February 15, 2012

Brazil Sugar/Ethanol Sector Needs R$ 156 Billion in Investments

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Union of Sugarcane Industries in southern Brazil (Unica) released another report indicating just how much new investments will be needed in the sugar/ethanol sector over the next eight years. The goal of the organization is to double sugarcane production by the year 2020 when they want Brazil to be producing 1.2 billion tons of sugarcane on an annual basis. That would be about double the average sugarcane production in recent years excluding 2011/12 when sugarcane production fell for the first time in a decade.

The amount of investments needed to double Brazilian sugarcane production is estimated at a staggering R$ 156 billion. Of the total, R$ 46 billion would be needed to renovate and expand the production of sugarcane and R$ 110 would be needed in the construction of 120 new sugar/ethanol mills. To achieve the goal of 120 new mills in eight years, 15 new mills would have to be opened every year.

This seems wholly unrealistic since it takes several years to build a new facility and there are very few now under construction. In reality, those 120 new mills would need to be constructed in a 5 to 6 year period at a rate of 20-25 per year. I doubt if there would be enough materials, equipment, or a trained labor force for such an enormous task in such a short period of time. Additionally, a lot of resources are currently being employed by the construction boom associated with the 2014 World Cup and then in 2016 the Olympic Games in Rio de Janeiro.

The increased sugarcane production is needed just to keep pace with the increasing domestic demand for ethanol. By the year 2020, it is estimated that 81% of the cars on the Brazilian highways and 63% of the stationary motors will be flex-fuel engines that can use pure gasoline, pure ethanol, or any combination of the two fuels.

In order to keep consumers using ethanol, the fuel needs to stay competitive with gasoline. As long as the price of ethanol is 70% the price of gasoline or less, ethanol is more economical to use than gasoline. Tight supplies of ethanol over the last few months have resulted in uncompetitive prices for ethanol and in most Brazilian cities; it is currently more economical to use gasoline. The ethanol supplies are expected to increase as soon as the new sugarcane harvest resumes in March or April.

If the goal is met for such a large increase in sugarcane production and processing, Unica estimates that the industry would create 350,000 new jobs directly and 700,000 indirectly. The gross receipts for the sector would increase from its current level of R$ 49 billion to R$ 90 billion.