Brazilian ethanol producers see sweet times on sustained demand

28 October 2010 00:08  [Source: ICB]

Sugar dynamics, weather and steady demand combine to deliver a solid 2010 for ethanol producers


All Canada Photos/Alamy

Brazilian sugarcane mills will have plenty to celebrate when they look back at 2010, as market conditions this year could hardly have been much better for a sector that was once plagued by low returns.

Sugarcane mills are benefiting from a combination of high prices in the ethanol market and even better returns from the price of sugar, which hit a 30-year high earlier this year.

For those plants that produce both products (about 10% of Brazilian mills can make only ethanol), 2010 will probably go down as one of the best years to date for the industry.

The reason for the surge in the price of sugar and ethanol has mostly been to do with the weather, as unusually dry weather hurt this year's sugarcane crop in southern Brazil and lifted the price of ethanol.

Meanwhile, a severe drought in 2009 affected India's agricultural output and drove up the price of sugar, as India - which once ranked among the world's top sugar exporters - became a net buyer of the product.

The monsoon rains, which usually begin in June, revived Indian sugarcane fields in 2010. But the country is still making only enough sugar to meet its own demand, allowing Brazil, the world's top sugar producer, to rake in profits from the export market. Export revenues from sugar reached $6.80bn (€4.90bn) from April to mid-September, a 64% jump compared with the same period in 2009, according to data from Brazil's sugarcane industry association UNICA.

UNICA says sugar exports from Brazil's cenral-south region, which account for 90% of the country's ethanol production, hit a monthly record in September at 3.35m tonnes, rising by almost 4% from a previous monthly record reached in August.

"No doubt this is the best year for the industry in terms of returns," says a major ethanol producer in Sao Paulo, attributing the bonanza to high sugar prices and also to sustained ethanol demand.

Brazil's ethanol demand between April and mid-September was steady from a year earlier at 11bn liters, based on the latest data from UNICA.

The figure includes sales of hydrous and anhydrous ethanol and puts consumption in Brazil at around 2.0bn liters/month - up by 25% from 1.6bn liters/month in 2008, according to data from Brazil's National Petroleum Agency (ANP).

Brazil blends anhydrous ethanol in ­gasoline at a mandated 25%, while hydrous ethanol is used in flexible-fuel vehicles (FFVs), which can run on gasoline or stand-alone ethanol.

FFVs have become the bread and butter for Brazilian ethanol makers in recent years, accounting for nine in every 10 new cars sold in the country. At the current pace, FFVs will make up about half of Brazil's total auto fleet by 2012.

Hydrous ethanol, the grade used to power FFVs, has accounted for 8bn liters, or nearly 73% of total ethanol sales so far this year, data from UNICA showed.

The surge in the international price of sugar, combined with a solid ethanol market at home, has allowed the Brazilian ethanol industry to recover from the 2008 financial crisis that wreaked havoc in the sector and sent many businesses belly-up.

"Ethanol producers are not in an even better position now because a lot of them are still recovering from damage caused by the financial crisis," says a national fuel distributor in Rio de Janeiro.

The credit crunch in late 2008 dealt a major blow to the sector by depriving the highly leveraged Brazilian ethanol sector of much-needed capital and forcing cash-strapped mills to lower their prices to remain operational.

Ethanol prices took a nosedive of historical proportions in early 2009, causing the ­demise of a number of smaller operators while accelerating a wave of consolidation in the sector.

F.O. Licht, a global commodity information service, earlier this year estimated that the Brazilian ethanol sector saw some 60 transactions involving 100 sugarcane mills take place in 2009.

Market participants expect consolidation to continue in the coming years - a process that will gradually take the sector from family-run Brazilian groups and put it under the control of heavily capitalized, multinational companies.

Global heavyweight French trading giant Louis Dreyfus is now Brazil's second-largest ethanol producer after its 2009 takeover of local group Santelisa, while Anglo-Dutch energy and chemicals giant Shell stunned the market earlier this year by announcing a $12bn joint venture with Brazil's top ethanol producer, Cosan.

French sugar group Tereos and US agribusiness firm Bunge also rank among the country's largest producers.

"No doubt this is the best year for the industry in terms of returns"
Sao Paolo-based ethanol producer
"The consolidation in the [Brazilian] sugarcane sector keeps advancing as previously expected," points out Plinio Nastari, president of Brazil's ethanol and sugar consulting firm DATAGRO.

Nastari expects 10 groups to control around 45% of Brazil's 600m tonne/year sugarcane capacity within the next five years - a projection that is in line with other estimates in the industry.

Brazil's Itau BBA bank earlier this year predicted that the top five Brazilian ethanol producers would control 40% of the sector in 2015. That would be up from 27% in 2010 and 12% only five years ago, an Itau BBA analyst said during an industry event in Sao Paulo in March.

Among the groups likely to make strides in the biofuels sector is Brazil's state-run oil company Petrobras.

In December 2009, the company bought a 40.4% stake in local ethanol group Total Agroindustria Canavieira for $84m and recently signed a number of partnerships with other groups, giving it partial ownership in as much as 900m liters/year of ethanol capacity.

Petrobras is also moving ahead with plans to build a $1.1bn ethanol pipeline system in partnership with Japanese trading company Mitsui and Brazilian conglomerate Camargo Correa.

"Each kilogram of green PE captures around 2.5kg of carbon dioxide"
Bernardo Gradin, CEO, Braskem
The 542km (337 mile) system will have the capacity to transport up to 12.9m m3/year of ethanol, according to Petrobras.

The company expects to triple its ethanol production by 2014 and become a major exporter of the product. It plans to assign some $3.5bn to biofuels during the next four years under its latest investment plan.

Diversification is also opening new doors for Brazilian ethanol makers. That includes the sale of surplus electricity that sugarcane mills generate by burning bagasse - a sugarcane residue - and the use of ethanol as a petrochemical feedstock.

Brazilian petrochemical company Braskem in September launched production of "green'" polyethylene (PE) at a 200,000 tonne/year plant that produces the polymer using ethanol-based ethylene as a feedstock.

The company says it opted to invest in ethanol-based PE because of the environmental benefits and because Brazil is a net importer of naphtha, which is used in PE production.

Braskem, which says customers have agreed to pay a premium as high as 66% for green PE, plans to build a second unit with a capacity of around 350,000 tonnes/year.

The company says ethanol and fossil PE have the same properties, except for the carbon advantage provided by using ethanol instead of crude oil or natural gas as a feedstock for the polymer.

"Each kilogram of green PE captures around 2.5kg of [carbon dioxide] from the environment," according to CEO Bernardo Gradin.

Braskem is not the only petrochemical maker that is looking at ethanol as an alternative feedstock.

"Ethanol producers are not in an even better position now because a lot of them are still recovering from damage caused by the financial crisis"
National fuel distributor, Rio de Janeiro
US-based Dow Chemical, Belgium's Solvay and Brazil's Unigel are among other chemical companies with a presence in Brazil that have expressed an interest or plan to use ethanol as an alternative feedstock.

Solvay Indupa plans to make polyvinyl chloride (PVC) using ethanol as a raw material, while Dow plans to build an ethanol-based PE plant with a capacity of 350,000 tonnes/year.

"We continue to be enthusiastic about the benefits of a cane-to-polyethylene project for Dow's growth in Brazil, as well as providing a renewable plastic offering and self-sufficient bio-energy source," a Dow spokesperson says.

Meanwhile, Solvay plans to produce green PVC at a 120,000 tonne/year plant in Sao Paulo. The start-up of the unit, which was originally planned for 2011, has been delayed, but a Solvay spokesperson says the company remains committed to the project.

For more in-depth chemical pricing and market intelligence

By: William Lemos
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