Brazil has relied on sugar cane-derived ethanol for much of its auto fleet for years. However, the industry has hit a soft patch in investment. Since 2005, the country has built 117 ethanol mills, but after the five currently coming on line are finished there are no plans for further expansion.
When you consider that the country’s auto fleet is expanding at 20% annually, capacity is going to be problem in short order. Unica, Brazil’s sugar cane industry association, believes this will contribute to a major shift in the national auto fleet. Currently 45% are flex-fuel vehicles, that is, they can burn gasoline or ethanol. By 2020, that figure will be 86%. Unica claims that without greater capacity, there could be an annual cane deficit of 400 million tons – current production is 650 million tons.
To deal with this, the Brazilian government has offered a plan to boost capacity. Reuters reports, “The state-run development bank BNDES announced that it would provide 30 billion to 35 billion reais (US$19 billion to US$22 billion) to finance expansion in the sugar cane sector through 2014, a major bet equivalent to about two-thirds of the industry’s annual output.”
However, there is a pretty significant headwind here, and that is the price of sugar. Bloomberg interviewed Alexandre Grendene Bartelle, a Brazilian investor with stakes in two ethanol refineries, and he said that he may upgrade his facilities to produce sugar as well as ethanol because it is profitable.
Bloomberg noted, “Sugar, which trades freely, has increased 47 percent from a year ago. Ethanol prices, which are linked to the state-set cost of gasoline, sometimes can’t even cover production costs, Grendene said. In the past year, developers announced just two new ethanol projects, compared with 48 between 2007 and 2008, according to data compiled by London-based research company Bloomberg New Energy Finance.”
Mr. Grendene told the news service, “Many mills haven’t been profitable over the last two years” following two poor harvests. “This isn’t a marvelous business. It’s a complicated one.”
30 to 35 billion reais may not make it simpler, but it could spark the next needed wave of expansion.