Brazilian ethanol attracts bioplastics investors

From generation to generation

15 July 2009 00:00  [Source: ICB]

Brazil's highly developed sugarcane-based ethanol industry is attracting investments in bioplastics, and second-generation technologies are growing strongly too. Yet ethanol makers are grappling with market instability

Consultant's corner
Carlos Coutinho, PricewaterhouseCoopers

ALTERNATIVE ENERGY sources have undergone a renaissance in recent years. Ethanol has started to attract greater attention from governments and policymakers, not only as a source of biofuel, but also as a feedstock for a number of chemicals usually derived from oil.

Ethylene, in particular, has gained attention, for use in its raw form and as a resin, as well as the basis for a host of products. Brazil's tropical climate gives the country a natural advantage in producing biofeedstocks, and Brazilian companies are at the forefront of efforts to develop and produce green plastics.

Ethanol from sugarcane is a first-generation biofuel, and has been subject to some of the same concerns facing other first-generation biofuels. Some critics say that increasing Brazil's production of sugarcane could have negative social and environmental consequences, with land use a prime concern.

Others have vigorously defended the sustainability of first-generation ethanol production in Brazil. Ethanol produced in Brazil uses sugarcane as a raw material, unlike the corn-based ethanol produced in the US. The Wharton School of the University of Pennsylvania, US, published an analysis in its Knowledge@Wharton series of articles asserting that land is plentiful in Brazil, with ethanol production occupying only 1% of the country's arable land. The authors point out that nearly two-thirds of recent sugarcane expansion has taken place in mostly degraded pastures. They also believe that improvements in the productivity of land used for cattle grazing should free up land for other uses. Brazil's technologically advanced production techniques have resulted in high yields, and the production of other foodstuffs has also grown steadily in recent years, they note.

Preharvest burning activities, which release carbon dioxide (CO2) into the atmosphere, and difficult working conditions for cane cutters are two additional sustainability concerns. New technology to convert sugarcane waste into energy and increasingly mechanized harvesting techniques are likely to reduce burning significantly. Brazil's Sugar Cane Industry Union, UNICA, signed an agreement with the Environment Secretariat for the State of Sao Paulo in 2007 to bring forward from 2021 to 2014 the end of sugarcane burning - as well as the end of manual cutting - in the majority of plantations. UNICA has also launched an initiative to help retrain unemployed cane cutters.

While many in Brazil remain committed to first-generation biofuels, and indeed the United Nations Food and Agriculture Organization has described Brazil as the only location in the world where these are being produced cost-competitively, efforts are underway to develop commercially viable second-generation fuels. Novozymes, a Danish enzyme producer, has received funding from the EU for a cooperative project with Brazilian private sugarcane technology firm CTC to develop technology for converting sugarcane by-products into ethanol. Novozymes says it intends to launch commercially viable technology by 2010. Using sugarcane by-products would mean that production of first and second-generation ethanol could take place in parallel, using existing infrastructure.

US cellulosic technology company KL Energy has also announced a planned expansion into Brazil. The company plans to tailor its existing cellulosic technology to produce second-generation ethanol from sugarcane by-products and straw. It intends to cooperate with add blue, a Brazilian company specializing in business development in Brazil's renewable energy industries, which will also offer ethanol plant process optimization technologies.

Whether green plastics producers will be able to take advantage of these developments in second-generation biofuels remains to be seen. Plastics manufacturers depend on long-term contracts, and some ethanol supply contracts are short-term. Further, plastics makers looking to use ethanol may have to compete to secure sufficient supplies if global demand for biofuels continues to surge.

Some industry players are confident that biofeedstocks have a promising future. One of the largest polyethylene (PE) producers in Latin America, Braskem, is aggressively pursuing the development of green plastics. In December 2008, Braskem said its board approved the company's proposed green PE project requiring an investment of reais 500m ($211.5m). Braskem plans to produce ethylene and PE from sugarcane ethanol in a new facility to be built in the Triunfo petrochemicals complex, in Rio Grande do Sul, southern Brazil (see Braskem feature, page 26). The company laid the cornerstone in April 2009. Braskem has already successfully piloted the production of bio-based PE, garnering accolades from the US's Society of Plastics Engineers.

Braskem views its green plastic as extremely sustainable. The company ­estimates that the production of each kilogram of recyclable PE made from biofeedstocks results in the absorption of 2.5kg of CO2 through the growing process. The company expects to garner a price premium from customers seeking more sustainable products. The export potential looks to be high, with major companies including car manufacturer Toyota and cosmetics company Shiseido, both Japanese, already expressing interest in the new resin. Braskem has also announced that it will cooperate with another Brazilian player, Cromex, to develop a range of colors for the new plastics, as well as additives to optimize resin processing and final product performance.

In addition to its initiative around PE, Braskem announced in June 2009 that it is planning additional investment in research around further development of green propylene for the production of polypropylene (PP) based on 100% renewable raw material.

Another important Latin American PE producer,Quattor, a new entity created in June 2008 as part of a major restructuring of Brazil's chemical sector, also has plans to develop green plastics. Quattor is pursuing a licence for ethanol dehydration to produce ethylene and is looking to produce propylene from glycerin, a by-product of biodiesel production. It has applied for a patent for the proposed technology for the latter process.

Among other companies using Brazilian ethanol as a feedstock are French chemical firm Rhodia, which makes ethanol-based solvents in Brazil, and Solvay Indupa, a subsidiary of Belgium's Solvay, which is planning to produce polyvinyl chloride (PVC) using ethylene from ethanol feedstocks in Santo Andre, in the Southeast of the country. Solvay Indupa expects to start up the 120,000 tonne/year plant by the beginning of 2011.

The ongoing financial crisis has had a clear impact on plastics production in the region. According to the American Chemistry Council (ACC's) March and provisional April 2009 Global Chemical Industry Production Index, overall chemical production in Latin America was down by 11.8% in the first four months of 2009, compared with 2008.

Nonetheless, Brazilian companies are not backing away from their investment in green plastics. They continue to anticipate robust demand for the new green materials as consumer products makers respond to growing sustainability awareness on the part of end-users, so green plastics should remain competitive, even given lower oil prices.

For Brazilian companies, the current shift to ethanol and other biofeedstocks is not just a stopgap solution to high oil prices. They are firmly convinced that alternative sources of raw materials, such as sugarcane, will have an important role to play in the overall product mix of a chemical industry that is sustainable for the future.

Carlos Coutinho is a tax partner at global consultancy PricewaterhouseCoopers and serves as the firm's chemicals industry leader for South America.

William Lemos/Houston

The Brazilian ethanol industry has expanded and attracted significant foreign investment in the past three years, but a number of mills are struggling to stay afloat because of volatility caused by the financial crisis.

"This is a complicated moment for the ethanol industry and the main obstacle continues to be lack of credit," says Luciano Almeida, an official with the Sao Paulo state department of development. According to Almeida, the Brazilian ethanol industry became highly leveraged following a rapid expansion that took place in the past three years. But when credit markets suddenly froze in late 2008, a number of mills were left hanging by a thread.

The slowdown in the economy dealt a huge blow to some of the units that had just begun operating, said Jose Vaz, general manager of SIMTEC, an annual sugar and ethanol industry technology conference in Piracicaba, Sao Paulo.

On the sidelines of the 7th edition of SIMTEC, which took place in the first week of July, Vaz said that some investors, from Brazil and abroad, poured a lot of money into the Brazilian ethanol industry without really knowing what they were getting into. "Ethanol can be a quite volatile market," he said, adding that some of the most successful Brazilian sugarcane groups have been in business for several decades. "Now it is all about a search for stability."

Vaz was critical of the way Brazil is tackling the global financial crisis, saying that the government is stifling growth by reducing taxes on the wrong side of the economy. The government is trying to stimulate the economy by cutting sales taxes, but it would be more beneficial for the country to reduce taxes on the production side, he said. The tax burden on Brazilian businesses is estimated at more than 30%, according to Vaz.

"But a tax break for businesses will not get you as many votes," Vaz said, implying that the government was not willing to sacrifice political capital under its economic plan. "If you reduced taxes for businesses it would have the same effect as cutting sales taxes, except that it would add more jobs to the economy and generate more investment."

The financial crisis is also blamed for triggering a sharp drop in Brazilian ethanol prices, further compounding the problem for the sector.

Cash-strapped mills began to sell ethanol at reduced prices in the first quarter in a desperate bid to service debt and meet operational cash needs. Adverse market conditions forced Brazil's second-largest sugarcane group, Santelisa Vale, to seek a partner earlier this year to escape going into bankruptcy.

The financial crisis left the industry with at least one black eye after high-flying ethanol maker Infinity Bio-Energy filed for bankruptcy protection in late May.

Market sources expect the industry to go through a phase of intense consolidation as a result of the latest crisis.

"Consolidation, not bankruptcy, seems poised to be the name of the game from now on," an industry consultant says.

For more on ethanol visit our Chemical Intelligence site

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