Brazil's flex-fuel car production rises, boosting ethanol consumption to record highs

Flex-fuels pump up ethanol

12 November 2007 00:00  [Source: ICB]

Brazil's burgeoning sales of flexible-fuel vehicles has juiced up ethanol demand, and consumption has risen to record highs

William Lemos/Houston

BRAZIL'S MONTHLY ethanol consumption peaked at more than 1.4bn liters (370m gals) in August, as local demand for the biofuel continued to boom, thanks to growth in probably the only other sector in the country that is expanding as fast as the biofuel industry - the flexible-fuel vehicle (FFV) market.

After a slow start in 2003, Brazil's FFV fleet hit 4m units in September, as low ethanol prices and a growing variety of flexible-fuel models are drawing more consumers to that market. Automobile industry association Anfavea says Brazilian carmakers now offer 63 FFV models, including compact cars, SUVs and pickup trucks.

FFV sales in September accounted for 86.3% of Brazil's total automobile sales, up from 79.6% in September 2006. At 167,409 units, FFV sales in September rose by 39% compared with 120,298 units a year earlier, the association says.

Brazil started producing FFVs in March 2003, when 49,000 units were sold. FFV sales hit the 1m mark in November 2005, 2m in August 2006, and 3m in March 2007, according to Anfavea data.

FFVs - or Flex-Fuels, as Brazilians normally call the vehicles - can run on 100% ethanol or gasoline or a combination of both fuels. The number of FFVs on the road is considered a leading indicator of potential ethanol demand, as almost half of the ethanol used in Brazil is pumped straight into the tanks of those vehicles.

Drivers are attracted to FFVs not only because biofuels may be better for the environment than fossil fuel, but because ethanol in Brazil usually costs much less than gasoline.

How much less? About half, depending on location. Figures from Brazil's National Petroleum Agency (ANP) for September showed national gasoline prices at an average of Brazilian reais (R) 2.49/liter ($5.20/gal). That compares with R1.33/liter for ethanol in the same month, according to the ANP. In states such as Sao Paulo, the country's ethanol powerhouse, the biofuel in September was available at an average of R1.09/liter versus R2.37 for a liter of gasoline.

Saving money with FFV

Ethanol critics argue that ethanol yields fewer miles per liter than gasoline. True, but even considering a loss of up to 30%, FFV drivers saved a good amount of cash by sticking with the biofuel.

Brazil's state-run oil company, Petrobras, expects FFVs to account for 71% of the country's automobile fleet by 2020. With an even more aggressive projection, Rio de Janeiro-based consulting firm CBIE has predicted 100% of Brazil's automobile fleet will be FFVs by 2030.

Although Brazil is the world's top ethanol exporter, domestically produced FFVs will likely be the main market for the ethanol industry in years to come, according to Sao Paulo industry association Unica. Brazil's ethanol consumption of 13.4bn liters in 2006 was nearly four times what the country exported last year.

While the industry in 2006 feared that a drop in US imports could lead to an ethanol glut in Brazil this year, domestic demand has so far made up for most of the decline in exports. Ethanol production in 2007 is expected to grow by 10% and, by 2012, Unica expects Brazil to produce 36bn liters/year of the biofuel.

Not a silver bullet for total energy independence, but so far a working strategy - that's what Brazil's ethanol program is proving to be, as the country has replaced 40% of its gasoline consumption by using the biofuel as a blend and stand-alone fuel.

The next step in Brazil's biofuel strategy is to reduce consumption of conventional diesel, which is estimated at nearly 40bn liters/year.

Brazil imports 5% of the regular diesel it consumes, but starting in 2008, the government plans to reduce that amount by two percentage points through a mandatory biodiesel blend nationwide.

If it all goes according to plan, Brazil could wean itself from imported diesel by 2010, when the biodiesel blend is expected to jump to 5%, three years ahead of schedule based on legislation from 2005 that set the 5% target for 2013.

Far-reaching potential

Although biodiesel is still an infant industry, compared with ethanol, which Brazil blends in gasoline at 25%, the country's biodiesel program could prove to be just as far-reaching.

Biodiesel consumption in 2007 is estimated to jump to 620m liters from 380m in 2006, even though blending is not yet mandated. The increase came as several companies took the initiative to adopt the 2% biodiesel blend before they would be required to do so next January.

Biodiesel is such a buzz word in Brazil nowadays that a lawmaker in June submitted a bill aimed at raising the mandated blend to 20% by 2018. While the bill has not been made into law, Cepea, a university research group in Sao Paulo, says Brazil could have enough capacity to meet the 20% target in the next 10 years.

Cepea expects Brazil's conventional diesel demand to increase by 7.5% in 10 years, jumping to 43bn liters/year by 2018. Based on that projection, the country would need about 8.5bn liters/year of biodiesel to meet the 20% target, a Cepea official says.

That is feasible, according to the official, who says the proposed increase could be achieved without affecting food exports, even though Brazil produces most of its biodiesel using soybean feedstock.

Brazil now has enough installed capacity to produce more than 1bn liters/year of biodiesel, and government projections indicate production will hit 2bn liters/year by mid-2008.

As was the case with ethanol in the late 1970s, Brazil's biodiesel program will start full of uncertainties, chief among which are questions as to whether biodiesel producers will be able to produce enough to meet the expected surge in demand next year.

While the government has already stepped into the market, signing contracts for more than 800m liters, industry leaders reportedly expect only one quarter of that amount will be actually delivered next year.

The possible shortage stems from high biodiesel production costs, which industry leaders say exceed the cost of producing regular diesel. Government officials acknowledge biodiesel production costs are up due to rising soybean values, but the government has dismissed speculation that Brazil will not have enough biodiesel to start the program in 2008.

Logistics are also a matter of concern. A large fuel distributor in Rio de Janeiro fears a tanker-truck shortage could hamper delivery of both biodiesel and ethanol in some areas of Brazil next year, once the biodiesel blend goes into effect.

Waiting period to increase

Demand for tankers has been so strong that fuel distributors have to wait as long as six months for delivery of new trucks, the official says, adding that the waiting period is likely to increase in 2008 because of biodiesel. It could take several years to see if Brazil's biodiesel industry will follow in the footsteps of ethanol. Despite the expected problems next year, chances for long-term success seem good, considering that both the government and the private sector are eager to see the program in place.

In the 1970s, cooperation between the government and private entities was vital for the start of the ethanol program. Fast-forward 30 years and more than eight in every 10 cars sold in Brazil can run with 100% ethanol-powered engines.

William Lemos, ICIS pricing editor in Houston, Texas, US, covers olefins, ethanol, maleic and phthalic anhydride. With ICIS for almost two years, he has already scored a goal at APLA's annual soccer match.

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