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Global Trends: Brazil

Global Trends: Brazil - Sugar Rush
By Brad Addington

Traditionally, gasoline retailers that sell ethanol blends look to the Midwest, specifically the U.S. Corn Belt, for supply. But increasingly, our country€™s ethanol might come from the far South €" South Ameri­ca that is €" thanks to a perfect storm of regulatory and market pressures.

A friendlier climate for ethanol im­ports from Brazil could mean greater bio­fuel supply here in the states, and therefore lower prices for ethanol and more opportunity for discretionary blending driven by favorable blending economics.

Corn vs. Cane
Brazilian ethanol producers harvest sugarcane, not corn, to make their bio­fuel. They argue that their means of production gives their biofuel competi­tive and environmental benefits over corn-based ethanol.

In California, clean air regulators clearly agree. They recently scored Bra­zilian cane-based ethanol much lower in carbon intensity than ethanol made from corn grown in the Midwest. That€™s an important distinction as the state pursues its controversial low carbon fuels standard (LCFS) that requires all motor fuels in the state to emit less climate-changing gases over the next several years. Several states in the Northeast and mid-Atlantic are looking to follow Cali­fornia€™s example, and talk of a national LCFS has surfaced on Capitol Hill.

Oil companies that are required, be­ginning this year, to blend a specific amount of "advanced biofuel" as part of EPA€™s Renewable Fuels Standard pro­gram are also banking on Brazil.

Trade Barriers Show Weakness
Ethanol prices in the United States €" in addition to international trade barriers €" have always limited Brazilian imports. Brazilian ethanol is subject to a 54 cents per gallon import tariff, except for a small portion that makes a stopover in certain Caribbean countries (Caribbean Basin Initiative countries, or CBI) for finishing before moving on to the United States tariff free. However, pressure continues to mount on U.S. lawmakers to lift the im­port tariff. In August 2009, The Washing­ton Post called on Congress to drop the trade barrier, saying it "artificially boosts the price of U.S.-grown corn, thus distort­ing the markets for food and energy."

The U.S. reformulated gasoline mar­ket shifted dramatically away from MTBE (methyl tertiary butyl ether) to ethanol for oxygenate blending in the spring of 2006, which caused biofuel prices to soar. As a result, blenders and marketers scrambled for supply and sticky infrastructure issues had to be worked out. During the same summer, when ethanol futures hit a high of $5 per gallon in New York Harbor, Brazil re­sponded by sending 30,000 barrels of biofuel each day to U.S. shores.

While the country hasn€™t come close to that import volume before or since, in 2008, Brazil sent 13,000 barrels a day to the United States €" more than double the amount four years earlier. Still, the future of Brazilian ethanol in U.S. fuel markets is uncertain following a rocky 2009 that saw Brazil€™s worldwide ethanol exports down by 35 percent compared to 2008. Brazilian ethanol exports to the United States dropped even more dramatically €" by 88 percent between April and Octo­ber 2009 versus the same period in 2008.

And before Brazilian ethanol can make significant inroads into U.S. mar­kets, it has to meet the country€™s own internal demand. Recently, the Brazilian government cut its maximum ethanol blend level in gasoline from 25 percent to 20 percent for a 90-day period, mak­ing in-country supplies less tight.

Not surprisingly, that didn€™t please U.S. corn ethanol companies. Ethanol lobbying group Growth Energy believes the move to lower blends in Brazil "is the perfect illustration of why it makes no sense to become dependent on any for­eign source of energy €" whether it€™s Middle East oil or Brazilian sugarcane ethanol," according to Growth Energy CEO Tom Buis.

"Between high sugar prices and a sug­ar cane crop shortage, Brazil can€™t meet its own ethanol needs€" let alone the ethanol needs of the United States," he said. "Yet time and time again, we hear from critics of American ethanol that Brazilian etha­nol is the solution. We see it in California, where the state€™s Air Resources Board fixed a low carbon fuels standard that blocks domestic ethanol, but opens the state€™s doors to Brazilian ethanol. We hear it from those who want to dismantle the tariff on Brazilian ethanol €" a move that would cost more than 160,000 jobs to this country," he continued.

However, "[n]o one [other than Growth Energy] is talking about Ameri­ca becoming dependent on Brazilian ethanol," said Joel Velasco, U.S. repre­sentative for Brazilian sugarcane indus­try group UNICA. "That€™s a false argument designed to play on protectionist fears. Instead, sugarcane ethanol is one more good option for diversifying U.S. energy supplies and improving energy security so Americans aren€™t reliant on any one source or country."

"Growth Energy seems to be push­ing a strategy of energy isolation," Ve­lasco continued. "The best way to re­duce U.S. dependence on imported oil and cut energy costs is to give consum­ers more choices and make providers of different energy sources compete for customers," he added. "Americans overwhelmingly call for an 'all of the above€™ strategy, but it seems Growth Energy wants the 'only corn€™ strategy."

Just how much Brazilian ethanol we€™ll be using in the future is up in the air, but industry observers are bullish given California€™s LCFS. As they say, however, past is prologue, and a look at last year€™s challenges can reveal which hurdles still remain in the way of Brazil­ian ethanol playing a bigger role in the U.S. energy matrix.

Sugar and Credit Shortage
Dwindling ethanol exports out of Brazil in 2009 stemmed largely from the coun­try€™s struggle to meet its own domestic ethanol demand. When India experi­enced a severe sugar production short­age in 2009, the resulting high sugar prices gave Brazilian mills an incentive to boost sugar production at the expense of ethanol output.

UNICA said that the region€™s sugar pro­duction from the start of the harvest sea­son in April 2009 was 6.53 percent greater than the amount produced in the same pe­riod in 2008. Meanwhile, accumulated ethanol production over the same period suffered a 7.69 percent reduction.

According to UNICA, in the second half of December last year, the proportion of cane destined for sugar production has gone down. In the second half of Decem­ber last year, 71.09 percent of the cane pro­cessed went toward ethanol production, and only 28.91 percent to sugar produc­tion. In comparison: Since the beginning of the most recent sugarcane season through the end of December, 43.31 per­cent of the cane processed went toward sugar production, with only 56.69 percent toward ethanol production.

UNICA President Marcos Jank said in January that, while high sugar prices hit ethanol production in 2009 and contributed to higher ethanol prices, other factors played a part. "The principal fac­tor that explains recent high ethanol prices has received little comment: the global financial crisis, which hit the sec­tor hard," Jank wrote in an opinion piece for Brazil€™s largest daily newspaper.

"In the first half of 2009, the lack of liquidity in the credit market forced sev­eral firms to sell huge volumes of ethanol at greatly depressed prices, below the costs of production, to be able to meet capital needs. This caused consumption to explode €" an almost 30 percent increase compared to the same period in 2008," he said.

Persistent rains in the second half of 2009, which compromised sugarcane harvesting and ethanol output, also exacerbated the tight supply-demand balance.

On the demand side, flex-fuel vehicles represent nearly 40 percent of Brazil€™s car fleet and around 90 percent of all new car sales. The vehicles€™ popularity €" and ethanol often priced lower than gasoline €"resulted in Brazilian ethanol consump­tion rising by 78 percent over the last three years, compared to just a 3 percent increase in gasoline consumption.

Observers question whether an in­creased reliance on Brazil €" a country struggling to meet its own internal etha­nol demand €" is the smart path forward.

Rebound Scenario
The country could still ramp up produc­tion, however. As mentioned, Brazilian mills already have started boosting their ethanol production at the expense of sugar production, despite attractive sug­ar prices. There€™s also a good chance that rains won€™t disrupt sugarcane harvests as heavily this year. Another factor to con­sider is the ongoing investment in new ethanol mills in Brazil. Despite the diffi­cult credit and financing environment, 23 new ethanol plants were built in 2009.

California demand for ethanol could be a boon for Brazil, especially after LCFS goes into effect. The California Energy Commission (CEC) projects the state€™s ethanol demand moving from 1.2 billion gallons in 2010 to almost doubling to 2.1 billion gallons by 2020, even under a low demand scenario for gasoline. Under a high demand scenario, CEC has ethanol demand at 2.6 billion gallons by 2020.

Domestic ethanol producers point to employment and national security fac­tors when touting biofuel made from

U.S. crops. However, as federal and state regulators move to curb greenhouse gas emissions, while simultaneously crank­ing up blending mandates each year, and consumers continue to demand lower prices at the pump, Brazilian ethanol imports look more and more attractive as a means of relieving supply tightness in the United States.

But is a focus on Brazilian ethanol, a volatile commodity with a rocky history of supplying the United States, the right path forward? As government officials pursue a carbon reduction strategy that may give preferential treatment to cane-based eth­anol over corn-based ethanol, domestic ethanol groups are pushing their product and fighting against carbon policies.

All this could put the entire future of the renewable fuels market in question. If federal law requires renewable fuels and other state, regional and possibly federal LCFS programs require a re­duced role of certain renewable fuels, then what does the future hold?

Brad Addington is a senior editor at the Oil Price Information Service (OPIS).

Brazilian Invasion!
C-store retailers from Brazil arrived at the NACS Show as a force to be reckoned with in 2009! More than 300 operators from Ipiranga joined the action, exploring the expo floor and listening in on workshops to improve their operations back home and exchange ideas that will change their businesses. Read more.