mecas(12)05 - outlook of sugar and ethanol production in brazil - english

8/10/2019 MECAS(12)05 - Outlook of Sugar and Ethanol Production in Brazil - English

1/50

International Sugar Organization

Outlook of Sugar and Ethanol

Production in Brazil

March 2012

MECAS(12)05

ISO


2/50

Outlook of Sugar and Ethanol Production in Brazil

MECAS(12)05

MARCH 2012


3/50

Market Evaluation Consumption and The Outlook of Sugar and Ethanol Production in BrazilStatistics Commitee

International Sugar Organization i MECAS(12)05

30thMarch 2012

Abstract

Brazil has the worlds largest and most diversified sugarcane processing industryand is the leading producer of sugar and cane-based ethanol. The country hadthe fastest growing sugar industry in the 90s and the first decade of the 2000s.Indeed, Brazils share in world sugar production and exports increased from 7%and 6% in 1990 to an impressive 25% and 50% in 2010. Since 2009, the lasttime the ISO published a paper on Brazil (MECAS (09)06 on Outlook on Brazilscompetitiveness in sugar and ethanol), Brazils frenzied expansion has come tohalt. The country has been grappling with a successive number of productionchallenges, including falling agricultural yields, escalating production costs,environmental obligations to speed up harvest mechanization, a strengtheningnational currency and adverse weather, among others. On the industrial side, aflurry of joint ventures and mergers and acquisitions has continued to reshapethe market shares of the leading players, but the focus has shifted to brownfieldrather than new greenfield mill investments.

This paper is structured into 5 parts. Part 1 presents the background as well asBrazils sugar/ethanol output relative to world production. Part 2 assesses therecent developments in Brazils cane sector, the drivers behind cane yieldperformance, an assessment of cane production costs versus cane prices, and acomparison of gross returns per hectare between cane and other major

competing crops like soybeans and maize. Part 3 of the paper presents therecent developments in industrial cane crushing by group of mills, detailing themarket leaders and the role of foreign direct investment. This part alsoelaborates on the economics behind the split of cane into sugar or ethanol. Part4 of the paper examines the six major drivers impacting Brazils competitivenessin sugar and ethanol in the world market, from production costs to diversificationinto cogeneration and bioplastics. Part 5 of the paper assesses the outlook fordomestic and international demand for Brazils sugar and ethanol and presents aforecast of supply and export growth to 2020.

The paper concludes that there are enough reasons to believe that the Brazilian

sugar/ethanol sector will continue to expand over the current decade, althoughat a significantly lower rate of growth. The ISO projects that cane productiongrowth in Brazil is expected to average around 3% a year between 2010 and2020, compared to 10% a year in the previous decade, taking cane output toaround 850 mln tonnes by 2020. This would be sufficient for Brazil to ensure thataround 20% of the projected light vehicle fleet runs on hydrous ethanol whilst atthe same time allowing the country to keep its current share in world sugarproduction, resulting in ethanol production of 43.6 bln litres and sugar output of47.5 mln tonnes in 2020.


4/50


International Sugar Organization ii MECAS(12)05

Table of Contents

INTRODUCTION 1

PART 1: THE BRAZILIAN SUGAR/ETHANOL INDUSTRY 2

SNAPSHOT OF BRAZILS CANE/SUGAR/ETHANOL PRODUCTION 2

PART 2: CANE PRODUCTION 4

CANEAREA ANDYIELDS 5

SUGAR

CANE

PRODUCTION

COSTS

8SUGAR CANE PRICES 10PRICES OF OTHER CROPS AND SUGAR CANE COMPETITIVENESS 11

PART 3: INDUSTRIAL PROCESSING 13

LEADING MILLING GROUPS 13THE NEW JOINTVENTURES INVOLVING FOREIGN GROUPS 16SPLIT TO SUGAR AND ETHANOL 17THE DILEMMA FACING THE LOCAL ETHANOL MARKET 19GOVERNMENT POLICY AND TAXATION 21

PART 4: DRIVERS OF BRAZILS COMPETITIVENESS INTHE WORLD MARKET 23

PRODUCTION COSTS 23INFRASTRUCTURE AND TRADE LOGISTICS 24INTERNATIONAL DEMAND FOR BRAZILIAN SUGAR 25EXCHANGE RATE COMPETITIVENESS 28THE WORLD FUEL ETHANOL MARKET 29COGENERATION 30

BIOCHEMICALS AND OTHER TECHNOLOGIES 31

PART 5: BRAZILS SUGAR/ETHANOL SUPPLY ANDEXPORTS TO 2020 AND OUTLOOK 32

CONCLUSIONS 35

APPENDIX: PRODUCTION INDICATORS OF FOREIGNGROUPS BY MILL 37

InternationalSugarOrganization

One Canada SquareCanary WharfLondon E14 5AA

General Enquiries:+44 (0) 20 7513 1144

Publications:+44 (0) 20 7715 9436

E-mail:[email protected]

Web:www.isosugar.org


5/50


International Sugar Organization 1 MECAS(12)05

Introduction

Brazil has the worlds largest and most diversified sugarcane processing industryand is the leading producer of sugar and cane-based ethanol. The country hadthe fastest growing sugar industry in the 90s and the first decade of the 2000s.Indeed, Brazils share in world production and exports increased from 7% and6% in 1990 to an impressive 25% and 50% in 2010.

Since 2009, the last time the ISO published a paper on Brazil (MECAS (09)06 onOutlook on Brazils competitiveness in sugar and ethanol), Brazils frenziedexpansion has come to halt. The country has been grappling with a successivenumber of production challenges, including falling agricultural yields, escalatingproduction costs, environmental obligations to speed up harvest mechanization,

a strengthening national currency and adverse weather, among others. Whilstbetween 2009 and 2010 cane output rose by 2.8%, down from an annualaverage growth of 10% in the previous decade, last year cane productionslumped to the lowest level since 2007/08. Sugar production also fell last year byan estimated 3 mln tonnes to 36 mln tonnes. Since Brazil is a price setter in theworld market, it is no surprise that Brazils wobbly performance is bullish forworld sugar market fundamentals.

This paper has the objective of reviewing the recent developments in Brazilssugar cane production and processing sector as well as the drivers impactingBrazils future competitiveness in the world market for sugar and ethanol. Thispaper is structured into 5 parts. Part 1 presents the background of the industryand status quo as well as Brazils sugar/ethanol output relative to worldproduction. Part 2 assesses the recent developments in Brazils cane sector, thedrivers behind cane yield performance, an assessment of cane production costsversus cane prices, and a comparison of gross returns per hectare between caneand other major competing crops like soybeans and maize. Part 3 of the paperpresents the recent developments in industrial cane crushing by group of mills,detailing the market leaders, the recent restructuring of the industry through

joint ventures and mergers and acquisitions as well as the role of foreign directinvestment, including oil giants. This part also elaborates on the economics

behind the split of cane into sugar or ethanol, presenting the dilemma facing thedomestic ethanol market at the moment and finally the role of government policyin prompting growth in the domestic market. Part 4 of the paper examines thesix major drivers impacting Brazils competitiveness in sugar and ethanol in theworld market, from production costs to diversification into cogeneration andbioplastics. Part 5 of the paper assesses the outlook for domestic andinternational demand for Brazils sugar and ethanol and presents a forecast forsupply and exports to 2020.


6/50



Part 1: The Brazilian Sugar/Ethanol Industry

Snapshot of Brazils Cane/Sugar/Ethanol Production

Brazil has the worlds largest and most diversified sugarcane processing industry.The vast majority of its sugar mills have integrated ethanol distilleries, allowingcane to be processed into either sugar or ethanol. Since 1999/2000, the share ofindustrial cane sucrose (known in Brazil as ATR, orAcar Total Recupervel)allocated to sugar production has varied between 41% and 52% - see table 1.Sucrose extraction from cane is allegedly high by world standards and hasaveraged around 140kg/tonne of cane (or 14%) over the past 10 years. Nationalcane output doubled in the past decade, with annual growth of around 10%,

although it suffered a major contraction in 2011/12, when output fell from 620mln tonnes to an estimated 562 mln tonnes, the lowest level since 2007/08.

Table 1 BRAZIL Industrial Cane Production (April/March), mln tonnes

Crop yearTotalcane

Total reducingsugars (ATR)

Sucrose yield(ATR) in

kg/tonne of cane

Share of ATR forsugar production

(%)

Share of ATR forethanol

production (%)

1999/00 310.05 43.91 141.61 46.2% 53.8%

2000/01 255.90 35.19 137.53 48.0% 52.0%

2001/02 290.57 39.86 137.18 50.2% 49.8%

2002/03 322.37 45.64 141.57 52.1% 47.9%2003/04 358.39 51.82 144.59 50.2% 49.8%

2004/05 386.74 54.74 141.55 51.1% 48.9%

2005/06 386.11 54.59 141.39 49.6% 50.4%

2006/07 426.29 62.10 145.69 50.5% 49.5%

2007/08 491.43 70.73 143.93 45.3% 54.7%

2008/09 572.67 80.33 140.28 41.3% 58.7%

2009/10 602.91 78.75 130.62 43.9% 56.1%

2010/11 619.53 86.64 139.85 45.9% 54.1%

2011/12 (e) 562.45 76.96 136.84 48.7% 51.3%

Source: ISO Ethanol Yearbook

Brazils sugar production and exports rose spectacularly in the two decades to2010, consolidating the country as a world sugar market leader. As table 2indicates, Brazils sugar production grew 5 times from 8 mln tonnes in 1990 to 39mln tonnes in 2010, while sugar exports rose exponentially in the period from 1.6mln tonnes to 28 mln tonnes, raw value. As a result, Brazils share in worldproduction and exports increased from 7% and 6% in 1990 to an impressive25% and 50% in 2010. To put this into international perspective, the secondlargest producer, India, has a 15% share in world production while the second


7/50



largest exporter, Thailand, has a 12-15% share in world sugar exports. WhileBrazils ethanol production from sugarcane also rose significantly between 1990

and 2010, from 12 bln litres to 27 bln litres, the countrys share in world ethanoloutput has been declining (from 58% in 1990 to 26% in 2010), but this reflectsexceptionally high growth in corn ethanol production in the US.

During the first half of the past decade, fast rising international demand for highquality VHP sugar by new destination refineries in the Middle East was the majordriver of Brazils cane supply growth. In the second half of the past decade, abooming domestic market for ethanol aided by a high penetration of flexifuelcars (running predominantly on hydrous ethanol), in addition to continuing highimport demand for sugar, boosted production growth further. During the peak ofthe industry expansion between 2005 and 2009, 103 new mills, mostly focusing

on ethanol production, came onstream in the country, an average of over 20new mills a year. Since 2010 the number of new mills has reduced to a trickle. In2011, Brazils share in both world sugar production and exports declined and norecovery is anticipated for 2012.

Table 2 - Sugar/Ethanol Production in Brazil as a share of World Output, (Sugar in mln tonnes,raw value; ethanol in bln litres)

ear Sugar Production Sugar Exports Ethanol Production

Brazil World Brazils

Share

Brazil World Brazil's

Share

Brazil World Brazil's

Share1990 8.0 110.8 7% 1.6 28.4 6% 12 20 58%2000 16.5 130.0 13% 6.5 36.5 18% 11 30 35%2005 28.1 140.7 20% 18.4 48.0 38% 16 46 35%2010 39.0 156.7 25% 28.0 55.5 50% 27 103 26%2011(p) 36.0 170.0 21% 25.6 53.0 48% 23 101 23%

2011 figures are preliminarySource: ISO

The latest assessment by Brazils Ministry of Agriculture (27 February 2012)notes that Brazil today has a total of 414 sugar/ethanol mills in operation. Of thistotal, 297 mills have integrated sugar/ethanol distilleries; while 104 make only

ethanol and 11 mills make only sugar (2 mills have unrecorded output).1Thiscompares with a higher overall number of operating mills three years ago (of 13March 2009) - 420 -, but a lower number of which- 248 - with integratedmill/distilleries (157 were ethanol distilleries only). Four Centre-South states top

1http://www.agricultura.gov.br/arq_editor/file/Desenvolvimento_Sustentavel/Agroenergia/Orientacoes_Tecn

icas/Usinas%20e%20Destilarias%20Cadastradas/DADOS_PRODUTORES_27_02_2012.pdf


8/50



the league of nationwide production units: So Paulo, with 184 mills, followed byMinas Gerais, with 44 mills, Gois, with 33 mills and Paran, with 30. Although

still dominant, the share of So Paulo in production has declined over the recentyears while Gois and Minas Gerais (which are in the Cerrado region) havegained market share. In 2009, So Paulo had 200 mills in operation, comparedwith 37 in Minas Gerais, 33 in Paran and 27 in Gois. The next two largestproducing states are the North-Northeastern states of Alagoas and Pernambuco,with 24 and 20 mills respectively.

While 9 new mills came onstream in 2010 and another 3 last year, many existingmills are reported to have stopped crushing cane over the past couple ofseasons, largely for financial reasons. Datagro, Brazils largest sugar/ethanolconsultancy, estimates that 26 existing sugar mills will not operate in the

coming 2012/13 season, of which 12 are in So Paulo state, 4 in Minas Gerais, 4in Rio de Janeiro, 2 in Alagoas, 2 in Gois, 1 in Tocantins and 1 in Cear.

Part 2: Cane Production

With 80% of the countrys mills, the Centre-South region has an almost 90%share in cane production, up from 81% in 2000/01 - see table 3.

Table 3 BRAZIL Industrial Cane Production by Region (mln tonnes) Centre-South

(C/S)North-Northeast

(N/N)C/S share in

countrys total (%)

2000/01 207.1 48.8 80.9%2001/02 244.0 46.5 84.0%2002/03 270.4 52.0 83.9%2003/04 299.4 59.0 83.5%2004/05 328.7 58.0 85.0%2005/06 336.9 49.3 87.2%2006/07 372.7 53.6 87.4%2007/08 431.2 60.2 87.7%2008/09 505.0 67.7 88.2%2009/10 542.0 60.9 89.9%2010/11 556.9 62.7 89.9%2011/12 (e) 495.0 67.4 88.0%

Source: UNICA/Datagro/ISO Ethanol Yearbook

Almost all new production facilities opened in Brazil in the past decade are in theCentre-South, which has a more suitable topography for cane growing and iscloser to the largest consuming markets. The average crushing capacity of aCentre-South mill is over 2 mln tonnes, while in the North-Northeast an averagemill crushes just over 1 mln tonnes of cane a year. While the cane harvest in theCentre-South takes place between April and December, in the North-Northeastthe bulk of the harvest is carried out between September to March, henceBrazils national crop year running from April to March.


9/50


10/50



81 tonnes/ha in the 2008/09 and 2009/10 harvests.2Several reasons are linkedto this sudden and large decline in agricultural yields, breaking the long-term

growth pattern. First, bad weather resulting from El Nio and La Nia eventsover the past few seasons have played a key role in this yield downgrade.Second, lower rates of cane replanting and expansion into new areas, partlyattributed to low cash flow and lack of new greenfield plantations, but also dueto fast rising input costs, like fertilizers, have contributed to a dramatic ageing ofthe cane fields in the country. According to Datagro, the average age of the canefields in the Centre-South today is now estimated at 3.8 years, significantlyhigher than the optimal average age of 2.7 years. Third, the cane farming sectorin Brazil has undergone a significant change with the fast incorporation ofharvest mechanization, which presents challenges over the short-term as theinexperienced work force adapts to a sudden shift in planting and harvesting

techniques.

Erratic weather has been affecting Brazils cane production since 2009. 2009 sawthe wettest weather in Brazil in recent history, whilst 2010 and 2011 were

drought years, negatively impacting cane growth see fig. 1. While the severelywet weather in 2009 did not affect cane volumes, bringing instead lower sugarcontent in cane, the dry years of 2010 and 2011 lowered cane outputsignificantly from initial harvest expectations. In addition, in 2011 frost andflowering hit the cane crop strongly, affecting cane growth development and theearly heavy rains of November brought an early finish to the harvest.

2 Industrial cane (used to produce sugar/ethanol at modern mills/distilleries) accounts for around90-95% of total areas under cane in Brazil.

Table 5 Industrial Cane crop indicators in Brazil

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12(e)

Industrial Cane harvested area (mln ha)

C/S 3.5 3.8 4.2 4.3 4.7 5.2 6.0 6.4 6.9 7.1

N/N 0.9 1.0 1.0 0.9 1.0 1.1 1.1 1.1 1.1 1.1

Brazil 4.4 4.8 5.2 5.2 5.6 6.3 7.1 7.5 8.0 8.2

Industrial Cane harvested (mln tonnes)

C/S 270.4 299.4 328.7 336.9 372.7 431.2 505.0 542.0 556.9 495.0

N/N 52.0 59.0 58.0 49.3 53.6 60.2 67.7 60.9 62.7 67.4Brazil 322.4 358.4 386.7 386.1 426.3 491.4 572.7 602.9 619.5 562.4

Industrial Cane yields (tonne/hectare)

C/S 77.1 78.7 78.7 78.4 79.5 82.2 83.5 84.2 80.5 70.2

N/N 56.8 59.8 58.8 53.5 56.0 56.6 63.7 57.1 56.7 61.0

Brazil 72.9 74.8 74.9 74.0 75.5 77.9 80.6 80.4 77.2 68.9

C/S - April/December; N/N - September/March

Source: ISO Ethanol Yearbook


11/50



Fig. 1 - Cumulative rains April-January,

Ribeirao Preto

0200400600800

100012001400

AprMayJun JulAugSepOctNovDecJan

mm

2007

2008

2009

2010

2011

Source: CIIAGRO

Data from CANASAT, Brazils satellite system for monitoring cane area growth,indicates that only 5.8% of the cane areas in the Centre South were used forreplanting in 2010/11, down from 6.4% seen in 2009/10 see table 6. In

2011/12, cane areas idle for replanting are estimated to have risen to 9%. Inprevious years the replanting idle area as a share of total areas was alsorelatively low, averaging only 7.3% between 2006/07 and 2008/09, but theshare of new expansion areas was high at 14.5%. Therefore, contrary to somebeliefs, the biggest impact on cane ageing has therefore come from theslowdown in expansion into new areas, where cane yields are highest, and notfrom a lower rate of cane replanting. Indeed, the share of new cane areas intotal harvested area has fallen to around 5% in 2011/12 and 2010/11,significantly down from almost 10% seen in 2009/10 and the average of 14.5%between 2006/07 and 2008/09.

Box 1: Drought resistant cane

Given the losses in cane output following adverse weather over the past couple of seasons, Brazil isspeeding up research for the development of drought-resistant GMO cane varieties. Embrapa, thegovernments leading Agriculture Research Centre, has a budget of up to BRL 40 mln set aside for thedevelopment of new cane varieties between now and 2015. Drought-resistant GMO cane has been afocal research area since 2008 in collaboration with Japan International Research Center for AgriculturalSciences - JIRCAS. The CTC (Centro de Tecnologia Canavieira) is another leading cane technologycentre in Brazil. Founded in 1969 by Copersucar, but since 2004 funded by almost 200 sugar caneprocessing groups in the country, it is working on the development of GMO drought tolerant cane inpartnership with BASF Plant Sciences and Bayer CropScience in different and separate R&D projects.Another active research centre is So Paulo- state funded IAC (Instituto Agronmico de Campinas). In2005, IAC opened a research centre in the heart of Brazils sugar cane belt, Ribeiro Preto. Theprogramme has soon become one of Brazils largest with 400 experimental fields in 11 states. TheRibeiro Preto station has two main focus of research: drought resistance and the development of canewith high bioenergy content and high fibre content. Between 2005 and 2011, IAC developed 50 newcane varieties.


12/50



Source: CANASAT/INPE

Sugar Cane Production Costs

One driver of the lower rate of cane renewal as well as expansion into new caneareas has been the escalating cane production costs, driven by rapidly risingfarm production costs. This phenomenon is not exclusive to Brazil and also has

been affecting several other commodities, and is linked to sudden rises in worldmarket prices. Since 2005, many agricultural commodities have seen worldmarket price rises of well over 10% a year on average: maize, at 20%; cotton, at19%; sugar, at 17%; coffee, at 16%; soybeans, at 14% (for more details, seeCommodity Pricesin ISO Quarterly Market Outlook (MECAS(12)02).

A February 2012 study by CNA/PECEGEs concludes that cane production costs inBrazil were consistently higher than the cane price between the 2007/08 seasonand the 2010/11 season.3 In 2011/12, although cane production costs continuedto rise sharply year-on-year, they fell below cane prices for the first time in 5

years. Total cane production costs in the traditional growing areas of Centre-South Brazil are now estimated at BRL 71/tonne, up from BRL 59.3/tonne in2010/11, but are estimated lower at BRL 56/tonne in new expansion areas. Theaverage cane production costs for the Centre-South are today therefore aboveBRL 60/tonne (USD 35.29/tonne).

3CNAis Brazils Confederation of Agriculture and Livestock and PECEGE is the Agribusiness

Economic Research Centre of the University of So Paulo. See Pecege/CNA, Custos de Produode Cana-de Acar, Acar e Etanol no Brasil: Acompanhamento da Safra 2011/12, February2012, ISSN 2177-4358.

Table 6 - Share of areas used for crop replanting and new expansion areas in total cane areas by state, Centre-south Brazil

Idle for Cane Replanting Expansion areas

2011/12 2010/11 2009/10

2006/07to

2008/09 2011/12 2010/11 2009/10

2006/07to

2008/09

Esprito Santo 4.7% 4.5%

Gois 5.1% 3.9% 5.2% 5.4% 12.2% 12.7% 24.3% 24.5%

Minas Gerais 6.7% 5.2% 6.1% 5.1% 9.2% 8.5% 14.5% 21.8%Mato Grosso 12.3% 10.4% 6.5% 10.1% 6.8% 5.1% 6.6% 11.6%

Mato Grosso do Sul 3.8% 3.3% 2.5% 6.8% 13.8% 17.0% 29.3% 20.9%

Paran 6.2% 6.0% 5.3% 4.4% 2.7% 2.5% 5.6% 16.8%

Rio de Janeiro 4.4% 9.6% na na na na na na

So Paulo 10.9% 6.1% 7.0% 8.0% 3.2% 2.8% 6.6% 12.3%

Centre-SouthTotal 9.0% 5.8% 6.4% 7.3% 5.3% 5.0% 9.8% 14.5%


13/50



Much of the rise in cane production costs in Brazil can be linked to the higher

cost of inputs. The ISO in 2011 conducted a survey on worldwide input costs incane and beet farming including Brazil (for more information see MECAS(11)18on Input Costs in Cane and Beet Farming). The results have showed that, inBrazil, the cost of seed cane doubled from USD 20/tonne to USD 40/tonnebetween 2005 and 2010. The cost of fertilizer rose from USD 309/tonne in 2005to USD 568/tonne in 2010. Land rent costs rose from USD 212/ha in 2005 toUSD 435/ha in 2010. Crucially, the cost of mechanized harvesting skyrocketedfrom USD 210/ha to USD 460/ha see table 7.

Table 7 - Indicative Input Costs in Cane Production in Brazil

2005 2006 2007 2008 2009 2010Land rent (USD/ha) 212 334 264 284 317 435Fertilizers (USD/tonne) 309 334 484 815 488 568Seed cane (USD/tonne) 20 30 24 27 29 40Mechanical harvesting (USD/ha) 210 350 280 300 320 460

Source: MECAS(11)18

The high cost of mechanized harvesting is indeed an important driver of caneproduction costs in Brazil. Although over the longer term mechanization canincrease cane yields, over the short term the reverse can happen. In the Centre-South, where land inclination can be as high as 15o, mechanization has led to a

loss in agricultural yields in the past couple of seasons. First, there areoperational challenges in properly training staff to handle the sudden switch tomechanical harvesting. Second, the rising quantities of waste left by theharvesting machines have been linked to potential disease dissemination andhence lower agricultural yields. Third, in areas of more unfavourable topographythere is a decrease in the harvesting speed. For example, a study onrepresentative cane harvesting practices from Brazil and Australia puts theaverage speed of mechanical harvesting in Brazil at 4.7 km/h, compared to 8km/h in Australia. 4 The higher costs associated with mechanical harvesting inBrazil are expected to linger over the next few years as producers change quicklyto adapt to strict new legislation on cane burning. By 2014, 75% of all cane

harvesting in the states of So Paulo and Minas Gerais will need to bemechanized, rising to 100% three years later. It is estimated that around 60% ofthe harvest in these two states has been mechanized during the 2011/12campaign, compared to less than 30% only five years ago.

4PECEGE/Canegrowers/Rex Consulting/Queensland University, Comparativo das Prticas

Agrcolas de Brasil e Austrlia, 2011. ISSN-2117-4358.


14/50



Another fast rising input cost is fertilizer. Table 8 shows that fertilizer costs fornew plant cane have risen by 55% in USD between 2007/08 and 2010/11, from

USD 434/tonne to an average of USD 674/tonne in 2010/11.Table 8 - Cost of a tonne of cane fertilizer in Centre South Brazil (BRL and

USD)

2007/08 2008/09 2008/09 2010/11

Fertilizer New Plant Cane(BRL/tonne) 793 1,267 1,103 1,159Fertilizer Ratoon Cane(BRL/tonne) 740 1,062 1,007 963

BRL/USD Exchange Rate 1.83 2.03 1.84 1.72

Fertilizer New Plant Cane(USD/tonne) 434 625 599 674Fertlizer Ratoon Cane(USD/tonne) 405 524 547 560

Source: Pecege/CNA/MECAS(11)18

Of importance, there is no respite in sight from rising fertilizer prices. Betweenthe second half of 2011 and early March 2012, the global benchmark price ofurea (nitrogen fertilizer) US Gulf FOB - has averaged over USD 450/tonne,compared to around USD 350-400/tonne during the first half of 2011. Marketanalysts expect world urea prices to remain supported at high levels during 2012and beyond. This reflects the fact that China, the worlds largest urea exporter,has now imposed a 110% export tax on the product, and that world fertilizerdemand is projected to remain strong. Imports of fertilizers by Brazil, the worldslargest cane producer, reached a record in calendar year 2011 at 19.84 mln

tonnes, or 70% of the countrys total fertilizer demand.5With the envisagedexpansion of areas under cane and other crops, it is likely that this figure will risefurther in the near future.

Sugar Cane Prices

Cane production costs are not taken into account in the formula that calculatescane prices paid to an independent grower. Cane prices are calculated based ona methodology agreed by millers and growers, which only takes into account theevolving market prices of sugar and ethanol.6 Therefore the price of a kg of cane

sucrose ATR is a function of changes in the market price of sugar and ethanol inboth the domestic and the external markets multiplied by their respective marketshares.

Table 9 shows the dynamics of prices received by a grower in the state of SoPaulo. After trading many years between USD 19/tonne and USD 25/tonne, thecane price escalated to USD 33/tonne in 2010/11 and further to an estimatedUSD 39/tonne in 2011/12. In essence, although the gross cane price has

5Seehttp://www.anda.org.br/Principais-Indicadores-2011-Detalhados.pdf

6See Consecana formula at http://udop.com.br/index.php?item=cana&op=tonelada


15/50



increased significantly over the past couple of years, this does not seem to haveprompted cane growers to significantly increase supply. Indeed, independent

growers have argued the price adjustment came too little too late as between2005 and 2010 cane production costs increased sharply as well.

Table9- Cane Prices - So Paulo (April/March crop)ATR (kg/pertonne of cane)

ATR Price(BRL/tonne)

Cane price(BRL/tonne)

BRL/USD rateof exchange

Cane price(USD/tonne)

2000/2001 142.15 196.10 27.88 1.93 14.462001/2002 144.47 207.44 29.96 2.45 12.212002/2003 147.62 243.80 35.99 3.27 11.022003/2004 148.88 203.00 30.22 2.91 10.382004/2005 143.70 244.50 35.13 2.84 12.372005/2006 145.94 308.30 44.99 2.28 19.73

2006/2007 150.86 343.00 51.74 2.15 24.062007/2008 146.57 244.30 35.81 1.83 19.602008/2009 143.25 278.20 39.85 2.01 19.842009/2010 132.75 346.52 46.36 1.84 25.172010/2011 141.16 403.80 57.00 1.70 33.142011/2012 (p) 138.00 500.00 69.00 1.75 39.00

Source: Consecana/ISO Ethanol Yearbook

Prices of Other Crops and Sugar Cane Competitiveness

How can the growing of sugarcane in Brazil be assessed in terms of its relativecompetitiveness as against other major Brazilian crops? Production andharvested area from the Brazilian National Institute of Geography and Statistics(IBGE) is compiled for a selection of crops that compete (even if only partially)for land in Brazils Centre-South: soybeans, coffee, maize and oranges.7Of note,the IBGE sugarcane area includes land under cane for industrial and non-industrial purposes. In addition to crop production and area, actual domesticprices expressed in USD for these crops are obtained using daily BRL price datafrom Cepea, the agricultural economics research centre of the University of SoPaulo.8A comparison of annual average crop production, total crop area, yieldand price indicators are presented in table 10.

Areas under cane have risen the fastest among the crops surveyed. Compared tothe average during the period 2000-2005, cane areas were 52% higher in the2006-2011 period, followed by soybeans at 24% and maize at 10%, while areasunder coffee have decreased. It is important to note that cane crop landsubstitution with coffee is particularly difficult when compared with soybeans andmaize, suggesting that sugar cane has expanded largely into non-agricultural

7 IBGE/CEPAGRO, Levantamento Sistemtico de Produo Agrcola,v.25 n.01 p.1-82 jan.201,January 2012, ISSN 0103-443X8CEPEA: Centro de Estudos Avanados em Economia Aplicada, ESALQ, University of So Paulo,Indicadores de preos, www.esalq.usp.br/cepea.


16/50



areas over the recent years.9 Gross income per hectare in sugarcane growinghas risen by 137% between the periods 2000-2005 and 2006-2011. This rise is

within roughly the same range as that for soybean and coffee gross earnings up by a respective 146% and 135% between the two periods. Gross earnings inmaize farming rose by slightly less at 127% while in orange farming revenuesrose by only 61%. In conclusion, in terms of gross revenues, cane has remainedcompetitive against other crops grown in Centre-South Brazil over the past 6years.

Table 10 - Production Indicators for a Selection of Major Agricultural Crops in Brazil

Average 2000- 2005 2006 2007 2008 2009 2010 2011 2012*

Harvested Area (mln ha)

Sugarcane 5.28 6.36 7.08 8.14 8.51 9.08 8.91 8.75

Coffee 2.34 2.31 2.26 2.22 2.20 2.16 2.11 2.10

Soybeans 17.84 22.05 20.57 21.06 21.75 23.29 24.05 24.66Maize 12.15 12.61 13.77 14.44 13.66 12.81 13.27 14.90

Oranges 0.83 0.81 0.82 0.84 0.79 0.84 0.77 0.80

Production (mln tonnes)

Sugarcane 378.16 477.41 549.71 645.30 671.39 719.16 634.85 690.84

Coffee 2.78 2.57 2.25 2.80 2.44 2.87 2.67 2.96

Soybeans 44.25 52.46 57.86 59.24 57.35 68.52 74.83 70.07

Maize 39.24 42.66 52.11 58.93 50.75 56.06 56.10 62.52

Oranges 17.72 18.03 18.68 18.54 17.62 19.11 19.66 18.03

Yields (tonne/ha)

Sugarcane 71.52 75.12 77.63 79.27 78.85 79.20 71.23 78.94

Coffee 1.19 1.11 0.99 1.26 1.11 1.33 1.27 1.41

Soybeans 2.50 2.38 2.81 2.81 2.64 2.94 3.11 2.84Maize 3.22 3.38 3.79 4.08 3.71 4.37 4.23 4.20

Oranges 21.52 22.38 22.75 22.64 22.38 22.67 25.50 22.66

Prices (USD/tonne)

Sugarcane 12.14 24.06 19.60 19.84 25.17 33.14 39.00 36.00

Coffee 1,199.84 1,912.70 2,161.50 2,409.28 2,224.34 2,953.26 4,939.66 4,471.05

Soybeans 200.83 216.81 298.96 538.97 485.34 479.44 587.49 558.90

Maize 116.17 137.03 204.81 239.33 176.95 204.59 302.85 284.67

Oranges 175.52 243.92 271.41 245.25 125.94 310.00 371.26 na

Gross income per hectare (USD)

Sugarcane 866.03 1,807.33 1,521.59 1,572.80 1,984.76 2,624.54 2,777.93 2,841.90

Coffee 1,417.70 2,128.78 2,147.06 3,032.36 2,465.55 3,937.29 6,255.13 6,293.94

Soybeans 500.95 515.93 841.07 1,516.33 1,279.61 1,410.30 1,827.92 1,587.95Maize 370.50 463.47 775.24 976.47 657.35 895.00 1,280.70 1,194.41

Oranges 3,774.90 5,458.86 6,174.64 5,552.55 2,818.41 7,027.60 9,466.69 na

* 2012 data are estimates

Source: IBGE/ISO/Cepea

9 While the replacement of soybeans areas with sugarcane has occurred in the past, thesubstitution of areas used for coffee growing with sugarcane is negligible.


17/50



Part 3: Industrial Processing

Leading Milling Groups

The 414 mills that operate in Brazil today are controlled by 150 different groups,allegedly making the sugarcane processing sector in Brazil one of the leastconcentrated in terms of corporate structure in Brazils agribusiness. While duringmost of the past decade entrant groups would focus on acquisitions of greenfieldprojects, since the 2008 credit crunch, mergers and acquisitions have continuedto shape the industry, with many new players now entering the sector bypurchasing existing brownfield facilities. The countrys largest sugar millers

association is UNICA, whose 146 members account for respectively 60% and50% of Brazils sugar and ethanol production.

According to Datagro, 25 producing groups controlled 52.9% of the countryscane total crush in the 2010/11 (April/March) harvest see table 11. Cosan wasthen the market leader, followed by Louis Dreyfus-Santelisa Vale (LDC SEV).Guarani (Tereos/Petrobras) was the third largest producing group in 2010/11. Ofinterest, in the wake of the ensuing mergers and acquisitions of the past year,the sector has undergone further significant transformations. Raizen, a new jointventure between Shell and Cosan, is today the countrys market leader and BPhas entered the league of the top producers by acquiring new assets worth USD

680 mln.

Razen Energia is Brazils largest sugar/ethanol producer and exporter. Thecompany has 24 sugar/ethanol mills with total cane crushing capacity of 65 mlntonnes. Razen expects in the coming season to break Cosans 2010/11 caneoutput record, with a forecast cane crush at 57.6 mln tonnes, sugar productionat 4.3 mln tonnes and ethanol production at 2.4 bln litres. The countrys secondlargest sugar/ethanol producer is LDC SEV. In late 2009 Luis Dreyfus, which wasthen ranked Brazils 5th largest producer, took over Santelisa Vale to become theworlds second largest sugarcane milling group, LDC SEV. The group has 13 mills

in operation and is seeking to invest BRL 7 bln in further expansion between2012 and 2016. The third largest producer is Guarani, of which TereosInternational has 68.6% of shares, with the balance with Petrobras. Guaraniowns 6 mills in So Paulo state Brazil with a 50% shareholding in a seventh mill,

Vertente.


18/50



Table 11 Top cane processors in Brazil

2010/11 crop (April/March)Group Cane Output (tonnes)

1 COSAN 54,541,0002 LDC SEV 36,321,7103 GUARANI 19,661,0004 USAUCAR 15,922,2935 ALTO ALEGRE 15,466,3926 CARLOS LYRA 15,159,9527 BUNGE 13,483,5568 SO MARTINHO 13,001,5519 ZILOR 10,817,798

10 NOBLE 10,672,17911 RENUKA 10,297,34612 T.WANDERLEY 10,276,34013 GVO 10,030,13714 COLORADO 9,454,95515 PEDRA 9,250,04516 ETH 9,002,00017 USJ 7,839,29618 COLOMBO 7,831,43419 MORENO 7,825,30520 CLEALCO 7,173,00021 BAZAN 7,077,263

22 FARIAS 6,968,32023 BERTIN 6,955,95224 ARALCO 6,827,13325 VALE DO VERDO 6,109,362

TOTAL CRUSH OF TOP 25 327,965,319

TOTAL BRAZIL 620,036,692

SHARE % 52.9%

Source: Datagro

Petrobras the Brazilian state oil giant and Guaranis minority shareholder- is arelatively new player in the Brazilian sugar/ethanol industry since it announced in2009 the acquisition of stakes in Guarani with Tereos but also in Total

Agroindstria in Minas Gerais state. The company also has a minority stake ingrupo So Martinho through the Nova Fronteira joint venture in Boa Vista mill,which is also envisaging considerable expansion. With supply of ethanoldecreasing sharply in Brazil between 2010/11 and 2011/12, the government isattempting to devise a strategy to allow the state company to produce as muchas 5 bln litres of ethanol by 2015, compared to around 1.3 bln litres it currentlyproduces (versus a total Brazilian output of 23 bln litres). This will most certainlyinvolve the acquisition of additional stakes in other producing groups in thecountry for more details on Government Policy, see later section in the paper.


19/50



Another two Brazilian groups deserve special attention. Grupo So Martinho, witha cane crush capacity of 14.5 mln tonnes, has three mills and shares in a fourth

one. The groups assets include Brazils largest mill, the So Martinho, with acane crushing capacity of over 8 mln tonnes a year. So Martinho Group is likelyto climb further in Brazils rankings over the coming years as its Boa Vista millseeks expansion to become another mega crushing facility with cane crushingcapacity of 8 mln tonnes. Brazils probably fastest growing group is ETHBioenergia. The company only entered the Brazilian sugar/ethanol industry in2008. Today the group has 9 operating mills and 2 greenfield projects that arelikely come onstream over the next couple of years. Among the 3 new plants thathave opened in the Centre-South in 2011/12, 2 belong to the ETH group. ETH iscontrolled by Odebrecht and its focus is ethanol production rather than sugar.The target is to produce 3 bln litres of ethanol in 2012 and cogenerate up to

2,700 GW of electricity.

As table 11 indicates, Brazil has several other groups crushing over 10 mlntonnes of cane, including both national and international companies. For anoutline of the other major national producers, see box 2. For an overview of theother major international players, see next section on New Joint VenturesInvolving Foreign Groups.

Box 2: Brazil less known Sugar/Ethanol Giants

A few relatively unknown producing groups in Brazil have a cane crushing capacity of 10 mln tonnesof cane or more. Three groups Usacucar, Alto Alegre and Carlos Lyra, deserve particular attentionas they all have cane crushing capacities exceeding 15 mln tonnes. Usacucar has 9 mills, 2 greenfieldprojects and control a significant part of the output in the sugar belt in northwestern Paran, a topcane producer after northwest So Paulo and southwest Minas Gerais. Group Carlos Lyra has 5 mills,3 of which in the North-Northeast and 2 in Minas Gerais in the Centre-South, crushing 15.2 mlntonnes of cane in 2010/11. Alto Alegre has 3 mills in the northwest of Parana and 2 mills in theadjacent southwestern part of Sao Paulo state.

GroupNumberof Mills Name of Mills Cane Crush

Usacucar

9

Terra Rica-Santo Antonio do Caiua-Paranacity-Iguatemi-Ivate-Rondon-Cidade

Gaucha-Sao Tome-Tapejara 16.1 mln tonnesAltoalegre

5Junqueira- Floresta-Santo Inacio-Florestopolis-Central 15.5 mln tonnes

Carlos Lyra5

Caete-Marituba--Volta Grande- Delta -Cachoeira 15.2 mln tonnes

Zilor 3 Barra Grande-Quata-Sao Jose 10.8 mln tonnes

Tercio Wanderley3

Campo Florido-Limeira do Oeste-Iturama-Coruripe 11.2 mln tonnes

Zilor 3 Barra Grande-Quata-Sao Jose 10.8 mln tonnesGVO 4 Catanduva-Itapira-Jose Bonifacio-Moncoes 10.0 mln tonnes


20/50



The New Joint Ventures Involving Foreign Groups

International groups are today among the top producers in the country, with a25% share in production, up from zero twelve years ago and 12% in 2008/09 for a historical survey on FDI in Brazils sector, see MECAS (07)06on Cross-Border Investments in the World Sugar Industryand MECAS (09)06on Outlookon Brazils Competitiveness in Sugar and Ethanol. Whilst the period between2006 and 2009 saw the largest influx of foreign direct investment in greenfieldfacilities, reacting to the fast growing domestic and international markets forsugar and ethanol, more recently FDI has been linked to the acquisition ofproduction of scale and brownfield mills. In many regions, a single group nowcontrols a cluster of 3 to 4 factories in the same municipality, making it easier tomanage cane logistics.

Today 16 foreign companies have significant shareholding in Brazils mills: Frenchcompanies Tereos and Louis Dreyfus; Argentine/US Adecoagro, BP, InversionesManuelita of Colombia, Shell, Pantaleon Sugar Holdings of Guatemala, Spanish-based Abengoa, Indias Shree Renuka, US based Bunge, Glencore, ADM andCargill; China Noble, Norways UMOE and Japanese Sojitz. These companies havebeen aggressively buying stakes in the countrys sector over the past few years.Bunge and Noble, which up to three years ago had only one mill each in Brazil,have now a respective 9 and 4 mills. BP now controls 4 mills (1 being greenfield)compared to only one greenfield project three years ago. Cargill, Adecoagro,

Louis Dreyfus and Sojitz are heavily investing in further expansion. Indias ShreeRenuka entered the sector in late 2009 with a quick 2-step acquisition of 4 millsand is now seeking new partners.10See Appendix for a comprehensive listing ofestimated assets, including estimated cane/sugar/ethanol production, pertainingto international companies in Brazil.

There are however barriers to further growth in mergers and acquisitions in thesector. One new restriction is coming from bankrupt mills, affected by the creditcrunch, which are awaiting judicial proceedings with its creditors. For example,there is a current impasse regarding the sale of Albertina mill to LDC SEV group,blocked by outstanding debt with Cosan. This mill was the first one to file for

bankruptcy in November 2008 in the wake of the Lehman Brothers collapse. Asindicated earlier, another 25 mills are unlikely to operate in 2012/13 due tosimilar financial-related difficulties.

10Press reports last year announced that Shree Renuka had signed a partnership agreement withSingapore-listed trading house Olam to seek new acquisitions in the country.


21/50



Of importance, 2010 saw the reinterpretation by the Brazilian judiciary system ofa 1971 law regarding land ownership by foreign groups in Brazil. This has in

practice brought a new cap on the amount of land that can be controlled byforeigners. A new law is set to be approved by Parliament, but in the meantimeuncertainties remain. This may have contributed to the recent slowdown inmergers and acquisitions in the sector. While 26 mergers and acquisitions tookplace in the Brazilian sugar industry in 2010, this has fallen to 15 last year.

According to UNICA, restrictions on foreign companies buying Brazilian farmlandwill deprive the agricultural sector of much needed investment of up to BRL100bln over the next few years. At present, foreign-controlled companies cannotown more than 25% of land in any municipality.

But it is not only foreign groups that have been taking an active role in mergers

and acquisitions. Some national groups have bought back shares from foreigncompanies, aided with capital raised from larger-scale operations and the highersugar/ethanol prices. One example is So Martinho, which bought back the 10%shareholding that Mitsubishi Coporation had acquired in the Boa Vista mill. GroupHumus Agroterra also bought the Vertente mill from Moema group when thiswas being taken over by Bunge. Nevertheless, in 2010, Humus sold 50% of itsshares in Vertente mill to Guarani.

Moreover, the bigger Brazilian producers have been also looking for investmentopportunities abroad. Cosan early last year bought the UK assets of Comma Oiland Chemicals, a subsidiary of Essex Petroleum Company responsible fordistributing and exporting ExxonMobil lubricants. Copersucar, thecommercial/marketing arm of 48 Brazilian sugar/ethanol mills in So Paulo, MinasGerais, Paran and Gois, has recently set up a 50/50 joint venture in Dubaicalled Copa Shipping to operate as an international trader of sugar. The companyis also negotiating a joint venture in Hong Kong, its first direct presence in Asia,eyeing rising sugar import demand from China. Odebrecht is set to become oneof the first new foreign groups to invest in sugar/ethanol production in Cuba. Thecompany has signed an agreement with a Cienfuegos mill to revamp productionfacilities over the next ten years. Odebrecht also intends to produce ethanol byconstructing a new distillery in Cuba. Odebrecht is also a shareholder, alongside

Sonangol and Damer, in a sugar mill opened last year in Angola, called Biocom.

Split to Sugar and Ethanol

As mentioned in the first section, Brazils cane output allocated to sugarproduction has varied between 41% and 52% over the recent years. While thebulk of ethanol output is for the domestic market, only a third of sugar output isconsumed in the domestic market, with the balance exported, largely as VHP(high quality raw sugar). Table 12 shows the historical share of ATR (canesugars) allocated to the production of white and raw (VHP) sugar in So Paulo


22/50



state, as well as the shares going for hydrous and anhydrous ethanol andethanol for industrial purposes. The share of cane allocated to VHP sugar

exports has increased from 23% in 2004/05 to over 30% in 2011/12. Of interest,the share of cane going to ethanol for exports has collapsed from over 10% onaverage between 2006/07 and 2008/09 to less than 5% in the past two seasons.Furthermore, since 2009 there has been a rapid decline in the share of caneallocated to hydrous ethanol, which powers flexifuel cars (which can run onhydrous ethanol, gasohol, which contains anhydrous ethanol, or any combinationof the two). This is despite a big rise in the total number of flexifuel carscirculating in Brazil, from 10 mln in 2009 to over 15 mln currently.

The falling ethanol output marks a reversal in the previous trend, which showedethanol production gaining market share. With a lower cane crop last season,

producers decided to increase sugar allocation as this was more remunerative.

Table 12- So Paulo State - ATR Product Mix (in %)

2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Domestic Sugar 15.73 16.32 15.49 14.04 11.68 12.10 11.07 11.15

White sugar exports 12.63 10.35 9.60 8.29 7.16 7.37 8.07 8.08

VHP sugar exports 23.11 23.70 27.22 24.33 22.88 26.86 29.02 30.09

Sugar Exports 35.74 34.05 36.82 32.62 30.04 34.23 37.09 38.17

Anhydrous fuel ethanol 24.81 22.99 12.97 15.1 14.36 12.82 15.28 17.26

Hydrous fuel ethanol 12.88 17.18 20.39 26.35 29.99 31.48 29.40 26.28

Anhydrous industrial ethanol 0.52 0.50 0.60 0.88 0.81 0.76 0.70 0.62

Hydrous industrial ethanol 1.56 1.45 1.47 1.77 1.67 1.72 2.03 2.36

Domestic Ethanol 39.77 42.12 35.43 44.1 46.83 46.78 47.41 46.52

Anhydrous ethanol exports 3.16 2.28 9.00 4.72 6.79 2.39 1.86 1.94

Hydrous ethanol exports 5.6 5.23 3.46 4.52 4.66 4.51 2.58 1.95

Ethanol exports 8.76 7.51 12.46 9.24 11.45 6.90 4.44 3.89

Total 100 100 100 100 100 100 100 100

Fig 2 shows that up to late 2008 the domestic price of hydrous ethanol (ex-mill)in Brazil was on a par level with both the domestic and the international sugarprice. Since then, both the world as well as the domestic sugar price have oftenbeen trading at a significant premium of at least 10 cents/lb or USD 220/tonne todomestic ethanol prices. The industry has responded to the new price differentialby cutting ethanol output by 4 bln litres last season. This has worried the


23/50



government, which is now working on a long-term ethanol distribution strategy see Government Policysection for details.

Fig. 2 - Ethanol vs sugar prices in Brazil, on a cents/lb

equivalent basis

0

5

1015

20

25

30

35

40

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

US

D

cents/lb

World Sugar Price

Crystal sugar - domestic prices

Hydrous ethanol price

Source: Cepea

The Dilemma Facing the Local Ethanol Market

Brazils total ethanol consumption has been falling over the past couple of years,after reaching a peak of 23.92 bln litres in 2009, of which 22.5 were fuel ethanol

see table 13. Much of the ethanol demand destruction is blamed on petrol(whose prices have been fixed by Petrobras for 6 years) regainingcompetitiveness against hydrous ethanol, whose prices have since mid 2009risen partly mirroring the higher sugar prices. When the hydrous ethanol price isover 70% the price of gasohol, then hydrous ethanol stops being cost effectivedue to its lower energy content. As a result, price-responsive flexifuel motorists

have been switching back to gasohol use. Brazils domestic hydrous ethanolconsumption is estimated to have fallen to 12.50 bln litres in 2011/12, downfrom 14.50 bln litres in 2010/11 and 15.56 bln litres in 2009/10. Anhydrousethanol, which is blended with petrol at ratios that vary from 19% to 25% toform gasohol, has seen a modest demand recovery, but this is howeverinsufficient to compensate the large drop in hydrous consumption.


24/50



Table 13 - BRAZIL Ethanol Production, Import, Export, Consumption and Stocks

(bln litres)

Year Production Imports Exports Net trade Fuel Industrial Total EndingConsumption Consumption Consumption Stocks

2006 17.714 0.000 3.429 3.429 12.699 1.23 13.924 3.644

2007 22.243 0.000 3.533 3.533 16.204 1.30 17.503 4.851

2008 27.095 0.000 5.124 5.124 19.962 1.35 21.312 5.510

2009 25.323 0.004 3.296 3.292 22.523 1.40 23.923 3.617

2010 27.970 0.076 1.953 1.877 21.951 1.55 23.501 6.208

2011(p) 23.000 1.150 1.965 0.815 20.500 1.80 22.300 6.093Source: ISO Ethanol Yearbook

Table 14 shows that the hydrous ethanol/gasohol price ratio at the pump hasremained above 70% since December 2010. In other words, hydrous ethanolprices have over the past couple of years reached a ceiling in the Braziliandomestic market and demand has turned sluggish.

Table 14 - BRAZIL Hydrous Ethanol/ GasoholRetail Pump Price Ratio

2006 2007 2008 2009 2010 2011 2012

Jan 69% 63% 60% 60% 74% 70% 74%

Feb 70% 63% 59% 61% 76% 71% 72%

Mar 76% 63% 59% 60% 71% 78% 73%

Apr 77% 66% 59% 59% 66% 80%

May 69% 66% 59% 58% 63% 71%

Jun 63% 60% 59% 56% 61% 91%

Jul 63% 56% 59% 57% 61% 71%

Aug 64% 55% 59% 58% 62% 71%

Sep 62% 54% 59% 60% 63% 73%

Oct 60% 53% 60% 65% 66% 73%

Nov 59% 56% 60% 67% 68% 74%

Dec 59% 59% 60% 68% 70% 73%Source: ISO Ethanol Yearbook

The conclusion is that Brazil currently has a sugar/ethanol/petrol price dilemma.While ethanol prices are today relatively high compared to petrol, they arecurrently lagging sugar prices by a high margin. With sugar prices commanding aprice premium, producers do not have the necessary market signals to boostethanol output further. With lower ethanol supply, Brazils net ethanol exportsare estimated to have slumped to a multiple-year low of 0.815 bln litres in 2011.


25/50



Government Policy and Taxation

Traditional government policy response to generally firm ethanol prices has beento temporarily reduce the blend of anhydrous ethanol in petrol. This happenedlast October when the blend was reduced to 20% - see table 15. However theblend reduction means Brazil has now to increase imports of gasoline, which isnot a welcome outcome as world crude oil prices have been high. Raising thedomestic petrol price has been suggested as one alternative but the governmentremains fearful of its impact on inflation.

Table 15 BRAZIL Mandated Ethanol Blend Ratio in Gasoline

2004 2005 2006 2007 2008 2009 2010 2011

Jan 25% 25% 25% 23% 25% 25% 25% 25%Feb 25% 25% 25% 23% 25% 25% 20% 25%Mar 25% 25% 20% 23% 25% 25% 20% 25%Apr 25% 25% 20% 23% 25% 25% 20% 25%May 25% 25% 20% 23% 25% 25% 25% 25%Jun 25% 25% 20% 23%-25% 25% 25% 25% 25%Jul 25% 25% 20% 25% 25% 25% 25% 25%Aug 25% 25% 20% 25% 25% 25% 25% 25%Sep 25% 25% 20% 25% 25% 25% 25% 25%Oct 25% 25% 20% 25% 25% 25% 25% 20%Nov 25% 25% 20%-23% 25% 25% 25% 25% 20%

Dec 25% 25% 23% 25% 25% 25% 25% 20%Two figures indicate ratio varied within a rangeSource: ISO Ethanol Yearbook

Therefore the government has concluded that the only long-term solution to thedilemma is to intervene more forcefully in the ethanol market by boostingethanol supplies. The policies may include the provision of loans of up to BRL100 bln to the sector over the next decade. According to UNICA calculations, theBrazilian sugar industry would need BRL 156 bln to double sugarcane productionfrom around 600 mln tonnes currently to 1.2 bln tonnes in 2020, based on anadditional 120 new mills.11The key issue is that, while the government is seekingto earmark these loans for cane used for ethanol production only and not sugar,the industry argues that the future lies with the further development of flexiblesugar/ethanol production capacity. During years of surplus/deficit in the worldmarket, the industry would want to be free to switch production to or away fromsugar responding to price dynamics.

11 see part 5 of the paper for the ISO assessment on Brazils sugar/ethanol demand outlook


26/50



In practice, the government has been looking to foment most of the loansthrough its bank development agency, the BNDES, which has a loan balance

sheet that is allegedly four times larger than the World Bank. In January, BNDESreleased a financial stimulus package to boost the renovation of Brazils ageingcane fields the Prorenova with loan resources of a total of BRL 4 bln for 2012calendar year at an annual interest rate of around 8%. This measure came priorto the release of a broader national working plan targeting an increase caneareas from the current 9 mln hectares to over 14 mln hectares. This is likely tobe part of a programme called the Strategic Plan for the Sucro-energy Sector,estimated to be completed in April 2012.

On another front, there is a project to finance the stocking of ethanol throughthe National Monetary Council, the Conselho Monetrio Nacional (CMN). A long-

term policy of financing stocks of ethanol is something that has been envisagedfor several years but has failed to take shape. The programme of ethanol stockfinancing may involve up to BRL 4.5 bln at an annual rate of interest of 8.7%,which is still somewhat lower than the current Central Bank base rate of 9.75%.From April 2012, Brazil will require that ethanol distributors present advancecontracts of 70% of the total expected sales for the season.

Another front of possible further government policy action is on ethanol taxation.The industry argues that over the past ten years the government has on balanceprovided more tax relief for gasoline than for ethanol. According to UNICA, in2002, the Cide tax (sales tax) on petrol represented 14% of the pump pricewhilst this has reduced gradually to a low of only 2.7% today. Overall taxation onpetrol amounts to 35% today, down from 47% ten years ago, while overalltaxation on ethanol amounts to 31%, practically unchanged from 10 years ago.The industry argues that this would be the right time to cut ethanol taxation,particularly the value-added tax or ICMS, which still varies hugely from state tostate. One step forward has been reached with the reduction in the ICMS tax onethanol in the state of Minas Gerais from 22% to 19% as from January this year.In So Paulo, the countrys largest producer, the ICMS tax on ethanol is 12%,while in Paran it is 18%. These compares to ICMS taxes on gasoline at 27%,25% and 26% for Minas Gerais, So Paulo and Paran, respectively. In Gois,

the other top 4 producing state, the ICMS taxation on gasoline and ethanol iscurrently at a respectively 29% and 22%. Of interest, imported anhydrousethanol has been exempt of ICMS since 1st October 2011, as the country hasrelied on a record volume of seasonal ethanol imports. Last year, Brazil importedover 1.1 bln litres of ethanol, mainly from the United States, compared to only 75mln litres in 2010.

Small direct production subsidies programmes for Brazils sugar/ethanol supplyexist only in the North-Northeast region, where small to medium growers receivea grant of BRL 5 per tonne of cane up to a maximum of 10 thousand tonnes in


27/50



order to compensate for the regions higher production costs, arising from amore unfavourable topography. In 2011, the total subsidies to the sector in the

North-Northeast region amounted to BRL 58 mln. The region has also beenstruggling with high debt as a consequence of fast rising production costs.According to the press, millers in the state of Pernambuco owe around BRL 15mln of payments to independent cane growers. Over the past 3 years, thegovernment of Pernambuco has been handing out over 5 thousand tonnes offertilizers to small-scale growers, using the sugar/ethanol mills as distributionpoints.

Part 4: Drivers of Brazils Competitiveness in the

World MarketIn the last ISO paper on Brazil, MECAS (09)06, five major drivers of Brazilscompetitiveness in the world sugar/ethanol market were assessed: productioncosts, infrastructure and logistics, currency movements, ocean freight rates andthe world ethanol market conditions. Has Brazil gained or lost competitiveness asa result of changes in these drivers over the past couple of years? In 3 out ofthese 5 drivers, Brazil has lost some ground compared to other leadingexporters. However, on international demand for its sugar exports, as well as ona sixth driver, diversification into other co-products such as cogeneration andbiochemicals from sugarcane, Brazil has made positive strides, consolidating its

degree of market competitiveness.

Production Costs

Sugar production costs ex-mill have risen sharply over the past few years, in linewith the sharp rise in cane production costs as highlighted earlier in the paper. Inits assessment of Brazils 2011/12 sugar production costs, PECEGE/CNAestimates sugar production costs in Brazils traditional sugarcane belt to haverisen by as much as 20% to a record 19.56 cents/lb (BRL 776/tonne or USD431/tonne) for VHP sugar and 21.78 cents/lb (BRL 819/tonne or USD 480/tonne)

for white sugar. Ethanol production costs, on a sugar equivalent basis, areestimated to have reached 19.79 cents/lb for anhydrous and 18.03 cents/lb forhydrous. PECEGE/CNA estimates however that the differential between sugarmarket prices and production costs was positive for the second year in a row,while in the three seasons between 2007/08 and 2009/10 production costsexceeded remuneration (recall that for sugar cane the average market price onlyovertook the production cost in the 2011/12 season).12

12Pecege/CNA, Custos de Produo de Cana-de Acar, Acar e Etanol no Brasil:Acompanhamento da Safra 2011/12, February 2012, ISSN 2177-4358.


28/50



In principle, significantly higher production costs should translate into losses inworld competitiveness for Brazil when it comes to export markets. No studies

comparing nominal sugar production costs across countries are in the publicdomain. Nevertheless, LMC, a consultancy specializing in cross-countryproduction cost comparison, has recently established that Brazils costcompetitiveness has narrowed substantially and that opportunities for investmentmay now lie elsewhere.13The consultancy puts Brazils fob sugar productioncosts at 21 cents/lb in 2011/12, significantly up from only 14 cent/lb in 2009/10.The consultancy estimates that Brazils cost advantage as against other majorexporters, such as Thailand, Australia, Colombia and South Africa, has slippedfrom about USD 80/tonne in the middle of the past decade to USD 30/tonne overthe past 3 seasons. Barriers to entry constitute a major obstacle, withrequirement investments to erect a new mill exceeding USD 150 mln.

It is unclear whether production costs will continue to rise in Brazil at the paceseen over the past few seasons. With an expected recovery in cane yields andwith further gains to be achieved once full harvest mechanization is in place in afew years time, production costs could stabilize. Although labour costs areexpected to continue to rise in line with GDP growth, there is much potential forgains in labour productivity. Production costs are also a function of currencymovements see later section on Exchange Rate Competitivenessfor moredetails.

Infrastructure and Trade Logistics

Brazil has advanced in infra-structure and logistics over the past couple of years.In 2010, the country faced a serious bottleneck in sugar shipments, with thepress reporting queues of up to 100 vessels waiting to load sugar at Santos port.This problem was somewhat less pronounced last year, partly due to an overalllower volume of exports as a result of a smaller crush, although queuingproblems of up to 80 vessels were still reported. Recent infrastructure work, suchas a new Rumo Logisticsship loading roof to allow vessel loading to beunaffected by rainfall, should ameliorate the queuing problem in future.

A major recent development has been the March 2012 opening of a new sugarrail terminal in Ribeiro Preto. This will allow the transport of 1.5 mln tonnessugar a year from Brazils main producing region to the port of Santos, by railand in only 10 hours already from 2012/13, saving significant time on theprevious 2-3 day journey of lorry transport by highway.

13 Todd, Martin, Cost of Production Key to Success, Proceedings of ISO 20th Jubilee Seminar,November 2011.


29/50



Furthermore, planned investments in the Port of Santos should increasecontainer loading capacity to 8 mln TEUs from todays 3.2 mln TEUs. Odebrecht

and Coimex are investing in brand new terminals at Santos. Codesp (Santos portauthority) is investing BRL 200 mln for an upgrade of the terminal used byCopersucar and Cosan. Copersucar is soon upgrading its export terminal, withcurrent capacity from 5.5 mln tonnes, to 7.5 mln tonnes. On the ethanol front,investment in pipeline infra-structure is consolidating three existing projects intoone and is being led by Logum (of which Raizen, Copersucar, Petrobras andothers are shareholders), with the construction of a network of ethanol pipelinesin Brazil for the transport of 23 bln litres, linking the state of Gois with theSouth-East coast.

Furthermore, a hydroway (Tiet-Paran river) to aid ethanol transport in western

So Paulo state is being developed. In January 2012, ALL logistics hasinaugurated a railway to transport ethanol from the mill cluster in Mato Grossodo Sul to the state capital, Campo Grande.

International Demand for Brazilian Sugar

While investments in transport infrastructure are being made, growinginternational demand for sugar has continued to support the outlook forproduction growth in Brazil. Brazil exported a record 28.6 mln tonnes of sugar,raw value, in 2010, up from an average of only 17 mln tonnes in the middle of

the past decade.Only a few years ago, a crucial variable determining Brazils exports was oceanfreight rates. As of mid 2008, shipping white sugar in bags to Indonesia fromBrazil commanded a premium of USD 100/tonne over white sugar from Thailand.This freight premium has now fallen to only USD 60/tonne see fig. 3. Whenexpressed as a percentage of the world white sugar price, the drop in the freightpremium is even higher, from 25% of the world market price in August 2008, toless than 10% in February 2012.


30/50



Fig. 3 - Bagged White Sugar Freight to Indonesia by Origin, 14k

t vessel, USD/tonne

0

20

40

60

80

100

120

140

160

18/08/2008

18/08/2009

18/08/2010

18/08/2011

BRAZIL

THAILAND

Similarly, the relative cost of shipping raw sugar in a 40 thousand tonne vesselhas declined over the past few years. As late as mid 2008, the freight forBrazilian bulk raw sugar to Iran, for example, commanded a premium of USD60/tonne over raw sugar from Thailand. This freight premium has now fallen toonly USD20/tonne see fig. 4. When expressed as a percentage of the world

raw sugar market price, the freight premium has dropped further from around20% in mid 2008 to only 4% as of February 2012.

Fig. 4 - Bulk Raw Sugar Freight to Iran by Origin, 40k t

Vessel, in USD/tonne

0

20

4060

80

100

120

140

18/08/2008

18/08/2009

18/08/2010

18/08/2011

BRAZIL

THAILAND


31/50



The fact that it has become cheaper for Brazil to ship sugar to Asia relative toother countries has diversified the pool of destinations for Brazils sugar exports.

According to ISO statistics, back in the middle of the past decade, only Russiaimported more than 1 mln tonnes from Brazil. In 2010, 8 countries have done so see table 16. In particular, exports to countries such as Iran, China, the EU andIndonesia have boomed over recent years. Preliminary data from the Ministry of

Agriculture for 2011 confirm this trend, showing 9 countries importing more than1 mln tonnes from Brazil, with exports to China alone, Brazils new main exportdestination, exceeding 2 mln tonnes.

Table 16- BRAZIL - Exports by Country of Destination

Country of Destination 2004 2005 2006 2007 2008 2009 2010

Raw Sugar

Russian Fed. 3,287,719 3,995,824 4,498,224 4,304,599 4,451,955 2,761,021 3,464,945

India 865,865 1,329,927 7,763 0 165,212 4,139,854 2,093,123

Iran 80,000 294,574 996,959 1,061,756 467,853 474,661 1,540,384

China 0 0 193,064 50,955 76,690 263,060 1,237,005

Algeria 627,227 579,030 698,865 820,200 738,511 935,356 1,186,024

EU 106,057 151,698 64,923 372,443 552,145 355,325 1,128,709

Indonesia 0 89,705 122,153 91,818 130,100 585,244 1,092,060

Egypt, Arab Rep. 826,504 535,788 969,941 709,566 1,180,541 676,713 1,074,218

Saudi Arabia 603,921 862,240 792,737 1,109,878 598,228 509,822 968,994

Bangladesh 0 11,540 410,384 425,230 529,106 1,284,785 897,871

Malaysia 243,086 386,190 1,155,084 920,845 684,461 782,783 868,230

Venezuela 0 508 144,607 274,766 355,812 415,187 781,885

Morocco 528,007 516,100 570,688 526,542 550,360 833,894 774,063

Canada 646,984 756,903 778,777 868,493 830,076 890,816 699,884

Syrian Arab Rep. 103,498 70,945 91,859 118,700 579,528 374,278 611,444

Nigeria 548,815 852,880 908,723 843,984 1,022,853 1,003,565 579,857

United Arab Emirates 0 667,260 884,796 975,626 313,980 1,151,578 468,606

Others 2,379,026 1,400,075 1,046,643 898,426 873,788 967,286 1,460,935

Total Raw Sugar 10,846,709 12,501,187 14,336,190 14,373,827 14,101,199 18,405,228 20,928,237

White Sugar

United Arab Emirates 0 443,362 389,348 383,093 312,999 725,130 1,141,049

Yemen Republic 288,405 477,227 558,393 264,200 307,300 609,060 639,556

Pakistan 12,194 202,935 107,419 3,986 4,248 83,007 467,022

Ghana 458,981 479,588 295,345 415,564 466,477 289,602 454,565

Syrian Arab Rep. 413,511 364,445 269,789 285,234 176,004 262,320 431,032

Nigeria 739,519 468,456 257,409 341,983 383,368 275,459 430,024

Saudi Arabia 0 0 0 0 706,544 543,272 328,044

Others 3,535,409 3,462,039 3,316,695 4,461,977 3,685,076 3,794,852 3,784,133

Total White Sugar 5,448,019 5,898,052 5,194,398 6,156,037 6,042,016 6,582,702 7,675,425

Total Sugar Exports 16,294,728 18,399,239 19,530,588 20,529,864 20,143,215 24,987,930 28,603,662

Source: ISO Sugar Yearbook


32/50



Table 17 shows a snapshot of the sugar vessel line-up by type of sugar andcategory of buyers/sellers leaving Santos port in September 2011. Over 80% of

sugar exports were VHP. Sugar producers are the majority of direct sellers at theport with traders constituting the majority of buyers.

Table 17 Sugar Vessel line-up from Brazil's Santos Port - September 2011

Seller Buyer DestinationType ofSugar

Quantitytraded('000tonnes)

ShareinTrade

SugarProducer

SugarRefinery United Arab Emirates VHP 148 7.91%

China, Canada, Black Sea,Nigeria, Tunisia,

Bangladesh, India, Algeria,Morocco, Indonesia,United Arab Emirates,Saudi Arabia, South Korea,Spain, Egypt, Venezuela,Malaysia, VHP 1,227 65.61%

SugarProducer

SugarTrader

Ghana, Black Sea, Nigeria,Ivory Coast, Bangladesh

Othertypes 126 6.73%

Sugar

Trader

Sugar

Trader

Bulgaria, US, Venezuela,China VHP 243 12.99%

South Africa, South Korea,Ghana, Colombia,

Venezuela, China, Yemen,Tunisia, Nigeria

Othertypes 126 6.75%

Total 1,870 100%

Source: Datagro/ISO

Exchange Rate Competitiveness

Currency movements are today a major driver affecting Brazils competitivenessin world markets. Over the past decade, the Brazilian currency has appreciated

significantly to the US Dollar, reversing a previous trend that ended in 2003. Atthe time, much of Brazils fast rising competitiveness in world sugar exports wasattributed to the weak Real (BRL)- see MECAS (03)18 on Exchange Rates andthe World Sugar Market. Today, the exchange rate of BRL 1.7 to USD 1 is a farcry from the lows of BRL 4 to USD 1 recorded in late 2002. Last July the BRLreached a 12 and year high against the USD at BRL 1.56.

The analysis of the impact of currency movements on a countrys sugar exportcompetitiveness is naturally highly sensitive to the chosen time frame. Between

August 2006 to August 2011, the BRL has appreciated by 26% in relation to the


33/50



USD. As a result, while world sugar prices expressed in USD doubled in theperiod, when expressed in BRL they rose by only 50%.

Between 2007 and early 2012, currency movements have mitigated the higherworld sugar market prices for exporters from Thailand, Brazil and Australia,whose exchange rates have appreciated by between 9% and 21% see Fig. 5.By contrast, the INR and the ZAR have weakened, giving sugar exporters fromIndia and South Africa exchange rate competitiveness relative to other majorplayers. A continued relative strength of the currencies of Brazil, Thailand and

Australia, the worlds top 3 exporters in the recent years, is one of the factorssustaining the relatively higher world market prices expressed in USD.

Fig. 5 - USD Exchange Rate Movements inSugar Exporting Countries

0.70

0.80

0.90

1.00

1.10

1.20

1.30

2007

2008

2009

2010

2011

2012(Jan/Feb)

Index(1=2007)

IndiaSouth AfricaEuropean Union (EUR)GuatemalaSugar Weighted exchange rateThailandBrazil

Australia

The World Fuel Ethanol Market

The world fuel ethanol market has lost its shine over the past few years. Worldproduction contracted by 1% in 2011 to 84.4 bln litres, mainly due to Brazilsproduction slump. Production is expected to recover somewhat in 2012. Globalannual production growth averaged over 10% until 2010. World trade peaked in2008, with Brazil providing then over 90% of fuel ethanol exports. Since thenBrazil has decreased its share in world ethanol exports while the United States


34/50

Market Evaluation Consumption and The Outlook of Sugar and Ethanol Production in Brazil

Statistics Commitee


has increased its market share for more details see Ethanol Section in theQMO- MECAS(12)02. Brazils net exports collapsed to less than 1 bln litres in 2011 and

are unlikely to rise significantly this year. Brazils ethanol export price, which rosein the past years to partly mirror the sugar price rise, has caused import demandto slump. This is a major reversal of fortune for Brazil, which until recently wasthe worlds largest exporter of ethanol. In 2011 the US took over this role,although export availability from the US is set to fall this year.

Longer term, global trade is expected to rebound. Global fuel ethanolconsumption could resume growth should declared government biofuel policiesworldwide be implemented in full. With this would come the chance for Brazil toregain its position as the leading supplier, with ethanol exports potentiallymatching the record of 5 bln litres seen in 2008 by the end of the decade.

Cogeneration

Much of the recent upgrade in Brazilian mills competitiveness has been centred

around maximising income streams from sugarcane byproducts. According to thegovernment energy research company EPE, Brazil is expected to double powerproduction from bagasse biomass over the next 10 years. Current cogenerationcapacity from sugarcane biomass of 4.5GW would more than double to 9.2GWby the end of this decade under the plan.

Cogeneration will remain a future key to economic profitability. ETH, Brazilsfastest growing producer, has set up state-of-the-art cogeneration facilities in allof its operating mills. Much of the produced bioelectricity has been sold toschemes outside the government-arranged auctions.

Box 3: Can Brazil diversify its ethanol supply base?

Given the ethanol shortage of the past couple of years, new attempts have been made to produce ethanol

from sources other than cane. In Rio Grande do Sul state, two pilot plants in the towns of Sao Borja andCamaqua are producing ethanol from rice. In Campos de Julio in the state of Mato Grosso, a flex-plant thatcan make ethanol from either cane or corn has started up, enabling it to be operative in the cane off-season

using corn as feedstock. This year it has made its first production of 90,000 litres of corn ethanol, althoughthe production cost of BRL 1.23/litre is still higher than the cost of BRL 1.10/litre to make ethanol fromcane. The factory is seeking to expand production of corn ethanol to 120 thousand litres a day. Embrapahas been testing the feasibility of large-scale ethanol production using sweet sorghum as feedstock in Mato

Grosso, with the first results due next May. While sweet sorghum is seen as low yielding compared to cane,its natural advantages are the significantly short plant growing period 120 days and the fact that it couldbe planted where cane growing is currently prohibited by government zoning. Last year the Cerradinho mill

in Catanduva (Noble) produced 1.5 mln litres of ethanol using sweet sorghum as feedstock. The trials arepart of a joint project led by Monsanto/CanaVialis, which since 2004 research sweet sorghum as a bioenergyraw material. The conclusion is that, whilst new projects with alternative feedstocks are becomingcommercial, they will not challenge the dominance of sugar cane as Brazils main ethanol supply base.


35/50


Statistics Commitee


In August, Brazil's main electric energy auction contracted only six plants

powered by sugarcane bagasse to sell 327MW of energy, as all of the remainingcontracts (861 MW) have been awarded to wind power. Wind power currentlyfaces fewer obstacles in terms of accessing the national grid. Prices of energysold during the August government-organized auction for new power capacity fellto about BRL100 a megawatt-hour (USD 0.06/KWh), from BRL144 in August2010. That's about a third less than companies need to build the power plantsthat typically run cane mills.

Brazils next nationwide government-held electricity auction has been postponedto 28thJune from an initial scheduled date of 22ndMarch. According to UNICA,the per unit price ceiling has been set at too low a level to generate meaningful

interest from the sugarcane industry in the country. The new price ceiling, at BRL0.112/KWh (USD 0.063/KWh), is 20% lower than last years. The next electricityauction has the objective to arrange long-term supply contracts for 20 to 30years starting on 1st January of 2015. 22 projects amounting to 1,042 MW ofcogeneration capacity from sugarcane have registered for the coming auction,but this represents only 4% of the total, as the bulk of the interest has againcome from the wind power sector, at 51% of the registered interest.

Biochemicals and Other Technologies

The ISO estimates that production of ethanol for bioplastics and biochemicals isto rise to 4 bln litres in Brazil by the end of the decade. This is more than 3 timesthe current level, reflecting booming interest in demand.

Braskem has been operating a 200,000 tonne bioethylene plant since August2010 in Triunfo, Brazil, that uses sugarcane ethanol as its feedstock. The plantwas the first commercial-scale green ethylene plant in the world. The producedethylene is converted into equivalent polyethylene (PE) resin or green plastic.In late 2011, Braskem entered an agreement with German bioplastics companyFKuR to process Braskem bioethylene into polyethylene compounds to bemarketed in Europe.

At its bioplastics Triunfo factory, Braskem consumes up to 570 million litres ofethanol a year. The ethanol used as feedstock is initially being sourced frommajor Brazilian producers in the Minas Gerais, Paran and So Paulo states. Theethanol is transported from these states by water and rail, and a small portion byroad.

Meanwhile, Dow Chemical announced in November 2011 that Dow and Mitsui &Co., Ltd., of Tokyo, Japan, have secured all necessary governmental regulatoryapprovals and completed the formation of a previously announced 50:50 joint


36/50


Statistics Commitee


venture in Brazil, making Mitsui a 50% equity interest partner in Dows operationin Santa Vitria, Minas Gerais, Brazil. The initial scope of the joint venture

includes production of sugar cane-derived ethanol to be later used for productionof polyethylene for bioplastics.

Production of bioplastics other than ethylene is also a reality in a few othersugar/ethanol mills in Brazil. Sugarcane can also be used as a direct feedstockrather than ethanol. One example is the current production of PHA(polyhydroxyalkanoates) from sugarcane by Balbo Group in Brazil.

On other biochemicals, BioAmber Incorp. is working with Tereos to study thefeasibility of two possible facilities that would produce crystalline bio-succinic acidand/or bio-based 1,4 BDO (butanediol) in Brazil. The company expects to provide

bio-succinic acid and bio-based 1,4 BDO proprietary technologies, while Tereosexpects to provide long-term sugar cane biomass feedstock supply, utilities,available infrastructure and shared services.

Part 5: Brazils Sugar/Ethanol Supply and Exports to2020 and Outlook

Ethanol Demand/Supply to 2020

Estimating domestic demand for ethanol in Brazil remains crucial to forecastingBrazils sugar/ethanol demand and supply to 2020. Since 2007, over 50% ofBrazils cane output has been allocated to ethanol production. What is theoutlook for domestic demand for fuel ethanol to 2020 and how is this likely toaffect the cane allocation to ethanol compared to sugar?

Most of Brazils light vehicle fleet will be powered with flexifuel engines by theend of the decade. Today, approximately only half of the countrys total gasolinedemand comes from flexifuel cars, with the balance coming from cars whoseengines can only take gasohol. By 2020, the vast bulk of Brazils gasoline

demand will come from flexifuel cars since their share in the countrys total lightvehicle fleet will rise to close to 90%. There are today around 15 mln cars withflexifuel engines running in the country, a figure that is likely to rise to as manyas 40 mln by 2020.

Between 2006 and 2009, around 75% of all flexifuel cars ran on hydrousethanol, a share that declined to 48% in 2010 and further to 35% last year. TheISO projects that the number of flexifuel cars that will be running purely onhydrous ethanol will rise from todays 6 mln to 8.5 mln cars by 2020. This stillmeans, nevertheless, that the share of total flexifuel cars using hydrous ethanol


37/50

8/10/2019 MECAS(12)05 - Outlook of Sugar and

mecas(12)05 - outlook of sugar and ethanol production in brazil - english

Documents