Bio-Fuels

THE BIOFUELS MARKET 

Even at the verge of reaching 9 billion inhabitants (2035) and despite all efforts, the world is still failing to put the global energy system onto a more sustainable path. Global energy demand grows by more than one-third over the period to 2035 (…), with China, India and the Middle East accounting for 60% of the increase. Energy demand barely rises in OECD countries, although there is a pronounced shift away from oil, coal (and, in some countries,
nuclear) towards natural gas and renewable like bio-fuels. (International Energy Outlook
2012, IEA – International Energy Agency).

Bio-fuel is a type of renewable fuel that derives from a biological carbon fixation (biomass). Bio-fuels come from plants and are not associated with global warming, according to the European Environment Agency. Biomass renewable energy sources can either be used directly (thermal conversion or combustion), or indirectly when they are converted (chemically or bio- chemically) to other sources of energy such as bio-fuels.

Our projects accommodate 3 of the highest yielding biomass crops mastered in Brazil: Elephant Grass (EG),Pongamia Pinnata (PP) and Cactus Palm. We use the first 2 biomass crops mentioned to feed livestock and, without compromising our beef production, we also make them available for second generation technology owners to fabricate bio-fuels: mostly bio-ethanol from EG and Bio-diesel from PP.

Research indicates that the market for transport bio-fuels will reach US$185 billion by 2021, according to a recent study by independent research company ‘Pine Research’. There are a variety of current government policies and mandates, which favor increased usage of biodiesel, including quotas for renewable fuels within transport fuel mixes in Brazil, the United States and the European Union. 

Global bio-fuel production grew from 16 billion litres in 2000, to more than 100 billion litres in 2010 and is expected to rise (IEA) to 283 billion in 2035.

Bio-fuel provides around 3% of the world’s fuel for transport. In Brazil, biofuel provides 23% of all transport fuel, compared with 4% in the United States and 3% in the European Union.
According to the International Energy Agency, bio-fuels are liable to supply 27% of world transportation fuels by 2050 (and avoid around 2.1 Gt CO2 emissions per year when produced sustainably). In 2009, that share was only 3%. Biodiesel is already the
most common bio-fuel in Europe.

According to the International Energy Outlook 2013 (EIA/DOE), liquid bio-fuels will account for 28% of the global energy demand in 2040, followed by Natural Gas (23%), Coal (27%), Nuclear (7%) and others (15%).

The energy crops developed by our company do not compete with food production areas and are performed with the support of modern technologies that fit under the concept of Low Carbon Agriculture. Bio-fuel is a type of fuel that derives from a biological carbon fixation.

Research and Development on advanced BIOFUELS

Brazil has developed a considerable competitive advantage in bio-fuels development, as it pertains to all aspects of the sector, whether this relates to market development, technology, resources, logistics or capital. Second generation bio-fuels (like bio-ethanol from Elephant
Grass and bio-diesel from Millettia Pinnata Pongamia, for instance) constitute the optimum solution to the achievement of sustainable socio-economic development which addresses the current and projected Worldwide increase in energy consumption without necessarily supplanting all-important food production. The world leaders in bio-fuels development are Brazil, United States, France, Sweden and Germany.

ENTRY INTO THE BIOFUELS MARKET IN BRAZIL

MARKET OPPORTUNITY

Brazil is the second largest biofuel producer in the world. The United States ranks number one and Brazil ranks second as the largest producers of fuel ethanol and biodiesel. They accounted for 84% of global ethanol production between them in 2017, and 26% of biodiesel production. In both countries, fuel ethanol and biodiesel are blended with fossil transport fuels, and in Brazil unblended fuel ethanol also competes directly with gasoline at the pump. 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 10% (B10) blend of biodiesel is mandated in Brazil, with ongoing discussion about increasing this to B12 or B15 and a longer-term objective to reach B25.

INDUSTRY CONSOLIDATION

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 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 acquired its debt-laden rival Brenco; and has production capacity 3 billion liters. Also, 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.

EXPORT OPPORTUNITY

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.

INVESTOR STRATEGIES

Acquisition strategies can be directed at the domestic market or a mix of the domestic market and exports.

  • 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

Birchwood Stanhope

In addition to investment opportunities we also design tailor-made investment solutions in the form of individual mandates or specific investment strategies and their implementation.

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