Brazil pours billions into ethanol expansion

Shortages have prompted Brazil’s government to introduce new financing and other incentives for sugar-based ethanol production.

Lifted by high international sugar and oil prices, demand for sugarcane for both ethanol and sugar production is sky high, and has – temporarily at least – overtaken Brazil’s ability to supply sufficient volume. Brazil is now importing ethanol for the first time in 17 years. In April alone it imported 45 million gallons – 80% from the US.

Ethanol production in Brazil has stagnated over the last couple of years, as tighter credit in the wake of the global financial crisis made it difficult for the industry to expand, while a poor sugar cane harvest due to bad weather has cut into this year’s supply. Brazil might produce about 6.7 billion gallons of ethanol this season, not even 1% up on last year.

Shortages and consumer protests have led President Dilma Rousseff’s new government to criticise both banks and ethanol producers for not investing more, which it says has left the country vulnerable to cyclical shortages. To ensure funds are available, Brazilian state-run development bank BNDES has now earmarked a hefty $19-$22 billion to finance expansion in the sugar cane sector between now and 2014. State energy regulator ANP wants rapid expansion focused on cane output initially, which will provide a larger pool of raw material to satisfy both ethanol and sugar markets. It takes a tonne of sugar to produce 19 gallons of ethanol, meaning April’s ethanol import volume the equivalent of 2.4 million tonnes of sugar.

Overall, ANP believes sugar cane crushing capacity is adequate at the moment, although high sugar prices saw utilisation for ethanol drop last year by almost 2% to about 55%. ANP expects investment to switch to expanding processing capacity in the medium term. It’s also working with government and private-sector representatives to formulate a 10-year investment plan, during which demand for ethanol is expected to double.

Part of the reason for the ethanol squeeze is Brazil’s ever-expanding car fleet, growing by a staggering 20% per year, with over 85% expected to be flex-fuel by 2020, compared to just under a half now. Unless the ethanol industry starts to gear up, Brazil’s sugar cane association, UNICA, estimates that there could be an annual cane deficit of 400 million tonnes by 2020-21, compared to current production levels of around 650 million tonnes.

The government is also introducing new rules in an attempt to moderate price volatility and guard against domestic shortages, including requiring producers to hold stocks equivalent to 8% of the previous April’s production. Fuel retailers will also be required to hold a 15-day stock of ethanol. Some investors in the sector fear stronger intervention from Roussef’s government, such as the setting of production targets.

While the poor harvest and high prices have reversed the normal flow of ethanol from Brazil to the US this year (overall exports have fallen 20%), tightening environmental fuel standards, notably in California, could boost demand for cleaner Brazilian sugar-based ethanol, especially if support for US import tariffs fall and import barriers – very costly to the US economy – are removed at the end of this year.

source: worldcrops