INSIGHT: Got $150m? Buy an ethanol plant in Brazil

01 August 2007 17:01  [Source: ICIS news]

By William Lemos

HOUSTON (ICIS news)--If you have a few million dollars in the bank, about 150 to be more precise, you could buy one of the more than 100 ethanol plants that will be built in Brazil in the next five years.

Brazil ethanol production is expected to soar to 38bn litres/year by 2012, from 18bn litres/year in 2006. Industry association Uniao dos Produtores de Bioenergia (UDOP) estimates Brazil will have 107 new plants by 2012, with each adding 2m tonnes/year of sugarcane capacity.

Based on a production yield of about 85-90 litres/tonne of sugarcane, each plant will have capacity to produce 180m litres/year of the biofuel.

Ethanol powerhouse Sao Paulo will be the location of 30 of the new plants, while the states of Minas Gerais and Mato Grosso do Sul will each get 25 new units. Goias also ranks high on UDOP’s list, with 20 plants being planned for the state.

Brazil expects to use the additional 20bn litres/year of production to supply its growing domestic market, as well as to solidify its position as the leading biofuel exporter.

The odds that Brazilian ethanol will turn into a real money-maker have attracted the likes of George Soros, who in March announced plans to buy ethanol mills in western Brazil. According to press reports, the US investor is dolling out $900m of his personal fortune - not his investment funds - for the projects.

In addition to Soros, Microsoft founder Bill Gates and Larry Page and Sergey Brin, aka the “Google guys”, have also allegedly considered investing in Brazilian ethanol. Page and Brin were even said to have toured a plant in Piracicaba, home to Cosan, Brazil’s leading ethanol producer.

One of the main factors attracting investors to Brazil is the competitiveness of the local product.

Unlike the US, which uses corn to make ethanol, Brazil makes the biofuel from sugarcane, which has a much higher production yield than corn. As demand for biofuels is expected to soar worldwide, Brazil will be in a comfortable position to secure a large share of the international ethanol market, one analyst said.

Brazil’s strong domestic market also plays a key role in attracting investors.

Nowhere has ethanol been so effectively used to reduce fossil fuel demand as in Brazil, where the biofuel has replaced 40% of the country’s gasoline consumption.

In five years, Brazil will rely on ethanol to meet 60% of its gasoline consumption, according to industry projections.

Most of the growth will be driven by sales of flexible-fuel vehicles, which can run either on gasoline or 100% (hydrous) ethanol. More than 80% of new cars sold in Brazil are equipped with flexible-fuel engines, and nearly all of Brazil’s 34,500 service stations have hydrous ethanol pumps.

Brazil’s domestic ethanol demand, which reached 15bn litres in 2006, is likely to soar past 23bn litres/year in the coming years due to continued growth in flexible-fuel sales and increased use of hydrous ethanol as the primary fuel for these vehicles.

Brazil’s 340 ethanol plants are expected to operate at full throttle this year, with projections that output will climb by 10% from 2006.

With oil prices back above $70/bbl, current and prospective ethanol plant owners in Brazil, including Soros, are likely to remain confident their product will be in very high demand for the years to come.

By: William Lemos
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