Cleantech Investor

Marcos Jank of UNICA discusses the Brazilian ethanol industry as it enters its third era.

By Anne McIvor

Brazilian ethanol, manufactured from sustainable sugarcane, is considered to be a biofuel success story. Brazil has a well-established ethanol industry which in 2010 produced 26.2 billion litres of fuel. However, the industry has recently suffered a slowdown in the rate of growth, with repercussions both for the development of a global market for ethanol and also on consumer trends at Brazilian forecourts. Brazil’s new government, under President Dilma Rousseff, is currently reassessing ethanol policy, and an active debate on the future of the industry – with implications for biofuel markets around the world – has ensued.

Marcos Jank is the President and CEO of UNICA, the Brazilian sugarcane industry association. Jank believes that Brazil’s ethanol industry – despite the short term challenges – is entering a “third phase of development”. This phase, he claims, is being driven by oil majors including Shell, BP, Total and Petrobras.

UNICA represents both sugar producers and ethanol producers – a dual role which, as Jank acknowledges, means that the organisation is compromised in some respects. UNICA aims to promote Brazilian ethanol exports – but of course it also represents sugar farmers, who currently receive better prices for sugar than for ethanol. Setting the scene, Jank explains that growth in the Brazilian ethanol industry has slowed from rates of around 10% between 2000 and 2008 to just 3% or so at present. The global financial crisis hit the industry hard, with around one third of Brazil’s ethanol companies struggling to secure funding for expansion.

The ethanol investment which has taken place in the past few years in Brazil has focused on retrofit/brownfield projects, in contrast to the rush of greenfield projects before the crisis. The result has been a shortfall in production – at a time of rising demand for fuel in Brazil. Fuel demand has risen significantly in Brazil over the past few years, driven by measures taken by the Brazilian government to promote new car sales as a way of steering clear of the global financial crises. The government strategy was highly effective in terms of the automotive industry and the overall economy - Brazil pulled out of the crisis far more quickly than most of the world – but the fuel industry was ill prepared for a jump in fuel consumption on the back of record sales of new vehicles (particularly flexfuel vehicles). In the meantime, poor cane harvests also contributed to the problems: weather issues impacted the last two harvests (heavy rains in 2009/10 and a drought in 2010/11). The situation was probably exacerbated somewhat by the diversion of (albeit limited) volumes of supplies of cane to the sugar industry to take advantage of high global sugar prices. The combined result was a significant shortfall of ethanol for Brazilian consumers.

The short term impact has been high ethanol prices at the pump – driving consumers back to gasoline. A complicating factor is that the price of gasoline is regulated in Brazil. As Jank points out, gasoline prices in Brazil are maintained at artificially low levels by Petrobras (the national oil company). So petrol has remained cheaper than ethanol, despite the soaring oil prices seen on the world markets during the first part of 2011.

Jank identifies three eras in the evolution of the Brazilian ethanol industry. The first – the Proalcohol era – began in 1975 when ethanol production was incentivised by the Brazilian government. The strategic motivation for Proalcohol was energy security: ethanol was intended to replace oil as gobal prices were soaring – and at a time when Brazil’s rich offshore oil resources were still largely undiscovered. The Proalcohol era ended in 1990 when government funds dried up.

The second era in Brazilian ethanol expansion has been happening since 2003 and has been driven by the car industry. Automotive manufacturers capitalised on the fact that Brazil already had a distribution network for ethanol (for the mandated c.25% blend which was introduced under Proalcohol) to launch flexfuel cars – cars with dedicated engines which can run on any combination of ethanol and gasoline up to E100 (100% ethanol). Flexfuel cars have been a massive success story for Brazilian car manufacturers, and now account for 90% of all new cars sold in the country and over 50% of the total fleet.

Jank claims that Brazil’s ethanol industry is now embarking on its third era – the era of the oil majors. Oil companies are aware that they need to diversify beyond hydrocarbons and have identified the potential for ethanol to become a globally traded commodity. Much of the investment in the Brazilian ethanol industry in the past year or more has been merger and acquisition activity, driven by players which include Shell and BP of the UK and Total of France – as well as domestic oil company Petrobras. According to Jank, Brazil’s ethanol industry is now looking beyond its domestic roots – and multinational oil companies are gearing up to trade ethanol globally. Brazilian ethanol is recognised as a sustainable biofuel by jurisdictions ranging from California to the EU and is being used to comply with legislation on carbon emission reductions.

Jank anticipates that this third era will, like the first two, prove a strong driver for growth in the Brazilian ethanol industry. International trade in ethanol remains limited in terms of volume, mainly because of distortions in traditional agricultural policies and trade policies. The difficulties in exporting ethanol from Brazil to the US, which provides preferential treatment for its domestically produced corn ethanol, have been well documented. But Jank points also to preferential policies in the EU for sugar beet/wheat ethanol. With regard to Africa, he observes that there is little incentive for most African countries to invest in ethanol production so long as they have preferential access to the world sugar market. Jank is convinced, however, that, if the rich countries are serious about reducing carbon emissions, a global market for ethanol, from sustainable sources such as sugarcane, will emerge.

In the short term, meanwhile, with most new cars in Brazil capable of running on ethanol, there is clearly a requirement to supply the domestic market with this sustainable fuel at a competitive price. There is an irony in the fact that, while gasoline prices in Brazil are fixed, sugar prices trade freely – the inverse of the situation in the US and Europe, where sugar is subject to intervention.

At a domestic level in Brazil, there is much discussion about the need for strategic storage of ethanol and for measures which will reduce the volatility of ethanol prices. UNICA is opposed to a tax on sugar exports. Jank and UNICA are lobbying the government of President Rousseff to introduce legislation which would encourage the cane industry to produce more – as opposed to legislation which might constrain production of either sugar or ethanol.

Jank points out that sugar markets are much more developed than ethanol markets, and that instruments to reduce the volatility in ethanol markets will need to be developed in time.

Jank believes that the Brazilian ethanol industry needs a long term signal to plant more cane. “Ethanol is not a ‘just in time’ commodity; it takes three to four years to come on stream.” Jank hopes that the recent addition of aviation biofuels development to the list of areas of cooperation on biofuels between the USA and Brazil may be such a positive signal. Support for the Commercial Aviation Alternative Fuels Initiative (CAAFI) and the Brazilian Alliance for Aviation Biofuels was added to the areas covered by the Memorandum of Understanding in the bilateral Strategic Energy Dialogue between the two nations during a recent meeting between President Rousseff and President Obama.

Meanwhile, there is much progress on improving the efficiency of sugarcane ethanol production techniques – and on improving the efficiency of flexfuel motors. As Jank points out, it’s a bit unfair to describe the current challenging environment in the Brazilian ethanol industry as a “problem”. If the industry has a problem, it is a problem of growth – so in reality it is better described as the challenge to introduce conditions which will ramp up the growth rate from the current level of 5% to the 8%-10% levels which the industry was enjoying a few years ago. We are experiencing little more than a slowdown in the pace of development of a global ethanol market. And when it does emerge in full, that global ethanol market will certainly be positive for Brazil’s ethanol industry.

Jank doesn’t anticipate a future where Brazil becomes a ‘Saudi Arabia of ethanol’. He points out that “ethanol is a democratic commodity”: it is a renewable resource which is already being produced by 110 countries, albeit from a variety of feedstocks. Many countries can produce ethanol, given the right conditions. And with the right technologies, ethanol will be produced in the future from a host of new feedstocks, including biomass waste from a range of different sources in many geographic locations. However, Brazil will certainly remain one of the world’s leading producers and is poised to become a key player in the global ethanol market of the future.