A New Phase for Ethanol

One cannot say that ethanol produced from sugarcane is close to becoming a commodity; however a major obstacle to achieving this objective was removed with the end of the importation tax from the U.S. of 54 cents per gallon as of Dec. 31, 2011. This was decided by the U.S. Congress who also left the U.S. subsidy of 45 cents per gallon for grain ethanol in place. It was truly a victory for Brazilian producers of ethanol who for years had been trying to get American legislators to end the tariff on imported ethanol. In December, a plan was presented to extend the subsidy until 2014, but what prevailed was the majority view of the U.S. Congress to not include this subsidy, which was costing $6 billion reais annually, in the list of sectors that receive tax benefits. This was mainly because of internal pressures from the White House to cut government spending in the face of the raising budget deficit of the United States.

Ironically, Brazil has the opportunity to benefit from these improved conditions to export ethanol from sugarcane at a time when national production is low, because of climatic problems and reduced investments. This year the crop loss of sugarcane is estimated to be at 10 percent and the prediction is for a full recovery by 2014.

One must also consider that the American producers already don’t fear competition from Brazilian ethanol, reprocessed in the Caribbean, a recourse used by national producers to penetrate American markets without paying taxes. Brazil imported ethanol in 2011 and American producers are aware of the boost which the United States’ Energy Act gives to the users of bio fuels. Already, in 2012, 50 billion liters of ethanol will be mixed with gasoline in that country, and it is predicted that the volume will reach 57 billion liters in 2014; included in that will be imported ethanol.

Doubtless, as noticed by producers, the new American position is a powerful incentive to increase Brazilian ethanol production. The president of the Brazilian Sugarcane Industry Association, Marcos Jank, estimates that investments on the order of $156 billion U.S. dollars until the year 2012 and the construction of 120 distilleries will be necessary to provide for the exportation of 13.5 billion liters of ethanol to the American market. Although this is an ambitious goal, it is not impossible.

The opportunity is open for all. There is an internal market to be recaptured, something which was lost because of the low competitiveness of ethanol and because of lower production. Although a high proportion of new cars sold within the internal market are still flex cars*, it has been estimated that in the past two years, the volume of flex cars fueled with ethanol has diminished from 60 percent to 35 percent of national new fleet sales. And now the huge American market will be open to producers from other countries, starting with Brazil. There are possibilities that national and foreign investors will certainly consider in their plans for the coming years.

National groups belonging to this sector would do well to take advantage of this opportunity, anticipating that still larger volume of resources will come from foreign companies, who are already responsible for 40 percent of investments in the sector and who may elevate their participation to 60 percent.

Almost coinciding with the breaking down of the American barriers, the government passed a provisional measure providing federal funding for ethanol storage, with the aim of avoiding fluctuations in product supply, such as has occurred in recent years, mostly in the off-season.

With a high percentage of flex cars in the national fleet of vehicles, there is a captive market for ethanol in Brazil, as long as the prices brought about by storage are reasonable. The provisional measure will certainly not produce effects in the short term, but combined with recently announced measures in Brazil and abroad, will enable producers to adopt an adequate plan in this new stage which is just beginning.

*Translator’s note: These flex cars can be fueled by any blend of ethanol and gasoline including 100 percent of either. The fuel is stored in one common tank.