes prices vulnerable to a short-covering rally in the near term, Pollard said.

"Whilst fundamentals remain bearish, there's a natural caveat given the high net spec short, which if prompted to cover could see a counter-trend rally north towards the previous range high around 20 cents," he said.

March white sugar on Liffe rose $2.30, or 0.5 percent, to $500.80 a tonne.

COFFEE EDGES UP

March arabica coffee futures on ICE were up a modest 0.65 cents, or 0.5 percent, at $1.4500 per lb, not far above December's two-and-a-half year low of $1.4220 per lb on a second-month basis.

Surplus supplies of arabica coffee after a bumper crop in Brazil and improving prospects for the 2013/14 crop in the world's top producer weighed.

"In addition to ample supplies at present, the outlook for the forthcoming harvest in Brazil has improved now that heavy rain is expected in the country's coffee-growing areas over the next few days," Commerzbank said in a commodities note.

Dealers and analysts also said the technical outlook was bearish.

"About two weeks ago we looked like we'd broken above the range, but we've reversed that and broken out of the low end of the recent uptrend support," Sucden's Pollard said.

"Recent volume spikes and increased open interest suggests fresh shorts have been added and support the moves."

May robusta coffee futures rose $19, or 0.9 percent, to $2,066 a tonne, just below the previous session's three-month high of $2,074.

Coffee exports from Vietnam, the world's largest robusta producer, could drop by a quarter to a half from January's shipments as less activity is expected in holiday-shortened February, traders said.

"Vietnam are not an aggressive seller now because they are running into Tet," said a London-based broker, referring to holidays between Feb. 9 and 17 to mark the Lunar New Year.

March cocoa futures on ICE rose $4, or 0.2 percent, to $2,196 a tonne.

Cocoa prices remained under pressure from an improving supply outlook in West Africa, although Ivory Coast's latest port arrival estimates showed a fall in the flow of cocoa compared with the previous week.

Exporters estimated around 37,000 tonnes of beans were delivered to the West African state's two ports of Abidjan and San Pedro between Jan. 28 to Feb. 3, down from an estimate of around 42,000 tonnes delivered between Jan. 21 and Jan. 27.

May cocoa on Liffe rose 1 pound, or 0.1 percent, to 1,435 pounds a tonne.

(Reporting by Sarah McFarlane; editing by Jane Baird)