ENTRY INTO THE BIOFUELS MARKET IN BRAZIL
Brazil is the second largest biofuel producer in the world. It accounted for 22% of global production in 2010. The Brazilian government has demonstrated consistent support in the development of their biofuels industry over many years based upon sound technological choices and leads the world as the most successful biofuels industry at industrial scale.
The alcohol biofuels program began in the 1970s as a response to the oil shocks of the time. Since the advent of flex-fuel vehicle technology in 2003 the ethanol biofuel business has grown dramatically. Flex-fuel vehicles now represent over 85% of new light vehicles sales and are today 40% of the total park. In addition to sales of 100% ethanol (E100) at the pump, all gasoline sold in Brazil is a mandated 25% (E25) mixture with alcohol. Total volumes reached a key milestone in 2008 when alcohol sold at the pump overtook gasoline.
By contrast, biodiesel is a relative newcomer in Brazil. The Brazilian government maintains a strategic view promoting biodiesel.
Currently, a 5% (B5) blend of biodiesel is mandated in Brazil, with ongoing discussion about increasing this to B6 or B7 and a longer-term objective to reach B25.
Major moves are being made in the Brazilian bioethanol industry that is still too fragmented, with approximately 200 companies active.
There remain many smaller and inefficient family run businesses. Scale and vertical integration are now necessary to take advantage of agricultural yields; and technology that includes co-generation from bagasse (sugar cane waste) is becoming an essential component in a competitive industry. Foreign capital is now entering, with the stated objective to consolidate the domestic industry and then start to develop the global potential
In particular, the newly launched Shell-Cosan joint venture (Raizen) announced expansion plans to increases ethanol production from 2.2 billion to 5.2 billion liters. The company is vertically integrated and sells 10 billion liters of alcohol through its retail service station network. ETH Bioenergy last year acquired its debt-laden rival Brenco; and has production capacity 3 billion liters. Completing the series of transactions which occurred in early 2010 was: the acquisition of Grupo Moema by the U.S. based agribusiness and food giant Bunge; followed by the arrival of India’s largest sugar refiner, Shree Renuka Sugars, which acquired a controlling stake in Equipav S.A. Açúcar e Álcool. UNICA the Brazilian sugar producers association calculates that the percentage of Brazil’s cane crush now under foreign control stands at 22%.
Biodiesel will continue to depend upon government mandates to grow. High oil prices will help offset any economic penalty and should stimulate greater growth. Consistent policy towards the industry, as in Brazil, is helping to nurture the biodiesel market. Once consolidation has occurred in the bio-ethanol business then the large players can be expected to turn their attention to consolidating the equally fragmented biodiesel business, as scale and vertical integration become the critical success factors for this activity too.
Currently Brazil has insufficient production capacity for sugar-cane ethanol to make extensive trading a reality in the short-term. Supply of ethanol in the Brazilian market remains tight today, with little availability for exports, as high commodity prices are making the alternative of sugar production more attractive than ethanol. If an open market were to develop through the economic principle of comparative advantage, then Brazil would become the logical major supplier to the U.S. However, this will not be achieved without substantial new investment in additional production capacity. This has not stopped the Brazilian government and industry from engaging for a number of years in a broad campaign to consolidate ethanol as a global commodity. Finally they appear to be edging toward their goal and if successful they should stimulate the necessary additional investment. International trade in biodiesel is expected to evolve alongside bioethanol as subsidies and tariffs are adjusted globally.
For first generation biofuels Brazilian sugar-cane is far preferable from an environmental impact and economic perspective to the more subsidy dependent, less effective U.S. corn bio-ethanol route. Although the U.S. corn-ethanol industry exists and will continue to produce until a better alternative can be found or policy shifts dramatically. The development of second generation biofuels based upon cellulosic ethanol production, with diverse biomass as feedstock is the key to the future. The Obama administration recently entered into the debate and amended annual targets in the U.S. for different types of fuel: 16 billion gallons of cellulosic biofuels, 15 billion gallons of conventional biofuels, four billion gallons of advanced biofuels, and one billion gallons of biomass-based diesel by 2022. The first second generation biofuels plants are now ready for commercial production; and an opportunity exists to develop production of cellulosic bio-ethanol and bio-diesel in Brazil.
- Acquire first generation sugar/ethanol production plants and participate in the consolidation of the industry.
Work with Brazilian partner to develop plants.
- Acquire biodiesel production capacity ahead of the up and coming industry consolidation.
Work with Brazilian partner to develop plants.
- Invest in second generation bioethanol/biodiesel production with U.S. technology partner; license technology for plants.
Acquisition strategies can be directed at the domestic market or a mix of the domestic market and exports.